2015Hon. Minister Chinamasa Launches the CSD

The Hon. Minister delivers his key note address

The CSD CEO delivers his speech The MC kicks off proceedings

The SECZ Chair delivers her speech The CSD Chair delivers his speech

On 25 August 2015, Capital market players gathered at theRainbow Towers Hotel to celebrate the realization of animportant milestone; the official launch of ChengetedzaiDepository Company Limited (CDCL), which operates thesole Central Securities Depository (CSD) for the securitiesmarket in Zimbabwe.

A Central Securities Depository (CSD) is a computersystem that facilitates the holding of securities such asshares, bonds and money market investments inelectronic accounts in contrast to paper certificates. TheCSD also caters for the transfer of securities betweenbeneficial owners via a book entry, and for thesettlement of cash following transactions on organizedexchanges such as the Zimbabwe Stock Exchange (ZSE).The guests at the function included CDCL shareholders,directors and staff members, custodians, transfersecretaries, stockbrokers, fund managers and delegatesfrom the Reserve Bank of Zimbabwe (RBZ), theZimbabwe Stock Exchange (ZSE) and the Ministry ofFinance and Economic Development. The Honourable

Minister of Finance and Economic Development, Hon.Patrick Chinamasa was the guest of honour and hepresented the event’s keynote address. Other speakersincluded CDCL Chief Executive Officer, Mr. CampbellVincent Musiwa, CDCL Board Chairman, Mr. ZwelibanziNdlovu and the Securities and Exchange Commission ofZimbabwe (SECZ) Chairperson, Mrs. Willia Bonyongwe.Zimbabwe boasts of one of the oldest and mostadvanced capital markets on the continent with the firststock exchange in country having been established in1896. However, the automation of the Capital market isa dream that had remained elusive with the countrycapital market being one of the last to automate.

‘The automation of the Capital market is a dream thathad remained elusive with Zimbabwe’s capital marketbeing one of the last to automate.’

HON. MINISTER CHINAMASA OFFICIALLY LAUNCHES THE CENTRAL SECURITIESDEPOSITORY (CSD)

The CEO noted that the issue of the implementation of theCSD in Zimbabwe has been a major topic for a period ofnearly two decades and the country had remained laggingbehind in the automation of its trade and post tradeprocesses, thus making it less attractive to the discerningforeign investors.

Mr. Musiwa outlined the key drivers for establishing a CSD asfollows:

To reduce market wide operational risks in thecapital markets of Zimbabwe;

To improve operational efficiencies on thesettlement of capital markets transactions,culminating in the reduction in overall settlementtime from T+5 business days to T+3;

To attract global capital market investors, whowould have shunned our market for lack of anautomated infrastructure;

For transparency and building confidence, withdeliberate focus on distant global investors whomay not be available to physically monitor thecustody of their securities; and

To improve accountability and compliance in theZimbabwean capital markets

According to the CEO, the major delay in the implementationof a CSD in Zimbabwe was attributable to the lack of a legalframework that would enable this key market infrastructureto be put in place. The promulgation of the Securities Act in2004 set up the pace for this new development. The Actoutlines the need to implement a CSD as well as the settingup of a Securities & Exchange Commission (SECZ). The Actwas later to be augmented by Statutory Instruments 63 of

2013 which spelt out the specifics on how the CSD would berun and governed.

In 2008, SECZ was set up and made the implementationof the CSD as one of their key deliverables. Afterextensive market consultation, a tender was floated in2010 for bidders capable of providing a turnkey solution.The tender was won by a joint consortium comprising ofFirst Transfer Secretaries (Private) Limited, as the leadbidder and Inter link Solutions (Private) Limited. Theformer is an established transfer secretarial companyand the latter a consortium of seasoned technocrats inthe IT industry.

In 2011, the project was placed on hold as Cabinetdecided to rationalise the shareholding structure toinclude quasi- government institutions as the project wasdeemed to be a project of national interest. In 2012,following the signing of a CDC Shareholders Agreement,the Infrastructure Development Bank of Zimbabwe(IDBZ), National Social Security (NSSA), ZB FinancialHoldings Limited and the Zimbabwe Stock Exchange(ZSE) were introduced as shareholders in the companytaking up 51 percent of the CSD’s equity. Withsubsequent Rights Issues, quasi government institutionshave increased their stake in the company to 58 %.

