STOCKBROKERS: AUDIT AND ACCOUNTING GUIDE

STOCKBROKERS: AUDIT AND ACCOUNTING GUIDE Revised and issued October 2004 Every effort is made to ensure that the advice given in this guide is correct. Nevertheless that advice is given purely as guidance to members of SAICA to assist them with particular problems relating to the subject matter of the guide and SAICA will have no responsibility to any person for any claim of any nature whatsoever which may arise out of or relate to the contents of this guide.

COPYRIGHT 2004 THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS Copyright in all publications originated by The South African Institute of Chartered Accountants rests in the Institute. Apart from the extent reasonably necessary for the purposes of research, private study, personal or private use, criticism, review or the reporting of current events, as permitted in terms of the Copyright Act (No. 98 of 1978), no portion may be reproduced by any process without written permission. ISBN 0-86983-402-9 THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS P O BOX 59875, KENGRAY, 2100

Stockbrokers: Audit and Accounting Guide AUDIT GUIDE CONTENTS Page Paragraphs Preface 1 Knowledge of the environment 2 Background information 3.01.06 Regulatory environment 3.07.39 The equities dealing process 8.40.56 The STRATE custody and settlement process 10.57.112 Segregation of client funds 16.113.119 Capital adequacy requirements 17.120.125 Securities lending 17.126.133 JSE broker Deal Accounting (BDA) system 18.134.137 SWIFT and Merva 19.138.140 Reporting to clients 19.141.147 Audit Guide 21 Accounting Guide 37 Page Appendix A Other business typically conducted by JSE members 43 Appendix B Risks inherent in a stock broking environment and typical control procedures 49 Appendix C Standard BDA accounts 58 Appendix D Reports available on BDA 62 Appendix E Guidance on CSDP reconciliations 65 Appendix F JSE Consolidated Mandate 70 Appendix G Summary of general requirements for managed account mandates 84 Appendix H Proforma reports to the JSE and schedule of reporting deadlines 87 Appendix I Glossary of abbreviations and acronyms 98

PREFACE This publication has been developed by the Stockbrokers Project Group of The South African Institute of Chartered Accountants (SAICA) in order to provide practical guidance on the auditing and accounting issues related to the accounts of Stockbrokers. The principal objectives of the guide are to describe the unique operating environment in which Stockbrokers operate, and to ensure that the key risk areas inherent in their businesses are adequately addressed during their audits. It is presumed that any audit will be conducted in terms of statements of South African Auditing Standards (SAAS) and that Stockbrokers financial reporting will comply with South African Statements of Generally Accepted Accounting Practice (GAAP) and the Companies Act in South Africa. Consequently, familiarity with the requirements of SAAS, Statements of GAAP and the Companies Act is assumed. Whilst auditing and accounting guides do not have the authority of either SAAS or Statements of GAAP, in the event of any significant deviation from the guidance embodied in this document, the auditor may be required to demonstrate that such deviation was justified. The Guide is not intended to be a static document, and it is the intention of SAICA to issue revised versions from time to time to take account of changes in the markets and regulatory environments in which Stockbrokers operate. The audit risk standards comprising international standards on auditing (ISA) 315 Understanding the entity and its environment and ISA 330 The Auditors Procedures in Response to Assessed Risks have not been taken into account in drafting this guidance. Auditors are therefore requested to consider these auditing standards when they become effective. The effective date of these ISA standards is 15 December 2004. Stockbrokers fall into one or more of the following categories of JSE membership of the JSE Securities Exchange South Africa (JSE): Broking JSE members (equities) Custody and settlement JSE members Financial derivative JSE members Agricultural products JSE members This Guide is intended to give guidance relevant to broking JSE members (equities) and custody and settlement members only. Hereon referred to as Stockbrokers This Guide assumes a fully dematerialised scrip environment. Where Stockbrokers continue to deal with paper share certificates in the process of dematerialisation, auditors are referred to the Stockbrokers Auditing and Accounting Guide published by SAICA in January 1998. 1

KNOWLEDGE OF THE ENVIRONMENT Background information Markets.01 JSE members trade predominantly in equities and warrants listed on the JSE, but many also trade in the following markets: BESA (Bond Exchange of South Africa), which facilitates trading in fixed interest securities, specifically those issued by the South African Government, Municipalities, Local Authorities, Statutory Bodies or similar institutions. The money market, which involves the placement of client funds on call or in fixed deposit accounts, and the trading of money market instruments such as banker s acceptances, negotiable certificates of deposit, treasury bills and commercial paper. Exchange-traded and over-the-counter (OTC) derivatives markets. Previously a separate exchange listing contracts in financial and agricultural futures and options, South African Futures Exchange (SAFEX) was purchased by the JSE on 1 July 2001. Appendix A contains further details regarding JSE members activities in these markets. Services offered.02 The most common types of services offered by JSE members include the following: Buying and selling securities and financial instruments on behalf of clients. Settlement and administration of market deals, which would include activities such as the borrowing of securities on behalf of clients to facilitate settlement, dematerialising share certificates and processing corporate actions. Providing research and advice to clients to assist them in the buying and selling of securities and financial instruments. Actively managing a client s portfolio by making buying and selling decisions on behalf of the client. Providing portfolio services to clients, including the distribution of regular account and portfolio valuation statements and the preparation of Capital Gains Tax statements. Providing corporate finance advice or sponsorship services to corporate clients. Role players.03 JSE members typically interact with the following role players in the financial markets: Regulators Regulators are responsible for the maintenance of sound and equitable financial markets. JSE members are regulated by the JSE and are required to comply with rules and directives issued by the JSE. Compliance officers Compliance officers are employees of the JSE member firms who are responsible for ensuring that the JSE member complies with all applicable laws and regulations. Central Security Depository Participants Central Security Depository Participants (CSDPs) are authorised by STRATE to maintain and update Central Securities Accounts in the Central Security Depository in which dematerialised securities are held. JSE members communicate with CSDPs in order to ensure the settlement of market deals, and are also responsible for regularly reconciling their records with those of the CSDP. Custody and Settlement Agents JSE members may outsource their custody and settlement function to Custody and Settlement Agents (CSAs). 2

Nominee companies Nominee companies are subsidiaries of the JSE members and are used to hold clients securities in order to segregate them from the JSE members own assets and to ensure the efficient processing of deal settlement and corporate actions. Insurance cover.04 All JSE members are protected by an insurance policy taken out by the JSE, known as the in and out insurance policy..05 The policy covers a JSE member that incurs a loss after dealing in good faith in securities that subsequently prove to be counterfeit, fraudulently altered, forged or stolen. It also generally covers losses and third party liabilities incurred as a consequence of fraudulent acts by partners, directors and employees of a JSE member..06 The importance of the policy to the clients of JSE members is that it provides JSE members with a means of reimbursing clients for losses suffered by them due to fraud or theft in their accounts. Regulatory environment.07 The Financial Services Board Act established the Financial Services Board (FSB), which is tasked with the regulation and supervision of the South African financial markets in which the JSE is an important role player, with a view to providing sound and efficient financial institutions..08 The Stock Exchanges Control Act regulates the establishment and the operation of the JSE, and provides the legislative framework for trading in listed securities and the management of investments in securities. The FSB is tasked with the responsibility of administering the Stock Exchanges Control Act. It does this by granting an annual renewable licence to the JSE to operate the exchange and regulate the activities of its members. The FSB is also responsible for approving the JSE rules and directives and acts as an ex officio JSE member of certain JSE committees..09 The Surveillance Division of the JSE promotes the integrity of the market by ensuring compliance by JSE members with the JSE s trading rules, and by monitoring trades on the exchange to detect market abuse. The Surveillance Division also monitors the conduct of JSE members to enhance investor protection on the exchange and ensures that the JSE members are adequately capitalised..10 In fulfilling its responsibilities for investor protection and the monitoring of capital adequacy, the Surveillance Division places significant reliance on the auditors of JSE members firms to provide them with additional assurance regarding the extent of compliance by JSE members with a number of rules and directives..11 In addition to reporting on a JSE member s annual financial statements, auditors are specifically required to report on issues such as the existence of securities and cash balances held by the JSE member on behalf of its clients, and the JSE member s compliance with directives regarding its accounting records and the JSE member s capital adequacy position..12 The Surveillance Division has electronic access to all JSE members accounting records and uses a Surveillance Database and Surveillance System to interrogate and analyse these records. Much of the Surveillance Division s monitoring of compliance by JSE members with the JSE rules and directives is conducted with the use of these surveillance tools. For example, JSE members capital positions, the segregation of client funds and the balancing of securities held by the JSE members with the records of their custodian can all be monitored, to some degree, through the Surveillance System. The Surveillance Division also makes enquiries of JSE members and conducts inspections of their activities..13 The Surveillance Division encourages bilateral discussions with the auditors of JSE members on perceived non-compliance or areas of concern that fall within the scope of an auditor s reporting obligations. This enables the auditors to elaborate on any of their findings that may be of relevance to the Surveillance Division in performing its role. 3

.14 The Director: Surveillance specifically credentialises auditors of JSE members in terms of Directive DG by approving the proposed audit partner responsible for the audit..15 Amongst its other responsibilities, the Surveillance Division also ensures that applicants for JSE membership meet all of the requirements set by the JSE before they can be admitted; and it initiates disciplinary action against JSE members, officers and employees of JSE members, if the results of an investigation indicate that such action is warranted..16 Due to recent changes in the environment in which JSE members operate, in particular the dematerialisation of share certificates and the introduction of an electronic settlement system for share transactions, certain legislation has been updated, and further changes are in the process of approval. Most importantly, the Stock Exchanges Control Act and a number of other statutes affecting the JSE and the stock broking environment are being replaced by the Securities Services Act, which is expected to be promulgated in the last quarter of 2004. Consequently, the guidance provided in this Guide on regulations affecting JSE members is expected to change once this approval is obtained. The new Act is also expected to result in changes to the reporting requirements applicable to the audit of a JSE member, particularly those in respect of various compliance matters..17 The most important legislation affecting JSE members is the Stock Exchange Control Act, which is dealt with below. Stock Exchanges Control Act.18 Although auditors should have a thorough knowledge of the Stock Exchanges Control Act (SECA) in order to adequately understand the risks inherent in JSE member audits, sections 43(2)(b)(iv) and 44 specifically require the auditor to report, within three months of the JSE member s financial year end, on the JSE member s compliance with the following key sections: Section 14: JSE members are required to maintain separate trust accounts in which they deposit client funds, thus segregating client funds from the JSE member s own funds. Sections 22, 23 and 25: These sections set out the legislative framework for the settlement of purchase and sale transactions by clients, including carry account transactions, and specify the procedures to be adopted should clients fail to settle their transactions within the specified time period (which is T+5 per the JSE Rules). Section 36: Securities under a JSE member s control are to be marked in such a way that the owner of the securities can be identified. (In practice, the process of marking securities involves an allocation of the securities to the owner in the JSE member s electronic records.) Section 37: JSE members may not alienate client securities without authorisation from the client. Section 38: JSE members may not pledge client securities or repledge securities that a client has pledged to the JSE member. Section 43(2)(b)(iv)(bb): This requires the auditor to report on compliance with the regulations relating to accounting records and capital adequacy (refer paragraph.27 below). Section 43(2)(b)(iv)(cc): This requires the auditor to report on compliance with rules governing the following. - Maintenance and operation of the trust account. - Capital adequacy. - Marking of documents of title. - The granting of credit. - Lending or pledging of securities. - Issuing of receipts. - Holding or delivery of share certificates. 4

Regulations to the Stock Exchanges Control Act.19 Section 43(2)(b)(iv)(bb) of SECA requires the auditor to report on compliance by the JSE member with the following Regulations to the Act: Regulation 4 contains minimum standards for JSE members accounting records, including requirements relating to reconciliations and the balancing of securities held in custody. Regulation 5(3)(d) states that JSE members records shall disclose financial and business information to enable JSE members to monitor their compliance with capital adequacy requirements..20 Regulation 6 (1) requires the auditor to report on: whether securities entrusted to the JSE member or for which the JSE member was accountable to any person were registered and held in accordance with the Act, the Regulations and the applicable mandates, whether the auditor is aware of instances where the JSE member did not maintain adequate capital during a material portion of the financial year, and whether or not the financial statements fairly present the JSE member s financial position, results of operations and cash flow information in accordance with Statements of GAAP. JSE Rules.21 The following are the important JSE rules on which an auditor is specifically required to report in terms of Section 43(2)(b) of SECA: Maintenance and operation of the trust account Rule 5.290 states that every JSE member shall open and maintain a separate trust account at a bank as prescribed in section 14 of the SECA. Rules 5.170.3, 5.170.10, 5.200.1, 5.210.1, 5.220.1, 5.225.1, 14.60.10 and 14.60.11 relating to monies that are required to be deposited with JSE Trustees (Pty) Ltd (JSET). Capital adequacy Rule 4.55 states that every JSE member is required to hold at all times net assets that comply with the financial resources requirements set out in Rules 4.55.2 to 4.55.5. Rule 4.220 states that every Custody and Settlement JSE member (CSM) is required to hold at all times net assets that comply with the financial resources requirements set out in Rules 4.220.3 to 4.220.4. Marking of documents of title Rule 5.140.8 lists the JSE members responsibilities in respect of the marking of scrip held in safe custody. Granting of credit No Rules dealing with carry accounts (refer definition in Rule 2.40) Lending or pledging of securities Rule 14.90 deals with the borrowing, lending or use of clients uncertificated securities. Issuing of receipts Rule 14.60.13 deals with the issuing of a receipt where a security is received from a controlled client for retention in safe custody Holding or delivery of share certificates Rule 5.140 lists the JSE members responsibilities in respect of scrip held in safe custody..22 The following are important JSE rules that have an impact on the matters on which an auditor is required to report in terms of JSE directive DG 1.7: 5

