Background and regulatory context
Issuers that are not registered as banks under the South African Banks Act, 1990 rely on the safe-harbour provisions of the Commercial Paper Exemption Notice (the Commercial Paper Regulations) to undertake the issuance of debt securities in South Africa. Published under the Banks Act, the Commercial Paper Regulations provide a critical framework that enables corporates, financial institutions, global investment banks, state-owned entities, municipalities and other non-bank issuers to access South Africa's domestic capital markets. They play an important role in enabling non-bank issuers to raise funding through debt securities.
The Commercial Paper Regulations have remained unchanged since their introduction in 1994. In recent years, the Prudential Authority initiated a comprehensive review of the Commercial Paper Regulations prompted primarily by increased global focus on financial stability. According to the Prudential Authority, two key concerns underpin this regulatory review: first, what it regards as exploitation of the regulatory arbitrage between the Commercial Paper Regulations and the Securitisation Exemption Notice; and second, what it views as significant issuance of corporate bonds under the Commercial Paper Regulations for purposes beyond short-term funding, specifically to raise capital for project finance, renewable energy projects and other long-term initiatives.
In response to the concerns identified by the Prudential Authority, draft amendments were released in 2018, 2023 and 2024. The combined impact of the proposed changes – stricter eligibility criteria, increased regulatory oversight and expanded disclosure requirements may inadvertently create barriers for non-bank issuers to access South Africa's debt capital markets.
In anticipation of the publication by the Prudential Authority of the final amendments to the Commercial Paper Regulations, it is an opportune time to revisit the key issues that have emerged in recent drafts. This article provides a recap of the most significant issues raised in the 2023 and 2024 drafts and highlights the outstanding matters in the 2024 draft that should remain top of mind for market participants as the regulatory process continues. As a cornerstone of South Africa's debt capital markets, it is essential for issuers to stay informed as the Commercial Paper regulatory framework evolves.
Evolution of the Proposed Amendments: 2023 vs 2024 draft
The 2023 draft of the Commercial Paper Regulations introduced several significant changes, many of which were revisited, though not fully resolved in the 2024 draft. Key differences between the 2023 and 2024 drafts include the following:
- Definition and term limit: The 2023 draft narrowed the definition of “commercial paper”, limiting its maturity to a maximum of 364 days. The 2024 draft retains this approach with a 365-day maturity cap but introduces a new category of "debt securities" capable of being issued with maturities ranging from 366 days to 30 years.
- Eligible issuers: Both drafts expanded the list of eligible issuers, with the 2024 draft going further to include, amongst others, state-owned companies, municipalities, trusts (including offshore trusts) and special purpose vehicles.
- Issuer eligibility criteria: The 2023 draft required issuers (excluding central government or those with government guarantees) to have net assets exceeding ZAR 100 million, verified by auditors within 18 months prior to issuance. The 2024 draft removes this net asset value threshold and the related auditor certification requirement.
- Disclosure and compliance requirements: Both drafts propose enhanced disclosure requirements for placing documents, many of which overlap with existing JSE Debt and Specialist Securities Listings Requirements. Both also introduce a new regulatory return for compliance monitoring. While the 2023 draft required auditors to reconfirm compliance in the event of material non-compliance and report such non-compliance to the Prudential Authority, the 2024 draft reverts to the existing requirement for auditors to confirm compliance of the initial issuance with the Regulations.
- Regulatory approval for issuance: The 2023 draft mandated that new issuers obtain prior approval from the Prudential Authority for placing documents before issuance. The 2024 draft retains prior Prudential Authority approval but limits the requirements to issuers of unlisted securities or securities listed on exchanges other than the JSE.
- Use of proceeds: A notable restriction in the 2023 draft required proceeds to be used solely for the issuer's operating capital. The 2024 draft retains this restriction for commercial paper issuances but introduces flexibility for debt securities, allowing proceeds to be applied to capital funding, including project finance and green bonds, treasury raising activities, finance company asset acquisitions and secured note or single-asset repack programmes.
The 2024 draft: Outstanding matters
While the 2024 draft of the Commercial Paper Regulations reflects progress from the 2023 version, market participants have identified several material issues that they hope will be resolved in the next iteration:
- Limitation on use of proceeds: The 2024 draft restricts the use of proceeds from commercial paper issuances to funding the issuer's operational activities, while proceeds from debt securities must be applied to capital funding purposes such as project finance and green bonds, treasury raising activities, finance company asset acquisitions and secured note or single-asset repack programmes. This approach has been criticised for limiting issuers' flexibility to structure funding efficiently. The prevailing view is that issuers should retain discretion over how proceeds are applied, provided appropriate disclosure is made to the investor community.
