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South Africa: Warning – exchange controls apply beyond cross-border transactions

30 September 2023
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Exchange controls are generally aimed at governing cross-border transactions (including forex (FX) activities and arrangements between residents and non-residents) in a particular jurisdiction.

Investors would be well advised to note that, in South Africa, exchange controls apply beyond this. The country’s exchange controls, which are restrictive in nature, are mainly provided for in the Exchange Control Regulations issued under the Currency and Exchanges Act 9 of 1933 (Exchange Control Regulations).

Under its authority delegated by National Treasury, the Financial Surveillance Department (FinSurv) of the South African Reserve Bank has issued various regulatory instruments relaxing the restrictions of the Exchange Control Regulations.

These include the Currency and Exchanges Manual for Authorised Dealers (Authorised Dealers Manual), which contains permissions and conditions applicable to transactions or activities that may be undertaken by authorised dealers (approved commercial banks) and/or clients of authorised dealers without reference to or the approval of FinSurv.

The Authorised Dealers Manual also contains restrictions. For example, section H(A) which provides as follows:

‘(i) Instruments that offer South African investors exposure to foreign referenced assets in Rand terms must be listed on a South African exchange. The types of instruments include equity, debt and derivatives.

(ii) These instruments may only be denominated in Rand.

(iii) These foreign referenced instruments may not be offered to South African investors on an over-the-counter basis.

(iv) The listing of all instruments referencing foreign assets will require specific prior approval of the Financial Surveillance Department.’

These provisions technically extend South Africa’s exchange controls to transactions that are not cross-border, do not involve FX and do not involve non-South African residents, but that derive value from foreign assets, thereby giving South African investors in those financial instruments’ indirect exposure to foreign assets.

Technically, these instruments are domestic in nature. If issued by a South African issuer to South African investors, one would typically not expect the instruments to be subject to exchange controls. However, FinSurv strictly applies the above provisions of the Authorised Dealers Manual to such instruments.

The over-the-counter (OTC) derivatives market is greatly impacted by these restrictions. Players in this market solely focus on OTC trades and they have no intent to have their instruments listed on any exchange. South African OTC derivative providers are bound to offer instruments that only reference local assets. It is for this reason that South Africa’s OTC derivatives market is not attractive to foreign investors (foreign OTC derivatives providers).

The reasoning behind the restrictions of section H(A) of the Authorised Dealers Manual is unclear, leaving stakeholders questioning whether it is aligned with the objectives of South Africa’s exchange controls.

On its website, FinSurv explains the purposes of exchange controls as follows: prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa; effectively control the movement of financial and real assets into and out of South Africa; and avoid interfering with the efficient operation of the commercial, industrial, and financial system.

One can only guess that the restrictions of section H(A) of the Authorised Dealers Manual are informed by the third purpose.