Subsequent to the signing of the shareholdersagreement, the issue of the appropriate CSD Softwaresystem had to be extensively revisited. In March 2013, acontract was signed between the company and withCMA Small Systems AB of Sweden for theimplementation of the Depo/X system. CMA is a highlyrated software vendor with a global footprint in morethan 50 countries. The company has African experience

THE CEO’S SPEECH- THE STORY OF CHENGETEDZAI DEPOSITORY COMPANY

through its installation of a successful CSD system inRwanda.

In November 2013, the company was technically readyto Go- Live but could not do so as the issue of the CSDlicense and a gazetted CSD levy were still pending. Theseissues were subsequently granted on 6 May 2014 and 11July 2014 respectively paving way for the project to golive.

In August 2014, the company commenceddematerialisation of three pioneer counters andsubsequently went Live on 8 September 2014. The on-boarding of further counters was done on a phasedapproach basis in order to avoid a grid lock as had beenexperienced in other countries. To-date 61 out of the 62active counters have been on-boarded by the CSD. Onlyone counter, which is under judicial management,remains outstanding.

CDCL Chairman, Mr. Zwelibanzi Ndlovu attributed thesuccessful launch of the CSD in Zimbabwe to thecollaborative efforts of various stakeholders in thecapital market.

He thanked the promoters and founding shareholders ofCDCL for the critical role they played during thecompany’s formative stages from the initial tenderprocess all the way to the negotiations with theGovernment of Zimbabwe to introduce quasi-government institutions as shareholders. He alsoexpressed his gratitude to all the current shareholders ofCDCL for their patience and support during criticalperiods including the capitalisation exercises thecompany has undertaken since its formation and duringthe periods when the project was delayed for variousreasons as highlighted by the C.E.O.

The Chairman also acknowledged the CDCL Board ofDirectors, management and staff for their role in guidingthe operations of the company. He also recognized andemphasized the efforts of the first Board of CDCL, whichled the company during the formative stages and waslater replaced by the current Board.

Mr. Ndlovu also expressed appreciation to various capitalmarket participants for the role they played in makingthe CSD a reality. He said CDCL was thankful for theefforts of the Stockbroking community, the CustodiansAssociation of Zimbabwe, the Association of TransferSecretaries, Fund Managers and Pension Funds. Heconveyed gratitude to regulators and partners in thecapital market such as the Zimbabwe Stock Exchange(ZSE), the Reserve Bank of Zimbabwe (RBZ), theInsurance and Pensions Commission (IPEC) and theSecurities and Exchange Commission of Zimbabwe whoregulate the CSD.

Last but not least, the Chairman documented the criticalrole played by the Government of Zimbabwe and theMinistry of Finance in the CSD Project. He told delegatesthat the Government through the Ministry of Financehad always supported the project and ensured that, as aproject of national interest, the CSD had strongshareholders through the introduction of quasi-government institutions. The ministry also played a keyrole in unlocking the obstacles that CDCL encounteredalong the way.

THE CHAIRMAN’S SPEECH

Mrs. Bonyongwe told the delegates that the CSD was akey market infrastructure in the capital market and shewas honoured and humbled to preside on the occasionto mark the launch of Chengetedzai. According to theSECZ Chairperson, the implementation of a CSD inZimbabwe was long overdue.

However, Mrs. Bonyongwe highlighted that the CSDlaunch was not the end but a precursor of otherimportant developments in the capital market thatZimbabwe still needs to achieve. For instance, it wouldnot have been possible to implement the AutomatedTrading System (ATS) without a functioning CSD. Toachieve all this, a lot of effort was put to ensure thatthere was adequate regulatory framework, which theSECZ, in consultation with the market successfullyimplemented.

The SECZ Chairperson highlighted that given the progressthat has been made since the launch of the CSD, thefuture of the capital market was exciting. The CSD opensup the capital markets, brings transparency, efficienciesand places Zimbabwe’s capital market in the rightinternational standing.