Rule 5.170 lists the JSE members responsibilities in respect of the operation of managed accounts. Rule 5.260.11 regulates the holding of Krugerrand coins in safe custody on behalf of clients. Rule 5.280.4 regulates the holding of Money Market instruments on behalf of clients. Rule 14.60 lists the JSE members responsibilities in respect of the operation of controlled client accounts, including the custody requirements, provisions relating to mandates and the deposit of client funds with JSET. Rule 14.80 deals with the operation of managed discretionary and non-discretionary portfolios in respect of uncertificated securities. Rule 14.100 requires the timeous allocation of securities purchased in the JSE member s nominee register..23 Although auditors are not currently required to report on any other JSE rules except for those listed above, attention is drawn to the following important JSE rules: Rule 3.100, which sets out the role of a JSE member s compliance officer and its audit committee, including the presence of the external auditor at meetings of the audit committee. Rule 5.15, which sets minimum standards for client acceptance and account maintenance procedures. Rules 5.200 and 5.270, which regulate money broking operations. Rules 5.340 and 5.350, which regulate the acquisition of foreign portfolio investments on behalf of managed clients. Rule 14 generally, which deals with the trading and settlement procedures for STRATE approved securities, but in particular; Rules 14.120, 14.130 and 14.140, which set out noncontrolled client, controlled client and JSE member settlement obligations respectively..24 JSE Directives Directive BK contains the requirements relating to the operation of non-resident controlled client accounts by a JSE member. Directive DA contains further minimum standards in respect of a JSE member s financial records, risk management procedures and internal control systems. Directive DC2 describes in detail how a JSE member should calculate the Capital Adequacy Requirements as laid down in the rules. Directive DF states that the auditor of a JSE member of the stock exchange must have professional indemnity insurance cover of at least R7.5 million. Directive DG 1.2 states that the appointment of an auditor by a JSE member shall be conditional upon the approval of the appointment by the Director: Surveillance. Directive DG 1.7.5.2 states that the auditors shall report their opinion on whether or not there are adequate controls over signed mandates for safe custody and managed accounts, and that these controls were tested in accordance with SAAS. Directive DG 1.7.2 states that the auditor, as part of the audit of the financial statements, must satisfy himself/herself as to the existence of securities, bonds, Kruger-Rands, documents of title and cash balances by counting those held by the JSE member and/or confirming those held by a third party, and by obtaining confirmations of the securities, bonds, Kruger-Rands, documents of title and cash balances of clients from those clients. Directive DG 1.7.3 states that the auditors report shall confirm that the auditors have satisfied themselves of the existence of the securities, bonds, Kruger-Rands, documents of title and cash balances. Directive DG 1.7.4 states that the JSE member shall require the auditor to perform the following: 6

- Audit the register of mandates. - Audit the register of pledges. - Confirm cash held by JSET and banks. Directive BO states that the auditor is to confirm in writing that all JSE members of the audit team have confirmed their independence from the JSE member before and after the audit. Companies Act.25 The Companies Act is applicable since most JSE members are registered as companies..26 Other important legislation affecting the activities of JSE members includes the matters dealt with below. Financial Markets Control Act.27 The Financial Markets Control Act (FMCA) is the equivalent of SECA in respect of financial instruments, including bonds and derivative instruments. Derivative JSE members of the JSE and JSE members of BESA are regulated in terms of the FMCA, and the JSE derivatives market and BESA are licensed in terms of the FMCA. The FMCA is also being incorporated into the new Securities Services Act. Usury Act.28 The Usury Act provides for limitations on, and disclosure of, finance charges relating to money lending transactions, credit transactions and leasing arrangements. Many JSE members charge finance charges on amounts owing by their clients. The Usury Act does not lay down specific audit reporting requirements. Uncertificated Securities Tax Act.29 This Uncertificated Securities Tax Act (UST) levies a tax on the issue and the change in beneficial ownership of uncertificated securities. The UST specifies the tax rate to be levied and the responsibility for payment of the tax liability on such transactions. Custody and Administration of Securities Act.30 The Uncertificated and Administration of Securities Act (CASA) provides for the licensing of Central Depositories and regulates the conduct of the depositories. It also gives power to the Executive Officer of the FSB to register a depository and to set out Rules that the depository must comply with. It also sets out rules that the participants in the depository are to abide by. CASA is also being incorporated into the Securities Services Act. Inspection of Financial Institutions Act.31 The Inspection of Financial Institutions Act (IFIA) provides for the inspection of financial institutions and the affairs of unregistered entities conducting themselves as financial institutions..32 The IFIA gives power to the Executive Officer of the FSB to appoint inspectors to conduct the abovementioned inspections. Insider Trading Act.33 The objectives of the Insider Trading Act are to: prohibit the dealing in securities by individuals that have inside information, prohibit individuals with inside information from inducing others to deal in such shares, provide for penalties for such deals, empower the FSB to investigate such matters, institute proceedings and administer the proof of claims and payments as a result of proceedings, and establish a Directorate as a committee of the FSB to institute proceedings against offenders. The Insider Trading Act requirements are being incorporated into the proposed Securities Services Act. 7

Financial Intelligence Centre Act.34 The Financial Intelligence Centre Act (FICA) establishes a Financial Intelligence Centre (FIC) and a Money Laundering Advisory Council (MLAC) in order to combat money laundering activities and to impose certain duties on institutions and other persons that otherwise might be used for money laundering purposes..35 The principal objective of the FIC is to assist in the identification of the proceeds of unlawful activities and the combating of money laundering activities..36 The MLAC advises the Minister of Finance on policies and best practices to identify the proceeds of unlawful activities and to combat money laundering activities..37 The FICA imposes a duty on accountable institutions, which specifically include JSE members of a stock exchange, to disclose information to the FIC at the FIC s request, and to report to the FIC any suspicious or unusual trades or any cash transactions or electronic transfers exceeding prescribed limits of which the institution becomes aware..38 In terms of FICA, accountable institutions are also required to identify their clients positively, document their anti-money laundering procedures and provide adequate money laundering training to their staff..39 The JSE is appointed in terms of the FICA as a supervisory body and is responsible for supervising compliance by its JSE members with the provisions of FICA and the regulations and exemptions therefrom. The equities dealing process.40 JSE members may trade in various exchange-traded securities and financial instruments including equities, warrants, equity options, futures, and options on futures; as well as money market instruments. Listed equities.41 The equities market is governed by the SECA and the JSE rules and directives. JSE members may act as agent or principal when trading in equities. When acting as a principal in a transaction, a JSE member may not deal directly with a client unless it has a signed mandate in the prescribed form prior to execution of the transaction or unless it is dealing with a foreign dealer. JSE members must at all times adhere to the best execution principle, taking reasonable care to obtain the result that is best available for the client in the equities market..42 Equities are traded through the Stock Exchange Trading System (SETS). Orders are prioritised upon entry of the order in terms of price and then in terms of time. A JSE member must specify whether it is acting as an agent or a principal when submitting an order to the SETS system. SETS matches bids and offers in a particular security based on the price and then time priority (the best possible price offered will be satisfied first and where more than one offer exists at that price, the order placed first at that price). All matched trades will then be passed from SETS, via JSE broker Deal Accounting (BDA), to South African Instruments Realtime Instruments Settlement System (SAFIRES) for settlement..43 The general legislative requirements with regard to the settlement of equity transactions on the JSE are set out in Sections 22 to 27 of the SECA. These sections indicate that transactions are generally to be settled within seven business days or such other prescribed period. However, in the STRATE environment, this 7 day rule no longer applies, and the prescribed period is effectively that stipulated in the JSE rules, which is currently five days after date of trade on a rolling settlement basis..44 The settlement of transactions executed through the SETS main order book is guaranteed by the JSE. JSE members may also report certain transactions that meet specific criteria to SETS without having to effect such transactions though the main order book. Reported transactions are, however, not guaranteed by the JSE. 8

.45 JSE members are responsible for and guarantee the due fulfilment of all transactions entered into by them, except those reported transactions where the clients that are the parties to such transactions have, between themselves, concluded the terms of the transaction and instructed the JSE member to report the transaction through SETS. Rule 5.10.7 also requires JSE members to ensure that buyers and sellers of listed securities are aware of their material obligations in terms of SECA and the JSE rules..46 When acting for a client, JSE members may deal either: on the client's specific instructions; or if the client has a discretionary managed account, at the JSE member's discretion..47 The BDA system produces a daily transaction blotter of all deals and a JSE broker s note for each client deal. JSE brokers notes should be checked by the JSE member to the original order and the trading sheet before being sent to the client. Misdeals.48 Misdeals arise from incorrectly executed or incorrectly reported client deals. In order to correct such errors, JSE members take these deals on as their own proprietary stock positions. The position can only be cleared through the market in transactions with another JSE member or foreign agent. Profits or losses incurred on misdeals are for the JSE member's own account. Bear sales.49 A bear sale or short sale is a transaction involving the sale of securities where the seller is not the owner of those securities. Bear sales are undertaken in the hope that the price of the securities will fall, allowing the seller to buy them in at a lower price before the securities have to be delivered to the JSE member..50 A bear sale may not be entered into without the JSE member ensuring that a securities borrowing arrangement is in place. A securities borrowing arrangement would normally have the following features: The securities borrowing arrangement would be concluded with a lending desk of one of the large banks or of another JSE member. These lending desks source the securities either from one of the other lending desks or from an institutional holder. For each security that is borrowed from the lender, the JSE member is required to put up collateral with the lender, either in cash or shares, at a rate determined by the lender. The JSE member will earn interest on the cash collateral. Carry transactions.51 A carry transaction is one in which a client is not obliged to pay for securities purchased on its behalf by the JSE member on or before the normal settlement date. The JSE member extends credit to the client, for an agreed period. The JSE member normally charges interest during this period. The client is required to deposit minimum cover with the JSE member in accordance with Section 23 of the SECA and as defined in Section 2 of the JSE rules. Arbitrage.52 An arbitrage transaction is one in which a JSE member, for its own account, purchases securities on one stock exchange and sells those securities on another stock exchange, with the aim of profiting from a difference in price of the particular securities between the two exchanges. Jobbing.53 Jobbing is an activity whereby a JSE member buys or sells securities, for its own account, with the intention of selling or buying those securities to close out the position and realise a profit in the short term. Intraday jobbing results in only the net quantity of the particular securities traded and the net purchase or sale consideration being settled on the settlement date. 9

Soft dollars.54 In some instances, JSE members will grant incentives to asset managers to direct trades to the JSE member. These incentives can either take the form of a portion of the JSE brokerage fee charged to the underlying client being shared with the asset manager, or a free or discounted service being provided to the asset manager (eg. investment research), or a service being purchased by the JSE member and provided to the asset manager, such as financial information or publications. Such arrangements are referred to as soft dollars or soft commissions..55 JSE members should nevertheless be aware of their duty to act in the best interest of their client. The JSE rules require soft dollar arrangements to be disclosed to the JSE member s client..56 It should be noted that soft dollar arrangements are currently under scrutiny from international regulators and there is a move to place restrictions on such arrangements. The STRATE custody and settlement process.57 STRATE is an electronic clearing, settlement and custody system for securities listed on the JSE. STRATE is South Africa s Central Securities Depository (CSD) for equities, warrants and bonds. Dematerialisation.58 Dematerialisation is the exchange of certificated scrip (physical certificates and certified deeds) for an uncertificated electronic record of ownership of securities. The investor approaches either a CSDP or a JSE member to effect the dematerialisation process..59 All securities dematerialised by JSE members must be registered in the name of the JSE member s nominee company before they will be accepted for dematerialisation by the JSE broker s CSDP..60 The CSDP communicates electronically with the transfer secretary concerned, while simultaneously surrendering the physical share certificates. The transfer secretary confirms the validity of the share certificate, cancels the original certificate and deletes the certificated record on the register of JSE members. The transfer secretary then advises STRATE of the successful dematerialisation order, providing it with the International Securities Identification Number (ISIN) and quantity of shares dematerialised. STRATE then credits the CSDP s account held with STRATE and the CSDP credits the client s account or JSE member s account in the subregister. Once the shares are dematerialised and reflected as an electronic entry, they may be sold on the JSE..61 If a JSE member has submitted share certificates for dematerialisation, it will update its record of dematerialised holdings on the BDA system only once the CSDP confirms to it that the securities have been dematerialised. Rematerialisation.62 Shareholders are allowed to rematerialise their shares and obtain share certificates. The CSDP affects the rematerialisation of securities by deleting the shareholding entry from its electronic subregister records and requesting the transfer secretary to issue a share certificate. STRATE then debits the CSDP s account held with STRATE and the transfer secretary includes the shareholder s name in the register of JSE members and issues the paper certificate. However, the rematerialised securities cannot be sold on the JSE. Equities settlement process on STRATE.63 When a client places an order to trade through a JSE member, the JSE member enters the order on the SETS where it will be matched automatically with an equal and opposite order. This trade is classified as being an On-Market Trade..64 Once the trades are matched on SETS, the trade will be passed from SETS, via the BDA System, to the SAFIRES..65 SAFIRES is an electronic real-time, integrated depository, clearing and settlement system. This system provides a gateway for participants to access and use the clearing and depository services provided by STRATE. 10

.66 Off-market trades are trades in uncertificated securities not concluded through the SETS. These trades are reported by the seller and the purchaser of the uncertificated securities to the relevant CSDP, for settlement through STRATE..67 SAFIRES will in turn send instructions to a CSDP using the SWIFT network (refer to paragraphs.138 to.140) for the relay of electronic messages..68 If the client is a non-controlled client that has appointed its own CSDP, it indicates to the CSDP that settlement may occur. The CSDP, through a commit process, confirms to SAFIRES that the settlement may proceed. The commit process is a conditional undertaking by the CSDP to ensure that the transaction will settle on settlement day. If the client is a controlled client on behalf of whom the JSE member holds securities and funds, and for whom the JSE member settles transactions, the JSE member s CSDP will auto commit to settling the transactions without requiring a specific instruction from the JSE member, provided there are sufficient securities in the JSE member s securities custody account with the CSDP. On settlement day, SAFIRES confirms the availability of shares through the reservation process. If the reservation at CSDP level is successful, SAFIRES proceeds to send a request for the transfer of funds to the South African Reserve Bank (SARB)..69 Once the availability of funds has been confirmed, and money has been transferred between SARB accounts at the CSDP level, SAFIRES will transfer ownership within CSDP uncertificated securities accounts in SAFIRES..70 For transactions that do not involve payment (such as account transfers and free of value orders), transfers will be effected on the settlement date, provided the participants have a sufficient securities balance..71 Confirmation of successful settlement is then relayed by SAFIRES to the CSDP, which reflects the entry in the CSDP s books at client level. At the end of the business day, transactions that could not be settled (due to lack of security or funds) will be treated as failed. Warrants settlement process on STRATE.72 The Listings Department of the JSE approves the new issue of warrants. Thereafter it allows two business days to enable STRATE to finalise the administration prior to listing. In addition to the normal application, the issuer of the warrant will need to furnish the Listings Department with its STRATE CSDP details including its custody account number in SAFIRES..73 The required master file data for the warrant will be loaded in the CSD. On activation date, the issued warrants will be credited to the securities custody account of the issuer in the CSD..74 When an exercise for cash occurs, the JSE member will book a WX (exercise of warrants) trade via SETS. This process will allow the holder to receive the cash, and the warrant will be moved back to the securities custody account of the issuer..75 When an exercise for the underlying share occurs, this will be processed as an off-market trade. The movement of the warrant will be handled by way of delivery free of payment/receipt free of payment (DFP/RFP) off-market trades reported to STRATE via the CSDPs. This will allow the movement of the warrant from the holder to the issuer..76 The underlying will also be settled off-market on the same day as the warrant is settled by way of a delivery versus payment/receipt versus payment (DVP/RVP). This will allow the movement of the underlying from the warrant issuer to the holder s account. The off-market trades will settle on a T+5 cycle. Rolling and contractual settlement.77 Rolling settlement refers to a settlement environment in which transactions become due for settlement a fixed number of business days after trade. In South Africa, rolling settlement has been introduced on a T+5 basis (where T=trade date). 11

