Regulatory Alerts2023-05-11
FSCA Conduct Standard 1 of 2023: Conditions for Pension Fund Investment in Derivatives
The Financial Sector Conduct Authority (FSCA) has published Conduct Standard 1 of 2023 to establish regulatory conditions for pension funds investing in derivative instruments. The standard addresses inherent counterparty and liquidity risks by mandating enhanced transparency and prudent portfolio management practices to safeguard market integrity. Following a concluded consultation process under the Financial Sector Regulation Act, 2017, the final standard will become operational twelve months after its May 2023 publication.
FSCA COMMUNICATION 14 OF 2023 (RF) Publication of FSCA Conduct Standard 1 of 2023: Conditions for Investment in Derivatives Instruments for Pension Funds
- PURPOSE This Communication informs stakeholders that today the Financial Sector Conduct Authority (FSCA) published the following documents: 1.1 FSCA Conduct Standard 1 of 2023: Conditions for Investment in Derivatives Instruments for Pension Funds (Conduct Standard) 1.2 Statement of Need, Expected Impact and Intended Operation supporting the Conduct Standard 1.3 Consultation Report
- SUMMARY 2.1 Derivative instruments in a pension fund portfolio can be used by pension funds for efficient portfolio management and risk management, as well as to hedge risk exposure to specific financial instruments. 2.2 The FSCA recognises that there is a role for the use of derivatives within pension fund portfolios. However, there are several risks inherent in these instruments, such as counterparty risk and liquidity risk. Therefore, there is a need for the FSCA to prescribe conditions in respect of the use of derivative instruments by pension funds to enhance market integrity through amongst others enhanced transparency. 2.3 More detail on the need, expected impact and intended operation of the Conduct Standard can be found in the document referred to in paragraph 1.2 of this Communication. 2.4 The process for making regulatory instruments is prescribed in Chapter 7 of the Financial Sector Regulation Act, 2017 (Act No. 9 of 2017). The said process has now been concluded, and the FSCA therefore published the final Conduct Standard. The Conduct Standard will come into operation 12 months after publication.
- ENQUIRIES 3.1 The documents referred to in paragraph 1 are available on the FSCA’s website at www.fsca.co.za. 3.2 For more information regarding the Conduct Standard and/or this Communication
2 please contact the FSCA’s Regulatory Framework Department at andile.mjadu@fsca.co.za.
KATHERINE GIBSON DEPUTY COMMISSIONER FINCANCIAL SECTOR CONDUCT AUTHORITY Date of publication: 11 May 2023