Mrs. Bonyongwe then introduced the HonourableMinister of Finance and Economic Development, HonPatrick Chinamasa and thanked him for accepting theinvitation to grace this momentous occasion.

SECURITIES AND EXCHANGE COMMISSION OF ZIMBABWE CHAIR’S SPEECH

The Hon. Minister told the gathering that he washonoured and privileged to officially launchChengetedzai Depository Company Limited. Accordingto Hon. Chinamasa, the coming on board of the CentralSecurities Depository (CSD) was a significant milestonefor Zimbabwe’s capital market and the economy ingeneral. He acknowledged that the financial servicessector plays the critical role of channeling funding to thecountry’s productive sectors. As such, it is a strategicsector in the Government’s drive to attain economicgrowth and social development goals through attractingadequate capital. The government recognises theimportance of strengthening and capacitating keyfinancial institutions.

The Hon. Minister highlighted that in order for thefinancial services sector to succeed in attracting capital,investors should be assured of the safety of theirinvestments and efficiency and transparency in theoperation of the markets. The CSD will eliminate someof the challenges in the certificated securities systemthat tended to slow down the growth of the capitalmarket such as loss of certificates, forgery, mutilationand theft of certificates and also reduce settlement riskand the processing time with the settlement cycle beingexpected to be reduced from the current seven (7) daysto three (3) days.

The CSD, together with the introduction of anAutomated Trading System (ATS) by the ZimbabweStock Exchange, also enhances the Securities and

Exchange Commission of Zimbabwe’s (SECZ) ability toproactively monitor all securities transactions andexercise their over sight role on the capital market forthe benefit of investors. The Government thereforerecognises the CSD as an important marketinfrastructure for ensuring efficiency and promotingaccountability and transparency in the management ofthe country’s capital market. The Government has beenclosely involved in the CSD project offering its supportand guidance every step of the way.

In February 2011, the Government recognised the CSDas a project of national interest. The Ministry ofFinance then opened negotiations with the foundingshareholders of Chengetedzai with a view to bringing onboard strategic quasi-government institutions asshareholders culminating in the signing of ashareholders agreement on 26 June 2013. As a result,quasi–government institutions such as the NationalSocial Security Authority (NSSA), InfrastructureDevelopment Bank (IDBZ), and ZB Financial Holdings(ZBFH) jointly own 58% of the shareholding inChengetedzai Depository Company Limited.

The launch of the Central Securities Depository sets thestage for further increasing the depth of the capitalmarkets in Zimbabwe. Government expects to see otherfinancial instruments coming on to the CSD and marketsuch as Fixed Income securities, commodities,derivatives, mortgage-backed securities, alternativeinvestments and other sophisticated securities.

THE HON. MINISTER’S KEY NOTE ADDRESS

Hon. Chinamasa highlighted that the CSD offers aplatform from which such sophisticated financialinstruments can now be introduced on to theZimbabwean market and implored management ofChengetedzai to be at the forefront of efforts tobroaden the scope of the capital markets throughworking with other market participants to introducesuch products.

The Minister told delegates that the next challenge isfor CDCL to grow its business and meet globaldepository standards. He reiterated that the Ministry ofFinance and affiliated institutions will continually offersupport and guidance to ensure the attainment of thisobjective.

Hon. Chinamasa also encouraged all stakeholderswhose activities affect the growth and development ofthe CSD to offer their support to ensure that the visionfor which the CSD was established is realized.

MAJOR CHANGES

1. BENEFICIAL OWNER M ODEL

CDCL has implemented a model wheresecurities are registered in the names ofthe actual beneficial owners as opposed toan omnibus model where securities can beregistered in nominee accounts.

In a beneficial owner model, investors’assets are clearly segregated from theassets of their service providers such asstockbrokers and custodian banks. Thisensures that investors’ assets are notopen to abuse and that they can easily beseparated in the event of failure of thestockbroker or custodian.

The beneficial ownership model is nowconsidered international best practicethough many jurisdictions have struggledto migrate to this model after operatingunder the omnibus model for a long time.

2. CUSTODIAN SETTLEMENT MODEL

Prior to the CSD, stockbrokers actedas the investors’ agent for bothtrading and post trade activities suchas clearing and settlement. In additionto this, stockbrokers also providedsafe custody services to investorsthrough the use of nominee accounts.