.78 Contractual settlement is a market convention embodied in the rules of the JSE rules, which state that a client has a contractual obligation to cause a JSE trade to settle on settlement day. The JSE, in its capacity as Settlement Authority, ensures that all on-market trades entered into by two JSE members settle five days after the trades are entered into. The investors thereby obtain the assurance that their transactions will settle on the specified settlement day. The appropriate cash and share accounts will be debited/credited on the settlement day..79 A settlement timetable setting out all the actions and events that should occur from the period prior to a trade being executed through to settlement day at T+5 is contained in JSE Directive EF. Controlled and non-controlled clients.80 A controlled client is one whose securities and funds are under the control of the JSE member or whose settlements take place via the JSE member s CSDP, while a non-controlled client is one that has appointed its own CSDP to act on its behalf..81 A controlled client keeps its securities with its JSE member and uses the CSDP of the JSE member s choice. The client s regular account statement comes from its JSE member..82 A non-controlled client nominates a CSDP, opens a securities account with the CSDP and deals with a JSE member only when it wants to trade. The non-controlled client also has banking facilities with the CSDP to facilitate the settlement of funds. The client receives a custody account statement directly from the CSDP. Settlement of controlled client transactions.83 It is important for auditors to familiarise themselves with the settlement process in respect of controlled client transactions in order to understand the nature of certain accounts in the JSE member s records and the flow of funds during the settlement process..84 Each JSE member is required in terms of the JSE rules to open and maintain a funds settlement account at a bank through which the settlement of controlled client transactions is effected. On settlement day, the JSE member is required to fund its settlement account from its current account with the total value of all controlled client and proprietary purchases. This figure is computed by BDA and is provided to the JSE member s CSDP. BDA also initiates a transfer from JSET to the JSE member s current account on settlement day of the total amount of client funds held by the JSE member in JSETs to cover those purchases. As the settlement cycle commences, the funds transferred to the JSE member s settlement account will be withdrawn by the CSDP to pay for the shares purchased..85 During the settlement cycle, the proceeds in respect of the sale of shares on behalf of controlled clients and in respect of proprietary sales is deposited into the JSE member s settlement account by their CSDP. BDA also computes the value of sales on behalf of controlled clients, less any charges (JSE brokerage, Value Added Tax (VAT), Uncertificated Securities Tax), and initiates an instruction to the JSE member s CSDP to transfer that amount from the JSE member s settlement account to JSET. The balance remaining in the JSE member s settlement account at the end of the settlement cycle should represent the proceeds of proprietary sales and any charges on controlled client sales, and this amount should be auto-cleared to the JSE member s current account by its CSDP. The JSE directives require the JSE members settlement accounts to be zeroed on a daily basis..86 The flow of funds described above applies to both local and foreign controlled client purchases..87 The net amount due by, or due to, the JSE member in respect of unsettled controlled client and proprietary transactions at any point in time is reflected on the JSE broker Netting Account (BDA Control A/C 12013). The balance on this account at any point in time therefore represents, at the most, five days unsettled controlled account transactions..88 On settlement day, the net amount of securities bought or sold by the JSE member on a proprietary basis and on behalf of its controlled clients, for each counter, is transferred to or from the JSE member s custody account by its CSDP. 12

Settlement of non-controlled client transactions.89 The settlement of non-controlled client transactions effectively bypasses the JSE member, as these transactions are settled directly between the CSDPs acting on behalf of those clients. The process of replacing the JSE member s obligation to settle a non-controlled client s transaction with the obligation of that client s CSDP is known as substitution..90 The net amount, which represents the amount to be settled amongst the CSDPs in respect of a JSE member s non-controlled client transactions, is reflected on the Non-Controlled Substitution Account (BDA control A/C 12005). The balance on this account at any point in time therefore represents five days unsettled non-controlled client transactions..91 If a non-controlled client s CSDP is unable to commit to settling a transaction by 10h00 on T + 4, the JSE member must assume responsibility for settling the transaction. This process is known as reverse substitution. Should this occur, the JSE member assumes the position as a principal and the client forfeits all rights to the transaction but remains responsible for any losses, costs and charges incurred by the JSE member in assuming the position. BDA automatically processes entries transferring the transaction from the non-controlled client s account to a Reverse Substitution Stock Account and transferring the opposite amount from the Non-Controlled Substitution Account to the JSE broker Netting Account. Margining requirements.92 A JSE member may be required to provide a margin to the JSE in respect of unsettled transactions in dematerialised securities. The margin is payable by the JSE member on T+4 in respect of the following: Non-controlled client transactions If by the end of the third business day after the trade date (T+3) the CSDP of the non-controlled client fails to commit to settle the transaction on behalf of the client. Controlled client transactions If by the end of the third business day after the trade date (T+3), the controlled client: - has insufficient uncertificated securities or funds in custody for the transaction to settle, and - has not entered into an uncertificated securities borrowing arrangement to facilitate settlement, and - has not concluded any other transaction (due to settle on or before the abovementioned settlement date) that will provide either sufficient uncertificated securities or funds to enable the transaction to settle. JSE member s own account sales If by the end of the third business day after the trade date (T+3), the JSE member - has insufficient uncertificated securities in custody for the transaction to settle, and - has not entered into an uncertificated securities borrowing arrangement to facilitate settlement, and has not concluded a purchase transaction (due to settle on or before the abovementioned settlement date) that will provide sufficient uncertificated securities to enable the transaction to settle. - has not concluded a purchase transaction (due to settle on or before the abovementioned settlement date) that will provide sufficient uncertificated securities to enable the transaction to settle. 13

JSE members own account purchases If by the end of the third business day after the trade date (T+3) the JSE member has not concluded a sale transaction due to settle on the settlement day of the purchase, which will provide sufficient funds for the purchase to settle on the settlement day..93 To the extent that the margin payable relates to transactions on a client s or a counterparty s account, the JSE member shall be entitled to recover such margin. Failure by a JSE member to pay a margin in contravention of the rules and directives may be deemed to constitute an act of default in terms of JSE Rule 8.40. Benefits of STRATE.94 The benefits of STRATE include the following: The risks created by long settlement delays have been eliminated. To the extent that scrip has been dematerialised, the risks associated with tainted scrip have been eliminated. The time-consuming process of physically delivering share certificates has been replaced. Instead, simultaneous, final and irrevocable settlement takes place on the stipulated settlement date. The South African equities market has been brought in line with international expectations for settlement, and will consequently become more attractive to foreign investors who have become accustomed to the security offered by CSDs worldwide. Due to the dematerialisation of scrip, settlements now occur electronically. The risk of physical scrip being lost during the delivery process has been substantially removed. Access to physical scrip is reduced. Securities held in custody by JSE members in dematerialised form are all held in one location with the CSDP, as opposed to certificated securities that could be in any number of locations at a particular point in time. Control over scrip held by the JSE member is thus improved, although greater reliance is now placed on a third party, the CSDP. STRATE facilitates the reduction of settlement risk and the guarantee of T+5 trade settlement by the JSE. Effects of STRATE on JSE members.95 The implementation of STRATE has had a fundamental effect on the stock broking industry, and consequently on auditors of JSE members..96 The most visible effects of STRATE are: to eliminate paper share certificates and replace them with electronic records maintained by CSDPs and by nominee register holders, including JSE members, on behalf of shareholders, and to introduce guaranteed, contractual, T+5 rolling settlement (on a simultaneous and irrevocable delivery versus payment basis), in place of weekly settlement that occurred in the pre- STRATE era. Settlements thus take place daily. Central Securities Depositary Participants.97 The CSDPs have to meet prescribed entry standards regarding minimum capital requirements, operational capabilities and clearing arrangements before they are approved as CSDPs by STRATE. These entry requirements are detailed in the CASA as well as in the CSD Rules..98 The major role played by the CSDP is that of custodian of uncertificated securities balances, and clearing and settlement agent interfacing with STRATE..99 CSDPs interact on a daily basis with STRATE and the Payments Clearing Houses, and indirectly with other CSDPs. 14

Custody accounts and nominee registers.100 A custody account is an uncertificated securities account maintained by a JSE member with a CSDP, which reflects the uncertificated securities balances of controlled accounts of the broking JSE member and through which settlement of transactions is effected. The custody account at the CSDP is in the name of the JSE member s nominee company so as to separate clients securities from the assets of the JSE member..101 A JSE member s nominee register is effectively the record of clients uncertificated securities balances in the JSE member s BDA records, which in aggregate equals the balance in the JSE member s custody account at its CSDP..102 In terms of Rule 14.60.8, all nominee registers must be balanced with the CSDP on a daily basis, and a certificate must be submitted to the JSE monthly to confirm that this has been done, or the reasons for the out of balance position. This process is facilitated by the Review the Daily CSDP Reconciliation (PCSDRC) report, which lists mismatches between the JSE member s records and those of the CSDP on an exception basis..103 The most common reasons for the JSE member s records being out of balance with the CSDP and additional guidance on the audit of the daily CSDP reconciliation report are set out in Appendix E. Custody and Settlement.104 A JSE member may only hold securities or funds on behalf of clients or maintain a nominee register on behalf of controlled clients if it has been admitted as a Custody and Settlement member (CSM). A JSE member that operates controlled client accounts but has not been admitted as a CSM must appoint a CSM as its CSA to perform its custodial functions..105 In addition to the JSE membership requirements applicable to broking members, CSMs are also required to comply with the criteria set out in Directive FK with regard to their systems of internal control and their financial resources, so as to ensure continuity of business and the total protection of client assets..106 In those instances where a JSE member outsources its custody and settlement functions to a CSA, the principle is that the key controls relating to the safeguarding of client assets should be exercised by the CSA. Directive FL therefore sets out the respective responsibilities of the CSA and the JSE member in relation to the operation and maintenance of client accounts..107 In terms of this outsourcing arrangement, the JSE member continues to interact with its controlled clients but, in the main, it has view only access to those client accounts on BDA. It can obviously book trades in securities to client accounts, and it can also process receipts of funds from clients. Clients personal particulars are also initially loaded by the JSE member when a new account is opened, and any changes to those particulars are also initiated by the JSE member. However, all other transactions on controlled client accounts are effected by the CSA, and only the CSA has update access to those functions on BDA. Access by staff members of both the JSE member and the CSA to the various BDA functions is controlled by the CSA. The CSA is also required to verify the loading of all new client accounts as well as any amendments to the key client particulars against appropriate supporting documentation obtained by the broking JSE member from the client..108 Certain JSE members act solely as CSAs on behalf of broking members. Therefore, the risks within these firms relate to the custodial functions that they perform rather than to trading activities. In this regard, it should be borne in mind that these CSAs may also have their own custody clients that may trade as non-controlled clients through other JSE members. In these instances, the CSA is not only acting as an agent on behalf of other JSE members but it will also have direct responsibilities in relation to the JSE s custody rules and the relevant sections of the various statutes that affect the activities of the JSE members, including the SECA and the FICA. The relevant audit procedures and reporting requirements in respect of a JSE member s own clients will obviously also apply to a CSA with its own custody clients. 15

Impact on liquidity and capital requirements.109 STRATE has, in many cases, affected the liquidity and capital requirements of JSE members, due to the following: JSE members are required to settle transactions on behalf of their clients on settlement date if the clients fail to meet their settlement obligations. JSE members need to place margin balances with the JSE in certain circumstances, which will have cash flow implications. The capital adequacy requirements that JSE members are required to adhere to have, under certain circumstances, increased materially in the STRATE environment. There is a possibility that the JSE will not allow the JSE member to continue trading should any electronic settlement or margin call not be timeously completed..110 However, STRATE has probably had a positive impact overall on JSE members liquidity, as settlement on a DVP basis avoids JSE members having to pay for securities received through the settlement system and possibly only receiving the funds from the client at a later date, particularly in respect of the high value institutional client trades. Scrip counts.111 Uncertificated securities balances (ie. scrip that has been dematerialised) are agreed to the confirmation of holdings received from the JSE member s CSDP through the review of the CSDP reconciliation report (refer Appendix E for common reasons for the JSE member s records being out of balance with the CSDP)..112 Physical scrip held by the JSE member, whilst in the dematerialisation process or otherwise reflected in the JSE member s BDA records in a particular location, and Kruger-Rands remain subject to the same physical scrip count audit procedures that existed in the pre-strate environment. Segregation of client funds.113 The segregation of controlled client funds from those of the JSE member firm is an important principle established in the SECA and in the JSE rules and directives..114 Section 14 of the SECA requires all funds received from or on behalf of a client to be deposited by the JSE member into a separate trust account at a bank or into a separate trust account maintained by the exchange to which the JSE member belongs. The funds are either to be deposited into the relevant trust account at the date of receipt, or the JSE member is required to deposit an equivalent amount into the relevant trust account for same day value..115 The JSE rules then specifically provide that all funds received in respect of the operation of a controlled client account that are not paid over to the client shall be deposited with JSET. JSET is a company established and owned by the JSE to accept from broking JSE members all funds arising from the operation of controlled client accounts. These funds are in turn invested by the JSE in the money market..116 The above requirements are met in two ways. First, all JSE members are required to open client trust bank accounts to be used for the deposit of all funds received from their controlled clients. Second, BDA facilitates a daily transfer (sweep) between JSETs and the JSE members current, settlement and trust bank accounts. Based on the type of transaction and the relevant details recorded by the JSE member, BDA is able to identify whether a particular transaction affecting a client s credit cash balance should give rise to a sweep to or from JSET, and which of the JSE member s bank accounts are affected. BDA then aggregates each of the transactions affecting each bank account and a SWIFT message is sent to the JSE member s bank each morning instructing the bank to transfer the net amount in respect of each bank account to or from JSET. 16