- Minimum denominations: The 2024 draft introduces minimum denomination requirements of ZAR 12.5 million for commercial paper and ZAR 18.75 million for debt securities. These thresholds have been criticised as arbitrary and inconsistent with the Companies Act, which prescribes a ZAR 1 million minimum denomination. Market participants question the rationale for imposing limits on the investment and trading of debt securities.
- Mandatory regulatory approval: The 2024 draft requires issuers of unlisted securities or securities listed on exchanges other than the JSE to obtain prior approval from the Prudential Authority for their placing documents before issuing commercial paper. Special purpose vehicle (SPV) issuers must also obtain Prudential Authority approval. Market participants argue that these additional steps may result in delays and increased administrative burdens.
- Mandatory credit ratings: The 2024 draft imposes mandatory credit ratings for issuances of debt securities. Market participants view this as overly restrictive and potentially detrimental to market activity, particularly given the cost implications of obtaining ratings.
- Types of issuers: The 2024 draft has been criticised for not adequately considering foreign issuers, such as global investment banks. Market participants note that the drafting requires reconsideration to avoid inadvertently hindering issuance by foreign entities in the domestic capital markets.
- Expanded disclosure: The expanded disclosure requirements may duplicate obligations already imposed on issuers of listed securities under the JSE Debt and Specialist Securities Listings Requirements, including continuing obligations.
- Auditor CP compliance report: The expectations in the 2024 draft regarding auditors' confirmation of compliance may require refinement. In practice, auditors typically provide a limited assurance statement, confirming only that nothing has come to their attention indicating non-compliance at the time of initial issuance. Market participants note that the drafting should be aligned with what auditors can reasonably attest to under professional standards.
- Single-asset repack programmes: Regarding repack programmes, vehicles successfully used by banks to manage risk and optimise capital market participants oppose the proposed limitation to single-asset repacks. They argue that such limitations could force banks to structure transactions under the more onerous Securitisation Exemption Notice, a process considered inappropriate, inefficient and costly.
- Compliance burden on international transactions: A significant outstanding issue relates to the uncertainty around whether offshore capital-raising exercises, specifically Regulation S and Rule 144A offerings, trigger compliance obligations under the Commercial Paper Regulations. Although these transactions are primarily aimed at international investors, the instruments may also be offered to South African institutional investors depending on structuring and transaction specific considerations. This raises broader questions about the potential extraterritorial application of the Regulations. Market participants argue that clear guidance would resolve this ambiguity. The requirement to obtain compliance reports also introduces additional transaction costs.
- Regulatory clarity needed for issuances by Bank Controlling Companies: Banking groups have highlighted the need for clarity regarding the application of the Commercial Paper Regulations to issuances of Additional Tier 1 and Tier 2 capital-qualifying instruments, as well as Flac-qualifying debt securities, by bank controlling companies. These instruments are issued to meet regulatory capital requirements under the Banks Act and, by their nature, should not be subject to processes designed for commercial paper issuance. Market participants note that imposing compliance obligations in this context creates uncertainty and adds significant costs that run counter to the regulatory objectives these instruments are intended to achieve.
- Uncertainty regarding existing CP instruments: The 2024 draft does not clearly address the status of commercial paper instruments issued under the existing Commercial Paper Regulations. Market participants require clarity on whether outstanding instruments will be grandfathered or whether placing documents will require amendments. There is also uncertainty regarding the continued applicability of exemptions for issuers who currently benefit from exemptions under the existing Commercial Paper Regulations, such as local and international development finance institutions.
Looking ahead
The proposed amendments to the Commercial Paper Regulations represent a potentially significant shift in the regulatory landscape for debt capital markets. While the 2024 draft addresses some of the concerns raised on the 2023 version, several key issues remain unresolved. As the regulatory process moves forward, active engagement between issuers, investors and the Prudential Authority will be essential to ensure that the final Regulations strike the right balance – enhancing financial stability without compromising the efficiency and accessibility of the debt capital market.
Ultimately, the success of these reforms will depend on their ability to address legitimate concerns about market stability while avoiding unnecessary barriers to capital raising and investment activity.