The CSD environment has replacedthis broker centric model with acustodian model where there issegregation of responsibilities. Acustodian is a specialized financialinstitution that holds customers’securities for safekeeping so as tominimize the risk of their theft or loss.Custodians normally handle a varietyof activities, including holding equitiesand bonds in physical or electronic(de-materialised) form, settlingpurchases and sales, reporting thestatus of assets, tax compliance andreporting, and management of theclient's accounts and transactions.

In the new model, stockbrokersperform the trading function whilecustodians are responsible for clearingand settlement and safe custody ofsecurities. This adds a layer of

protection for investors since there isindependent verification by thecustodian of all transactions. Mostcustodians are also units of banks thatare subjected to internationalstandards for risk management andalso have to pass a rigorous test forfitness by SECZ.

3. OPENING CSD ACCOUNTSEffective from the date of on-boarding, all trades in the on-boardedcounter relate to electronic (de-materialised) securities.

This implies that before an investorcan transact in electronic (de-materialised) shares, they shouldopen a CSD account first. It is arequirement that Stockbrokers shallonly trade on behalf of investors whohave CSD accounts, by insisting onquoting a valid CSD Account numberwhen an investor places an order.Only licensed Custodians have themandate to open CSD accounts,because all settlement duties havebeen transferred from theStockbrokers to Custodians. Thus aCustodian, by opening a CSD account,becomes the investor’s

CDC OPERATING UPDATE

appointed securities settlement agent, who manages theshare portfolio of the investor (safekeeping and reporting,not investment management which is done by assetmanagers), and is responsible for settling tradesbelonging to that particular investor. Investors can openCSD accounts through one of the five licensed Custodians,namely, CBZ Bank, Old Mutual , Standard Chartered Bank, Stanbic Investor Services and ZB Bank .

Where an investor provides all the KYC requirements, anaccount should be opened instantly by the Custodian.

- BROKER CONTROLLED CSD ACCOUNTS- CSDACCOUNTS CO-MANAGED BY STOCKBROKERS

Retail investors may find it administratively demanding toapproach a Custodian, and often the cost of maintainingan account directly with a custodian tends to be on thehigher side. In order to cater for this segment, the CSDallows investor s to approach their stockbrokers who willfacilitate the opening of CSD accounts through anunderlying licensed Custodian. The investor need notknow the sponsoring Custodian, as they would beaccessing the services through their broker. In this case,the broker collects the Know Your Client (KYC) documentsas stipulated by the underlying Custodian, and providesthe investor with CSD Account Opening Forms tocomplete for the opening of the CSD Account. Onsettlement, the stockbroker has the right to access thesettlement status of broker controlled accounts, so thatthey can be able to report back to the investor. This is analternative to opening accounts via a Custodian; it ischeaper as it does not have annual or monthly custodialfees. Charges relate only to transaction related fees.However, it also comes with minimal reporting in order tomanage costs.

4. DEMATERIALISATIONDematerialisation is the process of depositing shares ontothe CSD so that they are converted from certificate orphysical form into electronic balances to be credited intoan investors’ CSD Account. This process takes three

business days (72 hours). Dematerialised securities aretransferrable between investors through electronic book -entry. Investors can dematerialise their shares bysubmitting their shares to their Custodian, andcompleting the CSD Securities Deposit Form, which is theproof of deposit to be kept by an investor. This is similarto a bank where a depositor retains a deposit slip as proofthat they have deposited money into their account.Investors who have broker controlled CSD accountsdeposit their shares through their Stockbroker, who inturn process the deposits in partnership with thesponsoring Custodian.

5. MANAGING TAINTED SECURITIESAll securities that are deposited onto the CSD areconfirmed by the issuing company’s Transfer Secretary.The market is therefore protected as all trades relate toelectronic (dematerialised) securities which have alreadybeen confirmed by the Issuer through their TransferSecretary.

6. SIMULTANEOUS, FINAL, AND IRREVOCABLE DELIVERYVERSUS PAYMENTThe settlement of all trades on the CSD is done throughSimultaneous, Final, and Irrevocable Delivery VersusPayment (SFIDvP) which links the movement of securitiesto the payment in a matter of split seconds. This reducessettlement risks for market participants and investors asit guarantees that investors will not make payments andfail to get delivery of the shares bought or deliver sharessold and fail to receive payment.