.117 BDA produces a daily control report JSET Account Balances (PJSETB) which reflects three balances, all three of which should be in balance at all times. The report reflects the total client credit cash balances on BDA, the JSE member s JSETs Control Account balance and the JSE member s JSET balance in the records of JSET itself. There is a further split on the report between the local Rand balances and the non-resident balances. JSET also maintains non-resident accounts to facilitate the receipt and holding of non-resident balances..118 Surveillance Division closely monitors the PJSETB reports and is advised by the JSE Finance Division, that administers JSET, of any sweeps to JSET that have not been met. Directive BD requires JSE members to ensure that there are, at all times, sufficient funds or facilities available to them to effect transfers from their current account to JSET. The failure by a JSE member to meet this requirement is an act of default..119 Auditors should be aware that any client funds in a JSE member s current account that are not transferred to JSET for value the date of the receipt of such funds represent funds that are not being segregated in accordance with the SECA and the rules and directives. Capital adequacy requirements.120 The capital adequacy requirements imposed on JSE members as set out in the JSE rules and directives provide the JSE with the assurance that JSE members are able to meet their settlement commitments, that they can provide continuity of business to their clients and that they have adequate resources to support their role as custodians of client assets..121 A JSE member must at all times hold sufficient adjusted liquid capital to meet its base requirement and risk requirement..122 A JSE member s base capital requirement is the higher of 13 weeks fixed expenditure and R200 000, if the JSE member does not operate managed accounts or controlled client accounts; or R400 000 in all other cases..123 The risk requirements of a JSE member are the sum of its position risk requirement, counterparty risk requirement, foreign exchange requirement, large exposure requirement and, in the case of a custody and settlement JSE member, custody risk requirement. The calculations of these risk requirements are set out in Directive DC. These calculations take into account positions in all securities and financial instruments, including OTC transactions..124 The computation of a JSE member s adjusted liquid capital is also set out in Directive DC. Each JSE member is required to submit a monthly return to the Director: Surveillance reflecting its risk positions and its adjusted liquid capital. The Surveillance Division is also able to monitor each JSE member s capital adequacy position on a daily basis by extracting balances and positions from the JSE members BDA records and computing their capital position on the Surveillance Division s Capital Adequacy system. The monthly return submitted by the JSE members therefore serves as a confirmation of the position computed by the Capital Adequacy System..125 It is important to note, however, that the capital adequacy position monitored by the JSE through its systems and the position reported by the JSE member on its monthly return is dependent on the integrity of the underlying records. It is for this reason that the JSE places significant reliance on the auditors review of those records. In addition to reporting on the annual financial statements, auditors are specifically required to report on the capital position of the JSE member over the reporting period and are also required to compile an Annual Reconciliation Statement reconciling the amounts reflected in the annual financial statements with the monthly DC1.6 return submitted by the JSE member in respect of the period ending on the last day of the financial year. Securities lending.126 In recent years, there has been a significant increase in the volume of securities lending activities in the financial markets to facilitate trading strategies, which involve short selling, and to enable the orderly settlement of transactions. 17

.127 JSE members frequently borrow securities either on behalf of their clients or for proprietary purposes. Certain JSE members have established lending desks to facilitate securities borrowing either by other JSE members or by institutions..128 Securities lending is a process by which the owner of securities lends the securities to a borrower for a fee..129 The borrower must provide the lender with cash or securities collateral that is a multiple of the daily market value of the securities loaned. Common market practice is for the lender to request 105% of the market value of the securities lent in cash or 115% of the market value in securities. The lender has the right to recall the securities at any time, subject to the notice period referred to in the lending agreement..130 The lending transaction is structured so that title passes to the borrower. The lender receives a payment from the borrower to compensate for any dividend to which the lender would otherwise be entitled, known as manufactured dividends..131 The revenue earned by the lender generally varies between 1% and 1,5% a year (or pro-rata) of the value of the loan. In turn, the borrower receives interest on cash collateral placed to secure the loan..132 The value of the loan is adjusted daily in line with the closing equity price of the borrowed stock. Changes in the value of the loan are taken into consideration in calculating the fee, as well as the collateral required..133 The terms of a securities lending agreement typically include the following: The borrower is charged a rate for the facility based on the market value of the securities concerned. The borrower is normally required to lodge collateral with the lender to cover the full value of the securities and, depending on the credit assessment of the borrower, an additional amount to be put up as margin to cover price fluctuations. An agent acting on behalf of a borrower usually guarantees the return of equivalent securities to the securities lender. The borrower is often required to reimburse the securities lender, by way of manufactured dividends, for all dividend payments made by the issuer to the borrower. The securities lender, at any time, can recall the securities that have been lent, and the borrower or its agent undertakes to ensure that the securities can be made available within a reasonable period of time. The borrower may only borrow the securities for a maximum period of twelve months in order for the securities lender to qualify for an exemption from payment of UST on the return of the securities. JSE broker Deal Accounting system.134 The BDA system is the JSE s comprehensive integrated on-line computerised system encompassing all functions associated with the following aspects of a JSE member s business: Account maintenance. Dealing and deal adjustments. Scrip processing. Financial processing. Interest processing Dividends and rights processing It also provides the following features: 18

Logical access security. Menu system with on-line help facilities. Table maintenance. Processing control..135 The use of the BDA system is obligatory for all JSE members to allow the JSE to ensure that JSE members are able to meet their settlement commitments and that client assets are being adequately safeguarded. BDA also enables the JSE to promote the integrity of the market through its client-level review of trading activity..136 The BDA system is automatically updated daily for transactions in equities, bonds and exchange traded derivatives through the respective trading systems or clearing houses. American Depository Receipt (ADR) transactions, over-the-counter derivatives and money market transactions are processed manually into BDA by the individual JSE members..137 BDA generates all of the JSE member accounting records as well as all of the relevant control and compliance reports. Certain elements of the accounting records are stored on the BDA mainframe for a period of time determined by the JSE member, such as client financial transaction, deal history files and general ledger information. Thereafter, these records are transferred onto compact discs by the JSE and provided to the JSE members for their safekeeping. SWIFT and Merva.138 SWIFT is the messaging system used by STRATE to facilitate the electronic transmission of settlement instructions between JSE members, the CSDPs and STRATE. BDA automatically creates SWIFT messages in respect of the settlement of on-market equities transactions, which are transmitted through a SWIFT bureau maintained by STRATE and used by the JSE. Therefore, for the purpose of settling these transactions, JSE members do not require access to the SWIFT network themselves..139 JSE members can, however, be given access to a SWIFT front-end system called Merva. Merva allows JSE members to transmit their own SWIFT instructions to their bankers or their CSDPs in respect of fund transfers or off-market security transfers. Merva can therefore be used by a JSE member, for example, to instruct its CSDP to transfer securities to another JSE member. As the system administrator in relation to the use of Merva by JSE members, the JSE controls access by JSE members to the system and will therefore only grant access to Merva to a CSM. The designated person at the CSM will then grant appropriate levels of access to CSM staff and, if necessary, restricted access to staff of a JSE member for whom the CSM acts as a Custody and Settlement Agent..140 A JSE member who generates SWIFT instructions via Merva is able to print a copy of each instruction for record purposes and each instruction is sequentially numbered. If a JSE member omits to print a particular instruction, the instruction details can be obtained subsequently from the Merva system administrator in the JSE Clearing & Settlement Division. The JSE member is also able to view online the details of any changes to the access to the Merva system granted to each user. Reporting to clients.141 JSE members are required timeously to report details of transactions executed on behalf of their clients to those clients by providing contract notes to them. These contract notes can be provided to the clients either in hard copy form or in electronic form..142 JSE members are also required to send statements of account to their clients reflecting the transactions during the period since the last statement, and the funds and securities balances held by the JSE member at the statement date. These account statements are also provided to clients either in hard copy form or in electronic form..143 The distribution of contract notes and client account statements is a key control over the integrity of recorded client transactions and balances..144 Client account statements may be generated in the following different ways: 19

Hard copy produced by the JSE these statements are printed by a printing house appointed jointly by the JSE members and are collected from the printing house by the JSE members for distribution to their clients. Remote printed statement the JSE sends the statement print file to a printer designated by the JSE member either at the JSE member s office or at a service provider appointed by the JSE member to prepare its statements. Although the print file disseminated by the JSE is in a format that, in itself, cannot be manipulated, software used by the service providers enables them to copy the print file into a format that enables the data to be reformatted. The reformatted statement is then either printed for distribution to clients in hard copy form or it is distributed to clients in electronic form. Electronic Report Distribution (ERD) the JSE sends an electronic report in the format of a statement to the JSE member or its appointed service provider. Again, although the ERD file cannot in itself be manipulated, in a similar manner to the remote printer files, software used by the service providers enables the file to be reformatted and the reformatted file can either be printed for distribution in hard copy form or it can be distributed in electronic form. extensible Markup Language (XML) these electronic files distributed by the JSE to the JSE member contain all of the relevant statement information in a flat file that can be manipulated by the JSE member into the desired format. Daily dissemination the JSE member can obtain electronic files from the JSE on a daily basis containing all of the relevant client account transactions and balances, which enables them to compile a month end statement from the daily files. This facility can also be used to provide online daily access by clients to their accounts..145 JSE members also provide portfolio valuation statements to their clients reflecting the values of their holdings at the statement date and the performance of their portfolios over time. These statements are also either produced by the JSE in hard copy form or they are generated by the JSE members using one of the methods described above in relation to account statements, often with the use of the JSE members own portfolio systems..146 From the above it is evident that a key consideration for auditors is that, although BDA is always the original source of the data reflected in client account statements, there are a number of ways in which these statements can be produced. This necessitates controls being implemented to prevent the unauthorised manipulation of the data between its generation by BDA and its distribution to the client in the form of a statement..147 The dissemination of statement data by the JSE to a secure controlled environment, either within the JSE member s office or at an independent service provider, assists in mitigating the risk of unauthorised manipulation of data and interception of statements. 20

AUDIT GUIDE CONTENTS Page Paragraphs Acceptance of engagement 22.01 03 Planning 22.04.05 Consideration of fraud and error 22.06.14 Consideration of laws and regulations 23.15.18 Knowledge of the business 24.19.21 Materiality 24.22 Risk assessment and internal control 24.23.30 Audit evidence 26.31.79 Computerised systems 34.80.83 Obtaining confirmations 35.84.85 Analytical procedures 35.86 -.87 Related parties 35.88.91 Subsequent events 35.92.93 Going concern 36.94.95 Management representation letter 36.96 21

Acceptance of engagement.01 In view of the specialised nature of the operations of JSE members, it is important that the auditor accepts an audit engagement only after considering the auditor s own competence and the adequacy of the auditor's resources to carry out the duties. Guidance on factors to consider regarding the acceptance and retention of clients is contained in the statement of SAAS 220 Quality Control. The auditor will, in particular, need to have a proper understanding of: the nature of JSE members business, the characteristics of the various types of businesses in the industry, the structure and the types of risks attached to those businesses, the regulatory environment and, in particular, the accounting methods peculiar to the stock broking business, the accounting and audit implications of the relevant legislation and other statutory reporting requirements, information systems as they apply to JSE members, and the audit approach to key areas of the stock broking businesses..02 The auditor should ensure that there is a clear understanding between the client and the auditor regarding the terms of the engagement by issuing an engagement letter in terms of SAAS 210 Terms of Audit Engagements. In addition, the engagement letter should address the reports required in terms of the SECA and the JSE rules and directives, namely the Long Form Report and Capital Adequacy Report (refer to proforma reports in Appendix H)..03 The engagement letter should address the requirement that enquiries will be made of, and that representations may be necessary from, the compliance officer as to compliance with the JSE rules and the regulations. Planning.04 Statements of SAAS and, in particular, the statement of SAAS 300 Planning, provide guidance to auditors when formulating an audit plan for any type of business entity. The following paragraphs deal with aspects of stock broking that are likely to need special consideration by the auditor when auditing the annual financial statements of a JSE member..05 The complexity of the accounting and operating systems of a JSE member together with the wide variety of interested parties involved with the respective activities increases the risk of fraud and error. The auditor is alert to this risk and evaluates its impact specifically on the JSE member. The auditor refers to the statement of SAAS 240 The Auditor s Responsibility to Consider Fraud and Error in an Audit of Financial Statements, in this regard. Consideration of fraud and error.06 The primary responsibility for the prevention and detection of fraud and error rests with those charged with both the governance and the management of an entity. Management, with the oversight of those charged with governance, needs to set the proper tone, create and maintain a culture of honesty and high ethics, and establish appropriate controls to prevent and detect fraud and error within the entity..07 When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should consider the risk of material misstatements resulting from fraud or error..08 Two types of intentional misstatements are relevant to the auditor s consideration of fraud misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets..09 An audit conducted in accordance with statements of SAAS is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error. 22

.10 The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error, because fraud may involve sophisticated and carefully organised schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentation being made to the auditor. Such attempts at concealment may be even more difficult to detect when accompanied by collusion..11 Unless the audit reveals evidence to the contrary, the auditor is entitled to accept records and documents as genuine. Accordingly, an audit performed in accordance with the statements of SAAS rarely contemplates authentication of documentation, nor are auditors trained as, or expected to be, experts in such authentication..12 When planning the audit, the auditor should make enquiries of management to obtain an understanding of: management s assessment of the risk that the financial statements may be materially misstated as a result of fraud, and the accounting and internal control systems management has put in place to address such risk..13 When assessing inherent risk and control risk, the auditor should consider how the financial statements might be materially misstated as a result of fraud or error. In considering the risk of material misstatement resulting from fraud, the auditor should consider whether fraud risk factors are present that indicate the possibility of either fraudulent financial reporting or misappropriation of assets..14 Activities within the stock broking environment that may constitute fraud or unlawful activity include: Insider trading Price manipulation Front-running Cherry picking Unauthorised trading on client accounts Personal account dealing on undisclosed accounts Misappropriation of client securities or funds Money laundering Contraventions of exchange control regulations. Consideration of laws and regulations.15 It is management s responsibility to ensure that the entity s operations are conducted in accordance with all applicable laws and regulations. The responsibility for the prevention and detection of noncompliance rests with management..16 The auditor is not and cannot be held responsible for preventing non-compliance. The fact that an annual audit is carried out may, however, act as a deterrent..17 The auditor should be aware of and have an understanding of those laws and regulations applicable to JSE members..18 In accordance with specific statutory requirements in SECA and the JSE rules and regulations, the auditor is required to report, as part of the audit of the financial statements, on whether or not the entity complies with certain provisions of laws or regulations. The format of these reports is set out in Appendix H. 23

