When considering inclusion of foreign equity or foreign non-equity securities in a portfolio in accordance with section 45 of the Act, a manager must conduct a due diligence investigation in accordance with the following guidelines—
| (1) | In respect of an exchange on which foreign equity and foreign non-equity securities are listed and traded: |
| (a) | Liquidity and repatriation of funds |
In considering a foreign exchange, the following must be taken into account:
| (i) | the overall liquidity of the exchange; |
| (ii) | whether securities or derivatives can be bought and sold in a reasonable time, at best execution and in adequate amounts; and |
| (iii) | the procedures and restrictions, if any, on the repatriation of funds to the Republic. |
| (i) | The exchange must be subject to supervision by an authority, which must be a statutory body, an agency of a national Government, state department of such Government or another body designated for that purpose by one of said authorities. |
| (ii) | In addition, the following factors must be taken into account: |
| (aa) | The degree to which members of the exchange are subject to formal supervision by the exchange or another body, and in particular whether compliance with capital adequacy requirements by members is supervised; |
| (bb) | the involvement of a central securities depository and level of immobilisation or dematerialisation of scrip; |
| (cc) | the existence of a form of contract guarantee, e.g. a buying-in obligation by the exchange to ensure that its members' transactions are settled; |
| (dd) | the powers of the exchange or the supervising body to intervene in members' business in the event of misconduct and financial difficulties, including the power not to approve applications for membership, terminate membership and delist a security; |
| (ee) | the initial listing standards and on-going supervision of securities traded on the exchange, including the publication of prospectuses and audited annual financial statements; |
| (ff) | the everyday availability of current information about securities, derivatives, quotations, transactions, prices and spreads; |
| (gg) | requirements for the issue of contract notes or their equivalents; |
| (hh) | whether there is a requirement for trade reporting of the securities or derivatives or both to the exchange or other supervisory body; |
| (ii) | whether the clearing and settlement arrangements normally used for transactions on the exchange are prompt and secure; |
| (jj) | the risk of loss in the event of insolvency of a member of the exchange; |
| (kk) | the manner in which the exchange investigates and deals with complaints; |
| (ll) | whether any type of guarantee fund is maintained to protect investors in respect of liabilities arising prior to the default of a member or a fidelity insurance policy exists as a front-line protection for member firms particularly in so far as employee fidelity is concerned. |
| (i) | The exchange must have regular trading hours during which the listed foreign equity and non-equity securities may be traded. |
| (ii) | The following additional considerations must be taken into account— |
| (aa) | the availability and timing of price and volume information and the manner in which it is distributed; |
| (bb) | in respect of listed foreign equity and non-equity securities the degree to which, and the speed at which, companies with listed foreign non-equity securities on the exchange must release price sensitive information, and the medium through which that information is distributed. |
The exchange must be recognised or registered as a market or exchange or self-regulatory organisation by an authority which must be a statutory body, an agency of a national government, a state department of such government or another body-designated for that purpose by one of the said authorities.
Investments listed or admitted to dealing on the exchange must be freely available for trading by the public directly, or through members of the exchange, during normal trading hours.
The extent to which overseas investors are permitted to hold securities listed and traded on the exchange must be taken into account.
| (2) | In respect of foreign non-equity securities which are not listed on an exchange: |
| (a) | Liquidity and repatriation of funds |
The following must be taken into account
| (i) | overall liquidity in respect of unlisted foreign non-equity securities |
| (ii) | whether the unlisted foreign non-equity securities can be bought and sold in a reasonable time, at best execution and in adequate amounts; |
| (iii) | and the procedures and restrictions, if any, on the repatriation of funds to the Republic. |
| (b) | Nature of the foreign non-equity securities |
The manager must consider the relative and/or inherent risk levels of one security type compared to another and the appropriateness for its inclusion in a portfolio, for example secured debt measured against non-secured debt, or government guaranteed debt measured against debt not guaranteed by a government.
The manager must consider the likelihood or risk of loss of principal amounts or loss of a financial reward, stemming from an issuer's failure to repay a loan or otherwise meet a contractual obligation and the appropriateness for inclusion in a portfolio, for example measuring risk against reward considerations, and the credit worthiness of an issuer.
The manager must consider the maturity profile of an issuer to assess the issuer's ability to borrow and its liquidity position. Consequently the manager must consider the appropriateness of the inclusion of the particular foreign non-equity security of the issuer in a portfolio.
The manager must consider the sensitivity of the price (the value of principal amounts) of foreign non-equity securities to a change in interest rates. Consequently, the manager must determine the appropriateness of the inclusion of the particular foreign non-equity security in a portfolio.
| (f) | Currency risk profile |
The manager must consider the risk that arises from the change in price of one foreign currency against the South African Rand and other major currencies. Consequently, the manager must determine the appropriateness of the inclusion of the particular foreign non-equity security denominated in a specific foreign currency in a portfolio.
| (g) | Macro and micro economic factors |
| (i) | Domestic political situation |
The manager must reasonably consider all factors that contribute to a stable political environment that would be conducive to a stable investment environment.
| (ii) | Economic growth prospects |
The manager must consider the economic growth prospects of a foreign country in order to assess the merits and prospects of investing in foreign non-equity securities issued by entities in a particular foreign country.
| (iii) | Monetary and fiscal policies |
The manager must consider the monetary and fiscal policies of a foreign country in order to assess whether it would be, and is likely to remain conducive to supporting a stable environment for investment.
| (iv) | Open to foreign investors |
The extent to which foreign investors are permitted to hold foreign non-equity securities must be taken into account.