7. SECURE PLATFORM FOR PLEDGING SECURITIESThe CSD allows investors and lenders to enter into pledgetransactions on a secure platform that safeguards therights of both parties. A Pledge is initiated throughsubmission of a duly signed pledge form by the Pledgorand the Pledgee. The pledged securities are moved fromPledgor’s Available Balance to a Locked/Pledged Balancewhich cannot be traded. The CSD system thus ensuressecurities can only be pledged once and a new pledgecannot be registered on the same securities. The

securities can only be moved back to the Available forTrading balance upon termination of the pledge by thePledgee through the submission of a pledge release form.

ACHIEVEMENTS SINCE GOING LIVE

ON-BOARDING OF SECURITIESSince going live on 8 September 2014, the CSD has on-boarded 61 of the 62 active counters on the ZSE. Aphased approach was also adopted for equities on-boarding and the table below provides a summary of theon-boarding activities by the CSD:

The pace of equities on-boarding compares favourablywith other markets that have adopted a phasedapproach. For example, in South Africa the first counterwas on-boarded in November 1999 and it took eightmonths before more counters could be migrated onto theCSD with eleven counters coming on-board in June 2000.All counters took 2 years and three months to bemigrated onto the CSD.

CSD ACCOUNT OPENINGA total of 2,901 CSD accounts had been opened so far.These are dominated by local institutional and retailinvestors. Local investors account for 73% of the CSDaccounts opened with foreigner s having a 27% share.

The CSD’s on-going effort to educate investors throughthe print and electronic media has witnessed aprogressive improvement in investor awareness and thisis expected to continue driving the opening of newaccounts.

DEMATERIALISATIONIn the twelve months since going live, CDCL has processed30,534 deposits with a total market value of US$1.463billion as shown below:

This means that approximately 40% of the total marketvalue of the ZSE has now been deposited on the CSD. Theaverage ratio of electronic shares to total issued shares(Demat Ratio) is now 30%. Empirically, most CSDs haveachieved a Demat Ratio of just over 10% in their first yearof operation. The top 15 counters by Demat Ratio arenow all above 40% with the highest ratio now at 78%. Thechart below shows the top 25 counters (by Demat Ratio):

CLEARING AND SETTLEMENT OF TRADESThe CSD has processed 5,120 ZSE trades with a marketvalue of US$305 million since going live as summarizedbelow:

At beneficial owner level, the CSD has processed acumulative total of 11,993 transactions.

It is also significant to note that the number of trades thatdelay beyond the T+5 settlement cycle has been kept at avery low level even though the CSD is yet to implement aPenalties Framework to tackle settlement delay.

CSD OUTLOOKThe CSD has transformed the way securities are cleared,settled and kept in custody. The journey is not completebefore introducing other classes of securities to improvemarket depth and the financial products available toinvestors. Investors and market participants shouldexpect a number of changes that are meant toconsolidate the improvements brought by the CSD andfurther transform Zimbabwe’s financial markets. Theseinclude:

Introduction of penalties for settlement offences; Implementation of Straight-Through-Processing

(STP) with Participants. Introducing Fixed Income Instruments; and Migration from a T+5 settlement cycle to T+3.

Mrs. Bonyongwe walks to the podiumThe guests of honour

The Vice Chairperson presents a gift to the Hon. Ministergreets guests as

The Vice Chairperson presents a gift to Mrs. Bonyongwe

The CSD Chaiman walks to the podiumThe Hon. Minister poses for a photo with the guests of honour

PHOTO GALLERY

The Hon. Minister greets guests as he arrives

The CSD Chairman with invited guests The Hon. Minister laughs at a joke

The Hon. Minister after his speech

The guests of honour follow through proceedings at the function

SECZ CEO with invited guests The Vice Chairperson delivers the Vote of Thanks

Time for mixing and mingling

Invited guests follow through proceedings at the function

The invited guests follow at the functionInvited guests follow through proceedings at the function

Time for mixing and minglingTime for mixing and mingling