Knowledge of the business.19 In order to identify the important audit areas and plan audit work adequately, the auditor needs to understand the particular characteristics of a JSE member s business, and the environment in which the JSE member operates. Reference is to be made to the statement of SAAS 310 Knowledge of the Business, in this regard..20 Relevant background information may include: the rules and directives and applicable Acts, any circulars issued by the JSE, minutes of any management, trustee, audit committee or relevant sub-committee meetings, the market in which the JSE member operates and the methods by which business is transacted, relationships with CSDPs, related party transactions, extent to which clients are controlled or non-controlled, products with which the JSE member is involved, review of Annual Financial Statements, management accounts, policies and procedures manuals, budgets, etc, discussion with internal audit personnel and review of internal audit reports, discussion with compliance officers, discussion with other auditors, and with legal and other advisors, that have provided services to the entity or within the industry, making enquiries of the Surveillance Division with regard to breach of rules and regulations, penalties imposed and compliance with Capital Adequacy..21 The auditor should be aware of the importance of both financial and non-financial information in audits relating to JSE members, as well as the internal controls over such data, especially with regards to authorisation of transactions, dealer limits, products dealt in and control over client mandates. Materiality.22 The normal materiality considerations, as set out in SAAS 320 Audit Materiality, apply to JSE member audits. In a stock broking environment, however, the carrying amounts of many items on the balance sheet are highly variable and are often not a suitable indicator of the size of the entity s operations. Most auditors of JSE members will choose to base their materiality judgement on either the income statement or on shareholder s equity. Risk assessment and internal control.23 In considering audit risk, the auditor gains knowledge of areas that are critical to the business, for example: products offered and dealt in, extent of trades performed for controlled and non-controlled clients, outsourcing arrangements, extent to which the JSE member will be affected by reverse substitution in the event of failed trades, extent to which it is possible for the JSE member to be affected by unauthorised trades being entered into, credit and counterpart risk, and 24

the scope and rigour of the compliance officer s activities and those of the internal auditor and audit committee..24 In terms of the risk assessment, the inherent risk of a JSE member may be higher as a result of factors such as: the large volume of transactions involved, the large monetary amounts involved, and counterparty risk. Risks faced by the JSE member in a STRATE environment.25 Aspects of the STRATE environment that increase risk for the JSE member include the following: Segregation of duties has become more important, as securities held by the JSE member are now held electronically. To mitigate this, access controls to the computer system need to be properly maintained, to ensure that only designated authorised officials are able to effect the transfer of securities. Settlement is guaranteed to take place on T+5. Should a non-controlled client not be able to effect settlement, reverse substitution occurs, whereby the JSE member settles on behalf of its client. The JSE member is thus required to have sufficient resources available should this situation occur. Similarly, if a controlled client has not provided the JSE member with the funds or securities required to settle a trade, the JSE member will need to settle the trade on behalf of the client. Counterpart risk is inherently higher when dealing with non-controlled clients, who are typically institutions, rather than controlled clients whose securities and cash resources are held by the JSE member. The JSE member does not have access to a non-controlled client s holdings and thus, when transacting on its behalf, the risk arises that the member may be liable for reverse substitution. Certain JSE member have now outsourced their clearing and settling functions to designated CSA. This has the effect of mitigating the risk associated with segregation of duties, yet brings new risks in the form of relying on the CSA to adhere to the terms of the service level agreement. As the nominee registers maintained by CSM represent the sole record of ownership of uncertificated securities held by controlled clients, the custodial responsibilities placed on these JSE members are significant. The JSE member therefore has to be aware of the risk of fraud or error in the maintenance of those electronic records, as any criminal or negligent act could result in a client being dispossessed of its securities. The internal controls over the maintenance of nominee registers are therefore vitally important. JSE members play an important role in ensuring compliance with the relevant exchange control provisions in the STRATE environment, as the absence of share certificates means that the authorised dealers can no longer control the flow of funds in respect of the purchase and sale of securities by a non-resident controlled client, to the extent that they were able in the certificated environment. In the certificated environment, the authorised dealer was able to control the flow of funds through endorsing certificates purchased by non-residents and cancelling the endorsements when the securities were sold. In the STRATE environment, the control largely vests with the JSE member. The integrity of the JSE member s BDA records with regard to the Exchange Control indicator on non-resident controlled client accounts, the control over the dematerialisation of non-resident clients securities and the control over the transfer of securities into non-resident client accounts are all key aspects of the JSE members exchange control compliance obligations. JSE members therefore have significant additional exchange control responsibilities in the STRATE environment, and as a consequence, are subject to the risks of non-compliance, including sanction by the JSE and/or the SARB. 25

Accounting and internal control systems.26 The responsibility for the implementation and continued operation of adequate accounting and internal control systems rests with management..27 Management has a duty to ensure that adequate accounting records are maintained to enable JSE members of management to carry out their duties, which include the safeguarding of client assets. Since these responsibilities cannot be delegated, management will need to ensure that the JSE member has adequate accounting and internal control systems available to demonstrate proper stewardship, even where certain administrative or investment activities are undertaken by third parties..28 The extent and nature of accounting systems, procedures and internal control systems of a JSE member will depend mainly upon the size of the JSE member, the extent to which senior management delegates the administration procedures, and the extent of outsourcing to third parties..29 The auditor structures the audit to identify and record important procedures and internal controls, and to test them, where appropriate, as part of the overall audit approach..30 When reviewing accounting internal control systems, the auditor considers the extent of the management control over any third parties, consultants and advisors. The internal controls over dayto-day administration and trading, including management controls, organisation structure, segregation of duties, implementation of authorised signatories, supervision, and detailed internal checks will be similar to those found in many types of organisations. Audit evidence.31 In view of the complex nature of an audit of a JSE member, the auditor may obtain assurance from a variety of audit techniques. These include tests of control and tests of detail of transactions and balances, including analytical procedures and review procedures. It may also involve other auditors and the use of experts. The auditor exercises judgement in determining the most effective combination based on the information available, the deemed risks and materiality. The combination of procedures should ensure sufficient evidence is gathered to address the audit assertions of completeness, occurrence, existence, measurement, valuation, rights and obligations, and presentation and disclosure..32 The following aspects of a JSE member s activities require specific mention with regard to the audit procedures to be adopted and the audit evidence to be reviewed, as they either impact on the auditor s reporting requirements or they have material implications with regard to investor protection: Holding of client funds.33 The JSE rules contain the following specific requirements with regard to the holding of client funds: Rule 14.60.11: all surplus client funds received by the JSE member in respect of the operation of a controlled client account that are not paid over to the client must be deposited into JSET. Rule 5.200.1: where money is received on behalf of a client for deposit with an institution (i.e. money broking funds) and the deposit cannot be effected before the close of business, such monies must be deposited with JSET on that day. Rule 5.210.1: where the JSE member holds surplus margins and other payments or receipts for the account of a client or counterpart for entering into futures contracts, such monies must be deposited into JSET. Rule 5.220.1: where money is held to cover exposure or margins for the account of clients or counterparties for entering into transactions in bonds, such monies must be deposited into JSET..34 Each of the above requirements relates to the general obligation of JSE members to segregate all funds held on behalf of clients from the JSE members own funds at all times. Auditors are specifically required to report on segregation of client funds..35 In order to ensure that all client funds held by the JSE member are adequately segregated and can be accounted for, the auditor should perform the following procedures: 26

Review the JSET Account Balances (PJSETB) report produced by BDA and ensure that the list of client credit cash balances agrees with the JSE member s JSET Control account balances and with the balance held by JSET per the JSE s records. Review the JSE member s bank reconciliation and ensure that there are no: - unprocessed client deposits on current accounts that represent funds not deposited into a trust account due to the amounts not being swept to JSET; - unpaid sweeps that have not been processed on BDA; and - payments to clients that have been outstanding for an unreasonable period, which represent funds withdrawn from JSET and held in the JSE member s current account. Review the Credit Control Report (PCCREP) produced by BDA and ensure that there are no material credit cash balances on Delpay accounts, that may represent funds due to clients that have not been swept to JSET. It should be noted that, although the concept of a Delpay client no longer exists in the STRATE environment, credit cash balances on client accounts loaded with a D Settlement Type (Delpay) do not get swept to JSET. Auditors should ensure that there is no misuse of this functuality by the JSE member to avoid segregating client funds. Inspect the trial balance to identify suspense accounts used by the JSE member to record unallocated client deposits. These deposits should be recorded in a client account designated for that purpose to ensure that they are swept to JSET..36 JSE members are required to send monthly statements to all clients reflecting any funds held on behalf of each client..37 The cash balances reflected on these statements must be circularised by the auditors as part of their mandatory audit procedures. The different ways in which these statements can be produced and distributed by the JSE member is discussed in the section of this Guide dealing with Reporting to clients. Custody of client securities.38 The JSE rules specify the manner in which uncertificated securities held on behalf of controlled clients and any other securities held on behalf of managed account clients are to be held. The rules also require JSE members to submit monthly certificates to the JSE relating to the balancing of their custody records with the records of the relevant custodians, and to count any securities in their possession and reconcile those securities to the records of such holdings..39 Auditors are specifically required to report on the existence of securities, bonds, Kruger-Rands and any other documents of title held by the JSE member on behalf of its clients. The format of this report is set out in Appendix H..40 In order to ensure that all securities, financial instruments and Kruger-Rands held by the JSE member can be accounted for, the auditor should perform the following procedures: Review the PCSDRC report produced by BDA and establish whether the reasons for any differences between the JSE member s records of dematerialised holdings and those of the CSDP are acceptable. Further guidance on the review of these reports is contained in Appendix E. Obtain the Scrip at Location (POPLOC) report produced by BDA and confirm the existence of all of the certificated securities, bonds and Kruger-Rands on the report by: - physically counting any securities or Kruger-Rands in the JSE member s possession, - obtaining confirmations of holdings from custodians or bond settlement agents, - examining receipts issued by transfer secretaries or CSDPs; and - performing appropriate follow-up procedures on any securities in transit between any locations or between the JSE member and the client at the date of the scrip count. 27

Obtain a report from JSE Customer Services reflecting all open Exceptional Open Positions (XOPs), which are scrip journals, and identify open long positions on client accounts, representing securities due to the clients by the JSE member. Determine where the securities representing these positions are actually held by tracing the opposite side of the open position, and ensure that the JSE member can account for those securities..41 As with cash balances, securities held by the JSE member on behalf of its clients are reflected on statements of account sent to the clients and these securities balances must also be circularised by the auditors as part of their mandatory procedures, again with due regard to the manner in which these statements can be produced and distributed by the JSE member. Managed accounts and managed portfolios.42 A managed account is an arrangement whereby the client authorises the JSE member to hold securities and financial instruments on its behalf, or to receive cash arising from the operation of the account for deposit with JSET, and any discretionary account operated by a JSE member. The two types of managed accounts as far as transactions are concerned are: discretionary accounts - whereby the JSE member does not need the client's prior approval to buy and sell securities on its behalf; or non-discretionary accounts - whereby the JSE member must consult with the client prior to buying or selling securities on its behalf..43 The difference between a managed account and a controlled client account is twofold. First, a controlled client account is a custody and settlement arrangement in respect of uncertificated securities and JSET funds, whereas a managed account could involve the custody of securities and financial instruments other than just uncertificated securities, such as bonds. Second, a managed account can include an arrangement whereby the JSE member uses its discretion with regard to investment decisions on behalf of the client, whereas a controlled client s account does not incorporate an arrangement with regard to investment decisions..44 An arrangement whereby a client authorises a JSE member to conduct transactions in uncertificated securities on such client s behalf is referred to the JSE rules as a managed discretionary or nondiscretionary portfolio in respect of uncertificated securities..45 Depending on the arrangement between a client and the JSE member, a client s account could be a controlled client account, a managed account and a managed portfolio in respect of uncertificated securities..46 The operation of managed accounts is dealt with in Rule 5.170 of the JSE rules. The operation of managed discretionary and non-discretionary portfolios in respect of uncertificated securities is dealt with in Rule 14.80..47 In addition to the statutory requirement to verify clients cash and securities balances, the following procedures are relevant to compliance with regulatory requirements for the audit of managed accounts and managed portfolios: Regulation 6(1)(a) of SECA requires auditors to report on whether securities entrusted to the JSE member or for which the JSE member is accountable to the client are properly held in terms of the Act, Regulations and applicable mandates. Auditors should identify from the JSE member s portfolio system any investments not recorded on BDA for which the JSE member is accountable to its clients, such as foreign investments and unit trusts, and confirm the existence and ownership of these investments with reference to appropriate documentation obtained from the party holding the investments (e.g. foreign JSE member/investment manager or unit trust management company). JSE members operating managed accounts on behalf of clients are required to obtain mandates from those clients and must distinguish managed accounts from other accounts in their books of account. The JSE member therefore loads the account as being a managed account on the BDA 28

