Introduction

Africa’s capital markets stand on the brink of transformative growth. The African Continental Free Trade Area (AfCFTA), the world’s largest free trade area since the formation of the World Trade Organization, brings together all 55 member states of the African Union. This groundbreaking initiative is estimated to increase intra-African trade by an average of 50% between its implementation and 2030, with projections of up to 52% growth in annual trade value. However, the continent’s fragmented securities post-trade infrastructure poses a significant challenge to realizing this potential. This article explores how Central Securities Depositories’ (CSD) interoperability could align with AfCFTA’s continental ambitions while also positioning Africa as a global investment destination.

The Fragmentation Challenge

1. The Cost of Silos

• • Idle Liquidity: While specific figures for Africa are not available, global estimates suggest that inefficiencies in CSD interconnections can lead to significant amounts of collateral being unavailable. Globally, this figure is estimated at €1-1.5 trillion. In Africa, pre-funding requirements across different CSDs force institutions to park capital in multiple accounts, potentially tying up substantial liquidity for days.
  • Regulatory Misalignment: Differences in settlement cycles and regulatory frameworks across African countries can create arbitrage risks and deter foreign investors. For instance, South Africa operates on a T+3 settlement cycle, while other countries may have different timeframes.

2. Legacy Infrastructure Limitations

• • Technology Gaps: Many African CSDs operate on legacy systems that lack real-time data sharing capabilities, potentially causing delays in settlements.
  • Manual Processes: Reliance on manual reconciliation processes in cross-border trades can lead to higher error rates compared to more integrated markets.

The Promise of Interoperability

1. Liquidity Unlocked

• • Implementing direct CSD links could significantly reduce pre-funding needs, freeing up capital for high-impact projects. While exact figures would require further study, the potential for unlocking liquidity is substantial.

2. Risk Mitigation

• • Atomic DvP (Delivery vs. Payment): Implementing real-time settlement finality can minimize counterparty risk, which is crucial for attracting institutional investors.
  • Currency Harmonization: Integrating CSDs with regional payment systems like the Pan-African Payment and Settlement System (PAPSS) could allow for settlements in local currencies, potentially reducing dependency on USD and associated hedging costs.

The Path Forward

1. Regulatory Harmonization

• • Standardization: Adopting international standards like ISO 20022 for cash-leg, corporate actions messaging (e.g., dividend payments, proxy voting) – and potentially settlement & reconciliation – across CSDs could significantly reduce reconciliation errors and improve efficiency.
  • ESG Integration: Sustainability is a key driver in institutional & cross-border investment on the African continent and is generally increasingly in importance in global finance; as such, aligning CSD operations with ESG principles creates new opportunities for cross-border investment in green bonds and other sustainable financial products.

2. Technology as an Enabler

• • Hybrid Cloud Platforms: Solutions that connect legacy CSDs via APIs without requiring complete system overhauls are gaining traction. These could provide a cost-effective way to enhance interoperability.
  • Blockchain Exploration: Several African countries are exploring blockchain technology for financial market infrastructure. While still in early stages, these initiatives could potentially offer new models for inter-CSD settlements.

Conclusion

CSD interoperability represents a strategic opportunity to support Africa’s capital market growth potential. By prioritizing agile infrastructure and regional collaboration, Africa can work towards transforming its current fragmentation into a unified growth engine. The AfCFTA provides a strong foundation for this transformation, covering a market of more than 1.2 billion people and bringing together economies with a combined GDP of over US$3.4 trillion.

As stakeholders consider the path forward, focus should be placed on:

1. Conducting comprehensive studies to quantify the potential benefits of CSD interoperability in the African context.
2. Developing phased approaches to regulatory harmonization and technology upgrades.
3. Fostering collaboration between regulators, public and private sector entities to drive innovation in market infrastructure.
4. Aligning interoperability initiatives with broader economic integration goals under the AfCFTA.

The journey towards a fully integrated African capital market will require sustained effort and collaboration, but the potential rewards in terms of economic growth and investment attraction are substantial.

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