South Africa

The bond market, along with the money market, is a financial market; however, whereas the money market is designed to supply liquidity in exchange for short-term securities, the bond market supplies liquidity for long term securities. Bond markets are often without a centralised exchange system, and transactions/trades are completed in an over-the-counter fashion. Bond market liquidity is generally provided by dealers who commit risk capital to trading activity.

In the bond market, the counter party to an investor/investment fund who/which either purchases or sells a bond is almost always not another investor, but a bank or securities firm acting as a dealer. The bank or firm assumes some risk in the process as the market value of the bond might decrease before the dealer is able to sell it to another investor/investment fund.

The vast majority of bonds are bought and traded by institutions like central banks, insurance companies, banks, and investment funds like sovereign wealth funds and pension funds. There is nothing to deter individual investors from purchasing and owning bonds, however. Individuals are more likely to own and trade and stocks as the stock market is more liquid than the bond market despite the fact that bond yields are often better than stock dividends.

The South African bond market is a leader among emerging market economies. In 2008, local debt securities totalled R825 billion (nominal), and the bond market traded a volume of just over R19 trillion. Although the profits from coupon payments could be put towards current consumption on articles like skin care products, electronic devices, and larger assets, the sell high buy low principle would suggest that profits be used to further expand bond investments.

South Africa’s domestic bond market is dominated by government issued bonds, and does in fact have a centralised exchange known as the Bond Exchange of South Africa Limited (BESA). BESA is an independent, licensed exchange, and after demutualisation in 2002, is constituted as a public company.

The bond exchange has been mandated to operate and regulate the long term debt securities and interest rate derivatives markets in South Africa. BESA aims to build the local capital market by providing a variety of platforms and services to meet the demands of securities market participants (issuers, traders and investors).

BESA also acts as a direct regulator of the domestic bond market, and operates according to the parameters set out by the Securities Services Act of 2004, and is further committed to follow its own guidelines that have been sanctioned by South Africa’s Financial Services Board (FSB).

The Bond Exchange of South Africa is also dedicated to protect both traders and dealers through the implementation of best practice standards, and regulates the conduct of issuers and traders by surveillance and enforcing quality controls through the mechanism of minimum disclosure standards.

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