system. In terms of the JSE directives, auditors are specifically required to: report on their review of the adequacy of controls designed to ensure that signed mandates are held for safe custody and managed account clients, and their testing of such controls against the registers and account loadings, in accordance with Directive DG1.7.5.2. This can be achieved by: - enquiring of management as to the procedures applied by the firm to ensure that it obtains signed mandates from each managed account client. This would include the procedures whereby it identifies all managed accounts for which it has not yet obtained a signed mandate, and the steps that it takes to address these exceptions. Certain JSE members reflect that they have not yet received a signed mandate by not inserting a date in the Mandate Received field on the Client Maintenance screen (CLMNT) on BDA. Other JSE members insert NCS in the Managed Code field on CLMNT; - obtaining the Print Managed Client Mandates (PMNDTE) report produced by BDA, which reflects all client accounts loaded with a managed account indicator, and confirming the existence of a sample of mandates for the clients on the list. In this regard, it has been agreed with the JSE Surveillance Division that the minimum sample size should be 50 managed accounts, unless the total number of managed accounts operated by the JSE member is less than 50; - identifying all managed accounts for which the BDA records reflect a mandate has not yet been received, and obtaining explanations for these exceptions. The applicable accounts should be reflected on the PMNDTE report either with NCS in the Managed Code field or no date in the Mandate Received Date field, subject to the procedures applied by the JSE member to identify such accounts. The report can be requested in a format that only reflects those accounts with no date in the Mandate Received field or only those accounts with NCS in the Managed Code field; and - identifying all accounts that have not been loaded as managed accounts on BDA, but for which the JSE member is holding surplus funds, and either ensuring that an appropriate mandate has in fact been received from the client or obtaining explanations as to why no mandate has been obtained if the JSE member is holding funds on behalf of the client. These accounts can be identified on the JSET Account Balances (PJSETB) report produced by BDA as they will reflect a credit balance but will reflect no code in the Managed Code column of the report..48 It should be noted that the JSE prescribes minimum requirements for managed account mandates. These requirements are set out in the Consolidated Mandate issued by the JSE by way of a Special Gazette issued to JSE members. The most recent version of the Consolidated Mandate issued by the JSE is contained in Special Gazette No. 203 of 7 October 2003, which is attached as Appendix F to this guide. JSE members may amend the JSE s Consolidated Mandate to suit their specific arrangements with their clients, but the amended mandate must still contain the minimum requirements and the amendments must not compromise the principles or the specific rules contained in the JSE s mandate. Whilst auditors would not be expected to review the contents of each client mandate to ensure that they meet the JSE s minimum requirements, they should nevertheless familiarise themselves with the general requirements prescribed by the JSE and establish, through a reasonable review, whether the JSE member s mandates appear to comply with the JSE s requirements. To assist auditors in this regard, the Surveillance Division has compiled a summary of the general requirements that they would expect to be contained in any managed account mandate, based on the contents of the Consolidated Mandate in Appendix F, which is summarised on Appendix G to this guide..49 Most JSE members also incorporate a section in their client mandates in which the client states its investment objectives and indicates any restrictions in respect of the type of investments or instruments that the JSE member may purchase on its behalf. Any material deviation from these instructions by the JSE member, either intentionally or negligently, can expose the JSE member to a potential damages claim from the client. Auditors should therefore consider reviewing a sample of client mandates to ensure that the specified investment objectives and any relevant restrictions have been authorised by the client. Any amendments to the terms of the original mandate should be signed by the client and an authorised signatory of the JSE member. 29

Money broking.50 Whilst not specifically required in terms of the Rules and Directives, auditors should consider circularising client money broking statements at the time of the mandatory scrip counts and circularisation of other client balances..51 If the client money broking statements are produced by an independent computer system, the process used to prepare such statements should also be reviewed, with due consideration being given to the possibility of information either being altered or suppressed..52 In addition to the circularisation of client statements, probably the two most important issues for an auditor in reviewing the money broking activities of a JSE member are to: ensure that the balances allocated to each client match to the relevant bank balances, and confirm that the relevant bank balances agree with statements/confirmations from those banks..53 In order to confirm that the client balances agree with the relevant bank balances, auditors should review the List of Lenders per Borrower (PMMBOR) report produced by BDA and ensure that the relevant balances agree. If the JSE member uses its own money broking system, the auditor should review the corresponding report produced by that system. Derivative financial instruments.54 Consideration should be given by the auditors of JSE members to the effectiveness of risk management procedures practised by the JSE member where the JSE member is involved in proprietary derivative trading. The following are key controls that may be implemented by the JSE member: Strategies, policies and procedures for the use or trading of derivatives are clearly agreed by senior management and endorsed by the board of directors. Management supervision is exercised to monitor and report all derivative activities, positions and exposures. This includes a proper understanding by management of the products and related risks, the ongoing review by senior management of risk management, implementation of an independent risk function and the establishment and monitoring of limits. Control over valuation: this is a necessary precondition for managing financial risk, which includes procedures to ensure the accuracy of market data feeds and the appropriateness of valuation models, and regular independent valuations. Procedures for measuring and controlling sensitivity in terms of how the valuations will change with potential movements in the underlying variables. Counterpart credit exposure and, where relevant, collateral and margins are managed appropriately. Robust trade execution procedures are in place. This would include procedures for the approval of trades prior to execution, confirmation and matching of trades, and recording of trades. Transaction processing and settlement arrangements are designed to avoid error or loss. An appropriate methodology for dealing in new products is in place. Securities lending.55 The audit approach to a securities lending transaction may differ depending on whether the JSE member is a borrower or a lender of securities, and whether the transaction is entered into on a principal or an agency basis..56 Additional audit procedures where a JSE member has securities lending activities would normally include: inspection of the legal agreements between the lender and the borrower, review of position reconciliations between the lender and the borrower, both in terms of securities lent or borrowed (loans) and collateral, 30

confirmation with the counterparties of both the securities and collateral balances loaned/borrowed, in the case of a lender, consideration of controls over the adequacy and quality of collateral underlying the loan, and consideration of the control environment in which the securities lending activities take place, including controls to ensure the effective separation of client and proprietary account securities and/or collateral, and controls to ensure that collateral is not refunded before the loan securities are returned..57 JSE members record their securities loans and the associated collateral on BDA using specific functionality developed for this activity. Securities loans and securities collateral are identified with specific transaction types on BDA ( L and K respectively). Lenders and borrowers accounts also include specific Balance Codes ( K ) for cash collateral provided to or by the lenders and borrowers..58 The open loans or securities collateral positions on lenders accounts can be identified on the Open Positions (POPACC) report generated for Account Type LL only. All lenders accounts on BDA are loaded with Account Type LL. Borrowers accounts do not have a specific account type as any controlled or non-controlled client can be a borrower of securities..59 JSE members are exposed to counterparty risk when entering into securities lending transactions. They rely on the due performance of the borrower and the collateral provided by that party to meet their own obligations to return the borrowed securities to the lenders. Therefore it is important for the JSE member to identify who the borrowers are of all securities sourced from lenders, i.e. balance borrowers and lenders. JSE members do not necessarily match specific lenders and borrowers, but their securities lending and securities borrowing books should nevertheless balance with each other, both in aggregate and per security..60 JSE members involved in extensive securities lending and borrowing activities manage their loan books using external systems other than BDA. These systems usually reflect: the aggregate value of securities lent and borrowed, the aggregate value of collateral received and provided, the identity of each lender and borrower, the value of securities lent and borrowed per lender and borrower, and the value of cash and securities collateral received and/or provided per borrower and lender..61 JSE members usually use these external systems for risk management purposes rather than BDA. Counterparty limits are usually recorded in these systems and collateral top-up requirements are also managed via these systems. However, auditors need to recognise that there is a risk that the loan and collateral positions reflected in the risk management system may not agree with the positions reflected in the BDA accounting records. Differences between the two systems could either represent genuine positions that are not being risk managed or positions that either do not exist or may not be subject to audit verification if they are not recorded in the accounting records..62 Auditors therefore need to ensure that all securities lending and borrowing positions reflected in the JSE member s risk management system agree with the positions recorded in BDA. Similarly, all collateral reflected in the risk management system should also be agreed to BDA. Cash collateral balances are reflected on the Financial Account Balances (PBALSA) report as K Balance Types in the summary of each Account Type. Securities borrowed by the JSE member to settle proprietary sales will appear on the POPACC report generated for Account Type LB only. All proprietary loan accounts on BDA are loaded with Account Type LB..63 Once the auditor has satisfied himself that the BDA records appear to reflect all known loan and collateral positions, a sample of material loan and collateral balances should be confirmed with borrowers or reconciled to the statements received from lenders. 31

.64 Auditors should recognise that all securities loans that have not been adequately collateralised by the borrower represent contingent liabilities of the JSE member to the lender, subject to the credit worthiness of the borrower. An actual liability would be recognised in the event that the borrower is unable to meet its obligations post the balance sheet date. Confirmation of client balances.65 A JSE member firm may have established internal controls that ensure the existence and validity of its client balances, including both the custody positions on the client accounts and the transactions allocated to the accounts. These controls include ensuring that all clients receive their periodic statements.66 An audit of the JSE member would normally include steps to circularise such client balances. The following internal controls are therefore of importance to an auditor with regard to the confirmation of client balances: The JSE member s controls over the initial loading of clients personal particulars, including their postal address details, and the maintenance of those details. All initial details and any amendments thereto should be confirmed in writing by the client. The List New Accounts (PAHDIN) and List Changes (PAHDIM) reports produced by BDA can be used to test new account loadings and amendments to client particulars. This report should also be examined regularly by the JSE member to ensure that the appropriate procedures have been followed. The control environment around the production of client statements. In this regard, auditors should bear in mind the different ways in which these statements can be produced, as described in the section of this guide dealing with Reporting to Clients. Controls regarding the distribution of client statements, including those that ensure that no statements are withheld. Staff of the JSE member responsible for preparing statements for distribution and handling the distribution thereof should be independent of any staff that can initiate or authorise transactions on client accounts. Controls regarding the identification of statements that are to be distributed by hand and the distribution thereof. Ideally, appropriate, independent senior officials should acknowledge all statements to be distributed by hand and satisfy themselves that it is appropriate to do so, with due recognition being given to the identity of each client. Controls that address returned mail and client queries regarding balances or transactions on their accounts. Again, independent staff should deal with these issues, so that matters of concern can be identified and appropriately addressed..67 The following practical considerations should be borne in mind by the auditor: Auditors should ideally take control of all client statements produced at the balance sheet date and ensure, as part of their circularisation procedures, or observe that they are distributed to the clients. However, this may not always be possible, particularly if the JSE member uses a third party service provider to produce and distribute its statements. In these instances, the auditor should nevertheless obtain access to the statement information in order to apply its circularisation procedures, including the selection of accounts for positive confirmation and the insertion of negative circularisation messages on the other statements. Auditors should ensure that all statements to be delivered by hand do in fact reach the clients; and should satisfy themselves that the person accepting the statement is the genuine beneficial owner of the account. Auditors should establish an arrangement with the JSE member whereby all statements returned in the mail, including any that reflect the JSE member s own address, are secured and handed to the auditor. The auditor should then apply specific confirmation procedures to these accounts, with due consideration to the materiality of the balance and transactions on the accounts. Capital adequacy and accounting records.68 Auditors are specifically required to report on: whether the JSE member is in compliance with the JSE rules governing capital adequacy, and 32

whether it has come to the auditor s attention that the JSE member did not, for a material portion of the period under review, have adequate capital as prescribed by the JSE rules. In addition, auditors are specifically required to report on the Annual Reconciliation Statement submitted to the Director: Surveillance by the JSE member reconciling the amounts reflected in the annual financial statements with the capital adequacy return previously submitted by the JSE member in respect of the period ending on the last day of the financial year..69 In order to meet these reporting requirements, auditors need to have an understanding of the JSE s capital adequacy requirements. In particular, auditors need to be aware of the impact on the JSE member s capital adequacy of: material reconciling items on the JSE member s bank reconciliations, such as expenses and capital withdrawals not processed by the JSE member, or income and capital injections not processed by the bank; OTC positions in securities or financial instruments, particularly derivatives, not processed or incorrectly processed or which are not reflected correctly on the capital adequacy return submitted to the Director: Surveillance; guarantees provided by the JSE member to third parties not reflected on the capital adequacy return; and receivables other than amounts due by clients in respect of transactions in securities or financial instruments outstanding for more than 30 days but not recorded as such on the capital adequacy return..70 Auditors should be aware that in addition to reporting on the JSE member s capital adequacy position at the balance sheet date, they are also required to report on any capital adequacy shortfalls during the course of the year, if such a shortfall comes to their attention and if it existed for a material portion of the year. In this regard, the Surveillance Division has indicated that it would be particularly interested in being advised of shortfalls that were not reported to them on the monthly capital adequacy returns, due perhaps to any of the issues mentioned above or any other matter not correctly provided for in the JSE member s accounting records or on its monthly returns..71 Auditors should also be aware of the SECA requirement to report on whether all accounting records prescribed by SECA have been properly kept, and whether the JSE member has complied with the regulations to SECA regarding accounting records. If during the course of the audit, the auditor should become aware that transactions are not being timeously recorded or that proper records of transactions are not being kept or that items on reconciliations, other than genuine timing differences, are not being timeously cleared, in addition to considering the impact thereof on capital adequacy or segregation of client funds, the auditor should consider reporting on the breach of the provisions relating to accounting records. Verification of settlement balances.72 In the STRATE environment, transactions in uncertificated securities are not settled through a clearing house or central counterparty. They are settled by STRATE through a series of entries in the records of STRATE and the records of the CSDPs. However, the financial amount owed to or by the JSE member in respect of its unsettled transactions is not reflected in the records of STRATE or the JSE or a CSDP. This implies that an auditor will not be able to verify the settlement account balances reflected on the JSE member s trial balance directly with a third party..73 There are the following two settlement control accounts on BDA: The JSE broker Netting Account (A/C 12013) reflects the net amount due by or due to the JSE member in respect of unsettled controlled client and proprietary transactions, including any reverse-substituted non-controlled client transactions. The Non-Controlled Substitution Account (A/C 12005) reflects the net amount to be settled amongst the CSDPs in respect of non-controlled client transactions. 33

.74 Both of these control accounts have underlying sub-accounts, which can be viewed on the Financial Account Balances (PBALSA) report. The JSE broker Netting sub-accounts are reflected on the report as EN account types and the Non-controlled Substitution sub-accounts are reflected as ES account types. Any transactions on the sub-accounts will automatically update the balance on the relevant control account. The control account cannot be updated manually. Therefore, the total of the EN and ES account type balances should always agree to the balances on the relevant control accounts in the trial balance..75 Another important BDA control is that the only deals that can be recorded on the EN or ES subaccounts are the opposite sides of deals booked to controlled or non-controlled accounts. BDA does not permit a deal itself to be recorded on one of these sub-accounts or re-allocated to one of these accounts. The BDA system also prevents the JSE member from booking an XOP (scrip journal) to these accounts. The purchase and sale balances on the sub-accounts are therefore the result of entries automatically generated by BDA and cannot be adjusted manually by the JSE member..76 As all purchase or sale transactions on the control accounts are automatically generated by the BDA system, the only issue of concern for an auditor would be that the JSE member may have passed a financial journal entry to one of the sub-accounts. These accounts should never reflect a cash balance, only a trading balance, and there should be no reason why a JSE member would need to pass any entries on these accounts manually. Therefore, auditors should review the PBALSA report and ensure that there are no cash balances on the EN and ES account types, which would have been created via journal entries passed on these accounts. Surprise audits.77 Auditors should be aware that Directive DG1.8 requires them to conduct a surprise scrip count during the first six months and second six months of each financial year. The procedures to be followed in conducting these surprise counts will be the same as those applied in verifying securities balances at the year end, as described earlier under Audit Evidence in the section dealing with Custody of client securities..78 Directive DG 1.8.2 states that the auditor will only need obtain confirmations from clients if the surprise audit reveals any discrepancies, in which case the auditor should obtain positive confirmation from such clients as they deem necessary..79 As a supplement to the specific issues discussed above relating to audit evidence, Appendix B contains a schedule of risks inherent in a stock broking environment, typical control procedures to address these risks and the related audit considerations. Computerised systems.80 JSE members place considerable reliance on computerised systems. Data may be directly captured or amended through remote terminals by the client staff or, in some cases, by intermediaries, such as third party administrators and service providers. The audit of the controls over the computer system and the use of computer assisted audit techniques are often the only practicable means of checking control procedures that are performed by computer. The use of such audit software is ideally planned before the audit commences, to allow sufficient time for program development or amendment. In this regard, reference is to be made to the statement of SAAS 401 Auditing in a Computer Information Systems Environment..81 It should be noted that the BDA system is subject to an annual independent review, the scope of which is determined by the JSE. Whilst the scope of each annual review is limited, the JSE has suggested that all audit-relevant key general and application controls are tested on a cyclical basis. The JSE distributes copies of the audit report to the auditors of each JSE member, which should set out the findings of the review, and the scope and limitations thereof..82 However, this does not excuse the auditor from considering the effectiveness of internal controls and the interaction of the controls at the individual JSE members. Furthermore, as the report contains the results of the testing of a limited number of controls, it is only these controls, and the results of the compliance testing, that the auditors may rely on. 34

.83 It is understood that this review will be used by auditors of those JSE members in order to place reliance on the general computer environment and the key application controls identified in the report. Obtaining confirmations.84 The auditor may obtain confirmations from external parties such as the JSE and clients in order to assess accuracy, validity and cut-off of recorded balances..85 Due to the nature of the business and the extent to which reliance is placed on computer generated transactions, external confirmations may be a particularly useful source of evidence during JSE member audits. Analytical procedures.86 The objective of analytical procedures is to identify the existence of unusual transactions and events, as well as the amounts, ratios and trends that might indicate matters that have financial statement and audit planning ramifications. Guidance on analytical procedures is contained in the statement of SAAS 520 Analytical Procedures. Analytical procedures may be applied during the planning and the overall review stages of the audit. Analytical procedures may also be applied at other stages, e.g. as a substantive procedure..87 These procedures may include: a review of interim or management accounts and budgets, and comparison of various solvency, operating and other ratios to industry norms, budgets and prior periods. Related parties.88 The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties, and the effect of related party transactions that are material to the financial statements..89 Management is responsible for the identification and disclosure of related parties and transactions with such parties. This responsibility requires management to implement adequate accounting and internal control systems to ensure that transactions with related parties are appropriately identified in the accounting records and disclosed in the financial statements..90 The auditor needs to have a level of knowledge of the entity s business and industry that will enable identification of the related party events, transactions and practices that may have a material effect on the financial statements..91 The audit of related party transactions should occur in accordance with SAAS 550 Related Parties. Subsequent events.92 The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the audit report that may require adjustment of, or disclosure in, the financial statements have been identified, such as: uncommitted non-controlled client trades at year end, which subsequently go into reverse substitution; legal disputes or material client complaints regarding the operation of their accounts arising subsequent to year end; or fees or penalties imposed by regulatory authorities..93 The auditor should ensure that representations obtained from management address events that arise subsequent to year end but could have a bearing on the period under review. 35

Going concern.94 It is the auditor s responsibility to consider the appropriateness of management s use of the going concern assumption in the preparation of the financial statements, and to consider whether there are material uncertainties about the entity s ability to continue as a going concern that need to be disclosed in the financial statements..95 Factors which may affect the going concern assumption include: the turnover on the JSE and the ability of the JSE broker to generate sufficient JSE brokerage revenue to cover fixed cost commitments; non-compliance with the capital adequacy requirements imposed by the JSE rules and directives or other statutory requirements that may impact the ability of the JSE member to continue trading; the JSE member s exposure to credit risk and contingent liabilities arising from its broking activities; and the JSE member s ability to fund proprietary trading positions. Management representation letter.96 The auditor should include reference in the management representation letter to compliance by the JSE member with the SECA, regulations, rules and directives. 36

ACCOUNTING GUIDE CONTENTS Page Paragraphs Introduction 38.01 Revenue recognition 38.02.03 JSE Trustees capital and interest 38.04.07 Nominee company 39.08 JSE rights 39.09.13 Listed investments 39.14.15 Settlement accounts 40.16.18 Carry accounts 40.19.21 Guarantees 41.22 Money Broking 41.23.26 Financial year end 41.27 Risk management disclosure 41.28 Purchase of shares in holding company 41.29.30 Securities lending 42.31.36 37

Introduction.01 The annual financial statements of JSE members should be presented in accordance with IAS 1(AC101) Presentation of Financial Statements and the appendix to that statement. This section deals with aspects specifically relating to financial reporting by JSE members. In order to achieve fair presentation in their financial statements, JSE members are required to comply with all South African Statements of Generally Accepted Accounting Practice. Accordingly, the items presented below should be read as interpretations of those statements within the stock broking industry. Revenue recognition.02 JSE members typically earn the following types of income: JSE brokerage, which is recognised in full on the day that the purchase or sale of financial instruments is concluded, regardless of when settlement takes place. Proprietary trading or arbitrage profits. Long or short proprietary positions in financial instruments held for trading are measured at fair value, with fair value changes recognised directly in income. Where trading losses, including those relating to misdeals, are incurred during a reporting period, these are generally recognised as negative revenue. Portfolio management fees and other sundry fee income. Fees are recognised when the services are performed. Where services are performed over a period of time, fee income is recognised on a time proportion basis. Client assets are managed on an agency basis, and so the investment income attributable to the assets is not reflected in the JSE member s financial statements. Corporate finance fees. Generally, fee income should be recognised by reference to the stage of completion of the corporate finance transaction. However, it is often the case that the outcome of corporate finance transactions and the probability of receipt of fees are only certain once the transactions are completed. When the outcome of a transaction cannot be estimated reliably and it is not probable that any costs incurred will be recovered, revenue is not recognised, and the costs incurred are recognised as expenses. Where the receipt of income is probable but contingent on successful completion of the transaction, the JSE member should disclose the nature of the contingent income and, where practicable, an estimate of its financial effect. Interest and dividend income. Interest is recognised on a time proportion basis and measured using the effective interest method. Dividends are recognised when the right to receive the dividend is established. Interest and dividends are recognised only when due and payable to the JSE member in its own right. Income received on behalf of clients is not recognised..03 Each significant category of revenue should be separately disclosed. JSE Trustees capital and interest.04 JSET was established by the JSE to segregate client deposits from the JSE member s own funds. Any deposits made by clients and recorded in the client accounts in the BDA system will be automatically swept by the JSE from the JSE member s bank accounts and deposited with JSET. These funds are invested in a range of low risk money market accounts..05 The JSE member is not a principal to this deposit transaction notwithstanding that the client s deposit and the JSET investment are recorded separately in the JSE member s BDA general ledger..06 For financial reporting purposes, the client deposits and the JSET investment balances are set off in the JSE member s financial reports but are disclosed as a note to the financial statements. Similarly, the interest received from JSET and paid to clients is not recorded in the JSE member s income statement. Only the turn (ie. the margin between the interest paid to the JSE broker by JSET and the amount passed on to the client) taken by the JSE member is disclosed in the income statement..07 JSE members are entitled to charge an agency fee or turn on the amounts invested in JSET. These fees are typically 0.5% to 1% per annum, and are recognised on a time basis. 38

Nominee company.08 JSE members establish nominee companies in terms of JSE Rule 4.100 in order to facilitate the registration of client securities under the JSE member s control for purposes of portfolio management and the efficient processing of corporate actions. As the client s scrip is not beneficially held, it does not appear on the nominee company s balance sheet. Accordingly, the nominee company s financial statements often reflect dormancy, with only a nominal share capital and monetary asset on the balance sheet. JSE rights.09 JSE rights are equity instruments of the JSE. JSE members require a minimum number of rights in order to be a JSE member of, and to trade on, the exchange, but many JSE members choose to hold more than the minimum requirement as an investment..10 JSE rights do not have a right to income, but only to a share of the net asset value of the JSE in the (unlikely) event of liquidation of the JSE. Bids and offers in JSE rights are recorded on the JSE trading system and the JSE communicates the last traded price to the stock broking community, but the securities are not listed on the JSE and do not have an actively traded secondary market. As unlisted equity instruments, which are not actively traded, JSE rights should be classified as availablefor-sale financial instruments..11 IAS 39(AC 133) Financial Instruments: Recognition and Measurement requires available-for-sale instruments to be measured at fair value, based on a presumption that fair value can be reliably determined for most financial assets classified as available-for-sale or held for trading. However, AC 133 states that the presumption can be overcome for an investment in an equity instrument that does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable, in which case the financial instrument should be measured at cost. Where discounted cash flow analysis and net asset value are not considered appropriate techniques for valuing an equity instrument that only has a residual right on liquidation of the JSE, the JSE Rights should be carried at cost..12 JSE Rights should be assessed for impairment at each reporting date. Objective evidence of impairment would include financial difficulty of the JSE..13 The JSE member s financial statements should disclose the number of rights held to enable users to calculate the valuation that has been used. IAS 32 (AC 125) Financial Instruments: Disclosure and Presentation requires that, when it is not practicable to determine fair value with sufficient reliability, information should be provided to assist users of the financial statements in making their own judgements about the extent of possible differences between the carrying amount of financial assets and financial liabilities and their fair value. Such disclosures may include: The reason why management considers that available valuation techniques (such as earnings and net asset value) are not appropriate for the valuation of JSE Rights The range of prices in which the rights traded during the financial year (the maximum and minimum price) The last traded price An indication of the illiquidity in the market (such as the total volume traded in the year and that volume as a percentage of the total number of rights in issue) The net asset value per JSE Right, based on the latest financial statements of the JSE. Listed investments.14 In almost all cases, JSE members hold listed investments for purposes of generating a profit from short term fluctuations in price or dealer s margin, either as proprietary trading positions or as a result of misdeals. As such, they should normally be classified as held for trading assets and measured at fair value, with the resulting profit or loss being reflected directly in the income statement. 39

.15 A JSE member may intentionally or inadvertently sell a listed investment not owned by the JSE member (a short sale). Settlement is effected at T + 5 by entering into a securities borrowing transaction with a lender. Long and short positions in the same share counter are presented on a net basis in the balance sheet. A net short position in a counter represents a trading liability of the JSE member and is measured at fair value, with the resulting profit or loss being reflected in the income statement. Settlement accounts.16 Amounts owing to or by clients (other than amounts held by JSE Trustees), other JSE members or the settlement system are shown as current assets and current liabilities. Assets and liabilities are not setoff unless: there is a legally enforceable right of set off, and there is the intention to settle the assets and liabilities simultaneously or on a net basis..17 It is important to assess the recoverability of settlement receivables, particularly because these balances are often large in comparison to the JSE member s income and shareholder s capital. If, and only if, the recoverable amount is less than the carrying amount, the carrying amount should be reduced to the recoverable amount and an impairment loss should be recognised..18 The following factors should be considered in regard to the presentation of these current assets and liabilities in the balance sheet and the right to set off settlement balances: Amounts owing to or by clients are recorded on BDA in a single Client Control account; however, the gross amounts owing to clients and owing by clients should be reflected separately as current liabilities and current assets respectively. Although the JSE rules state that, with limited exceptions, the JSE member shall guarantee the settlement of all transactions entered into by it on behalf of a client, the JSE member s obligations in this regard actually only materialise if the client is unable to meet its settlement commitments. Once the client s CSDP commits to a trade at T+3, the CSDP assumes responsibility for settlement of the trade and the JSE member has a contingent liability rather than a settlement debtor or creditor that satisfies the Framework of the Preparation and Presentation of Financial Statements definition of an asset or liability. Therefore, if a postbalance sheet review indicates that a settlement obligation due by or to a client at the balance sheet date was actually met, this may entitle the JSE member to set off the relevant client balance and the corresponding settlement account balance. There may, however, in certain cases, be practical challenges in identifying the settlement amounts from the available BDA records that can be set off. IAS 32(AC 125) Financial Instruments: Disclosure and Presentation requires disclosure of the amount that best represents the maximum credit risk exposure at the balance sheet date, without taking account of the fair value of any collateral, in the event other parties fail to perform their obligations under financial instruments. Carry accounts.19 A carry account is defined in JSE Rule 2.40 as an agreement whereby a JSE member firm and a client agree that the client will not be obliged to pay the purchase price to the JSE member in respect of securities purchased by the settlement day, but shall be required to provide minimum cover to the JSE member by that date..20 SECA section 23(1) and JSE Rule 14.70 require the client to deposit JSE-listed securities with the JSE member as security (minimum cover) for the loan. JSE Rule 2.40 prescribes that the value of the securities held as minimum cover should at all times be not less that twice the latest quoted buyers price for the unsettled securities purchased. JSE Rule 14.70.4 prescribes steps to be taken by the JSE member should the value of this minimum cover fall below the prescribed minimum..21 IAS 39(AC 133) Financial Instruments: Recognition and Measurement requires that a lender, such as a JSE member that extends credit to a client, should disclose: 40

the fair value of collateral (both financial and non-financial assets) that it has accepted and that it is permitted to sell or repledge in the absence of default; the fair value of collateral that it has sold or repledged; and any significant terms and conditions associated with its use of collateral. Guarantees.22 It is common for JSE members bankers to issue a guarantee in favour of the exchange to cover potential liquid capital shortfalls. The standard wording of these capital adequacy guarantees states the guarantor may not claim any amounts that they may pay out in terms of the guarantee from the JSE member. Therefore, these capital adequacy guarantees would usually not represent contingent liabilities. Money Broking.23 JSE members may obtain authority in terms of the JSE rules to conduct money broking activities whereby they place funds in the money market on behalf of their clients. The JSE member may either open an account with a bank in the name of the client or it may open an account in the name of the JSE member in which it pools its clients funds..24 In those instances where the account at the bank is opened in the name of the client, the bank sends statements of account directly to the client and the funds clearly belong to the client. However, the JSE member may still reflect the amounts invested with the bank and the corresponding amounts owed to the client in their trial balance. Such balances would, however, not be reflected on the balance sheet but are usually disclosed as a note to the financial statements..25 In those instances where the account at the bank is opened in the name of the JSE member, the Banks Act specifies the required nature of the agency relationship (ie. the format of the Mandatory Agreement ) between the JSE member and the client, and exempts the JSE member from the prohibition on engaging in the business of a bank. This exemption under the Banks Act provides authority to JSE members to pool client funds in the money market. Such funds may constitute trust funds as envisaged by the Financial Institutions (Protection of Funds) Act, and may therefore not form part of the assets of the JSE member. Therefore, for financial reporting purposes, the amounts invested with the bank in the name of the JSE member and the corresponding amounts owed to the client, which may be reflected in the JSE member s trial balance, would also not be reflected on the balance sheet but are again usually disclosed as a note to the financial statements..26 In both instances, the commission earned by the JSE member on amounts invested on behalf of clients in the money market is recognised in the income statement. Financial year end.27 The BDA system is designed to process monthly close-off procedures on the last Friday of each month, or if this is not a business day then the immediately preceding business day. Accordingly, the financial year ends of JSE members may not coincide with the end of a calendar month. Risk management disclosure.28 Due to their financial instrument dealing activities, JSE members often face a number of financial risks, including price risk and credit risk, and liquidity risk in particular. Disclosure of the existence and significance of each of these risks is required by IAS 32(AC125) Financial Instruments: Disclosure and Presentation. Purchase of shares in holding company.29 Although there are currently no JSE members of the exchange listed directly on the exchange, a number of JSE members are wholly owned subsidiaries of listed companies. As these JSE members may intentionally or unintentionally acquire shares in their holding companies, the conditions prescribed by Section 89 of the Companies Act are applicable. 41

.30 AC 416 Share Capital, Reacquired own Equity Instruments, allows these shares to be accounted for in the financial statements of the subsidiary company in the same way as other financial instruments. However, in the group financial statements, these shares should be presented in the balance sheet as a deduction from equity notwithstanding that they are legally available for reissue or resale. No gain or loss should be recognised in the income statement on any reissue or resale of these shares and any consideration received should be presented as a change in equity. Securities lending.31 The accounting treatment applied to securities lending transactions and the related collateral balances depends on the role that the JSE member plays in the transaction and the legal arrangements between the parties. The JSE member may act in an agency or principal capacity..32 When a JSE member acts as agent in facilitating securities lending transactions, it typically obtains two mandates, one from the owner of securities to find a borrower for such securities and one from a borrower of securities to find a lender of the required securities. When the JSE member is able to match a lender to a borrower, or vice versa, the JSE member typically implements the loan transaction in its capacity as agent for two undisclosed principals. It is typically a term of every securities lending contract that the borrower must post collateral as security for the discharge of the borrower s obligation to return securities equivalent to those borrowed. Because the lender typically does not know the identity of its borrower, and vice versa, collateral is lodged with the lender by means of the borrower lodging it with the JSE member as agent, which then onward delivers it to the lender..33 Where a JSE member acts as an agent, ie. facilitating a scrip loan between a lender and a borrower, without being a principal party to the transaction: it may or may not disclose the identity of the borrower to the lender; it may guarantee performance by the borrower to the lender; and it may or may not pass on to the lender the collateral it takes from the borrower as security against potential non-performance by the borrower (ie. based on a credit decision by the lender to allow the JSE member to manage the collateral on its behalf)..34 Where the JSE member acts in an agency capacity, the borrowing and lending agreements are likely to be drafted in such a way that the JSE member does not take legal ownership of the securities lent or the collateral taken. The Financial Institutions (Protection of Funds) Act, defines trust property and requires that a financial institution, such as a JSE member, must keep trust property separate from its own assets. In such instances, the securities borrower does not derecognise the collateral delivered from its balance sheet..35 Collateral can be in the form of cash, marketable securities (shares, bonds, etc.) and guarantees..36 Where the JSE member acts in a principal capacity, cash collateral received is recorded on the balance sheet in accordance with IAS 39 (AC 133) Financial Instruments: Recognition and Measurement, but non-cash collateral received is not recorded on the balance sheet. 42

APPENDIX A OTHER BUSINESS TYPICALLY CONDUCTED BY JSE MEMBERS Bonds.01 Bonds refer to fixed interest securities issued in the primary market by the Government, a Municipality, a Local Authority, any Statutory Body or corporate. Bonds are redeemable at a specific future date and are generally purchased and sold on the basis of "yield to redemption" or "yield to maturity". This yield to maturity is the effective yield taking into account the interest receivable and the capital amount over the period to redemption. The yield varies depending upon the general level of interest rates in force from time to time and reflects demand and supply for a particular bond security..02 The bond market is regulated by the Bond Exchange of South Africa (BESA). Participants in the bond market include issuers, investors, intermediaries and speculators. These participants may be a JSE member of the exchange or clients of JSE members. In terms of the Financial Markets Control Act, the business of buying and selling of listed debt securities may only be carried on by exchange JSE members operating through BESA or through a BESA JSE member..03 JSE membership of the exchange is restricted to corporate entities that may elect to be registered as either trading or broking JSE members. Trading JSE members are permitted to trade on own account with or on behalf of clients while broking JSE members are restricted to providing a name-give-up broking service to trading JSE members and registered clients. Trading JSE members may also be JSE members of the JSE..04 The Universal Exchange Corporation Limited (UNEXcor) is the recognised clearing house, which undertakes the clearing of bond trades and facilitates the settlement of all reported transactions. All BESA JSE members use the Bonds Automated Trading System (BATS) to match orders and report trades to BESA and to UNEXcor. One of the key responsibilities of the clearing house is to provide a comprehensive system of electronic settlement to JSE members, using the Central Depository for scrip settlement and the SARB for funds settlement. UNEXcor has merged with STRATE and is therefore effectively owned by the shareholders of STRATE..05 The Bond Exchange Rules require that all bond transactions be settled electronically, thereby ensuring both JSE members and investors of delivery versus payment. This electronic settlement process is managed by settlement agents, approved by the exchange, who use trading information reported to UNEXcor to perform net settlement of both funds and scrip on behalf of all market participants. The settlement agents have direct access to the Central Depository (CD) and have clearing accounts with the SARB..06 The Central Securities Depository, operated in terms of the Custody and Administration of Securities Act, is responsible for the immobilisation of bonds. It holds the immobilised bonds in safe custody and facilitates transfer of ownership electronically within the depository system. CD Ltd, which operates the CSD, has also merged with STRATE. Key functions of the CD include the immobilisation of scrip, payment of interest and capital, electronic net settlement of scrip and the electronic pledging of scrip..07 All trades executed on or reported to BATS are automatically submitted to the UNEXcor system for settlement after the trade has been executed..08 The bond market is a dual trading capacity market in that a trading JSE member may act as a principal (for its own account) or as an agent (concluding the trade on behalf of the client). The BESA Rules specify the way in which a trading JSE member must declare the capacity in which it is trading..09 CSA perform settlement electronically on behalf of their clients. Settlement is performed not only for JSE members but also for those clients that settle directly through a CSA rather than through a JSE member. 43

.10 The CSA are the major clearing banks. Their money account systems and their scrip account systems are used to apply the debits and credits to the appropriate accounts on settlement day as advised by the UNEXcor system. Consequently, on settlement day a seller has its scrip account debited and its funds account credited, whilst the buyer has its scrip account credited and its fund account debited..11 If a client is in default then the JSE member with whom the client traded will be responsible for taking over the client s position by unwinding the client s trades and booking new trades with themselves as principal..12 If a JSE member is in default, then BESA will unwind all of the defaulting JSE member s trades. JSE members may need to trade to settle their new positions. Any price movement losses arising from having to re-transact to settle their new positions may be claimed from the Bond Exchange s Guarantee Fund. Bond options.13 A bond option gives the holder thereof the right, but not the obligation, to buy or sell a specified number of a specified type of bond, at a specified price during a specified period (American option) or at a specified date (European option)..14 Bond option trading involves either member-to-member or member-to-outside counterparty dealing. JSE members may act as principals or agents in these transactions..15 Bond option trades by JSE members are conducted OTC and are reported by the JSE members to the JSE via the Derivative Trade Reporting System for capital adequacy purposes..16 Settlement procedures are not governed by the JSE. Market practice is to settle premiums on the following working day. Exercised positions are settled on the value dates specified in the individual bond option contracts and are all scrip settled..17 Revenue earned by JSE members from option trading includes gains and losses from jobbing activities, spread income from trading options on a back-to-back basis, and premium income/fair value losses from writing options. In addition, profits in the underlying bonds are also derived where bond options are exercised in the spot market..18 A bond options register is required to be maintained by each JSE member. This register provides a record of the status of each option contract (i.e. sold, exercised, lapsed or held in safe custody) as well as full details of the terms of each option. Futures and options on futures.19 A futures contract is an exchange guaranteed agreement to buy or sell a standard quantity and quality of a specified asset (be it a commodity, a financial asset or a notional asset, e.g. a share index) on a specified date and time, at a price that is determined at the time of entering the contract..20 An option on a future gives the holder the right, but not the obligation, to buy or sell a specified futures contract at a specified price (the strike price), during a specified period. SAFEX options are options on futures traded through SAFEX..21 OTC options on SAFEX futures are traded over the counter, i.e. not through an exchange. It is illegal to trade option contracts identical to the SAFEX contracts outside the exchange. However, in reality, many OTC options on SAFEX futures are substantially the same as those traded through SAFEX, except that one or two details have been slightly altered, e.g. the expiry time..22 JSE members positions are marked-to-market at the end of each day, and the variation margin, being the profit/loss on the contract, is either settled by the clearing JSE member or paid to the clearing JSE member by noon the next day. 44

.23 JSE members may deal in futures and options on futures either as an agent for their clients or as principal for their own account. If a client fails to pay a margin on a contract, the JSE member has the authority to close the position without the client s permission, even if the JSE member was acting as an agent..24 The JSE currently lists futures and options on futures on the JSE indices, and individual shares and bonds on its financial derivatives market. It also lists futures and options on futures on certain agricultural commodities on its agricultural products market. Traded equity options.25 An equity option gives the holder the right, but not the obligation, to buy or sell a specified number of a listed equity at a specified (strike) price, during a specified period (American Option) or on a specified date (European Option). There are two basic types of option a call option, which gives the holder the right to buy, and a put option, which gives the holder the right to sell..26 When an option is purchased, the purchaser (holder) of the option pays an upfront premium to the seller (writer) of the option. This is paid irrespective of whether or not the option is finally exercised..27 On exercising an equity option, the party receiving the underlying security becomes entitled to any incidental accruals that may have arisen during the period of the option. Incidental accruals are those rights, events and other incidental accruals that flow from the ownership of securities that accrue to the underlying listed equity during the period of the option and prior to the exercise date..28 Trading by JSE members in OTC equity options takes place over the telephone. JSE members then report details of all such transactions through the JSE Derivative Trade Reporting system. Scripsettled OTC equity options are exercised through SETS as reported trades, and the delivery of the underlying securities is then effected via STRATE..29 The requirement for JSE members to report all OTC derivative transactions through the JSE Derivative Trade Reporting system enables those transactions to be automatically incorporated in the JSE members capital adequacy calculations as computed by the JSE. It also enables the Surveillance Division to determine whether the exercise of an option reported to SETS meets the criteria to qualify as a report-only transaction in that it originates from a genuine OTC option transaction..30 For all OTC equity options the holder is exposed to the risk of the writer defaulting during the period of the contract, prior to exercising. Equity options are not evidenced by prescribed standard contracts, although some form of contract must be entered into between the parties..31 A JSE member may trade as agent or principal in OTC equity options..32 JSE members may act as agent in trades in off-market OTC equity options between willing counterparties, who enter into individual contracts with specific terms. The exercise of these options could take place directly between the buyer and the seller, which would effectively result in an offmarket trade in the underlying shares between the purchaser and the writer of the option. Kruger-Rands.33 Kruger-Rands are gold coins struck by the SA Mint and are produced in sizes of 1oz, ½oz, ¼oz and 1/10 oz. Kruger-Rands are legal tender, which means the SARB is obliged to buy the coin back, based on the Rand value of the coin's gold content..34 The primary market for Kruger-Rands comprises the issue of new coins by the SARB. Sales are by way of tender, with only banks being permitted to tender..35 The JSE is the largest most liquid secondary market for Kruger-Rands in South Africa. Kruger-Rands are traded in the same way as any listed equity, with prices being quoted on all four sizes of coins..36 Three principal factors affect the Krugerrand price, namely: the gold price in US Dollar terms; 45

the Rand/Dollar exchange rate; and country risk (the political and social situation)..37 Krugerrand trading on the JSE and the settlement of Krugerrand transactions between JSE members is governed by the JSE rules and directives, particularly Rule 5.260..38 The commission charged by a JSE member when carrying out a Krugerrand transaction for a client is at a negotiated rate as for an equities transaction. Jobbing profits are earned from principal dealings..39 The settlement of Krugerrand transactions is dealt with as follows: Deliveries of Kruger-Rands are effected directly between JSE members on any business day of the new settlement period. When making delivery, two delivery slips produced by the BDA System and stamped by the delivering JSE member accompany the delivery. Upon acceptance of the Kruger-Rands, the receiving JSE member countersigns and stamps the delivery slips and retains one copy for its records. Payment in respect of the deliveries shall be effected either by bank cheque or the electronic transfer of funds, as arranged between the delivering and receiving JSE members. Acceptance of the coins by the receiving JSE member or client constitutes acknowledgement that the coins are genuine, unless held in safe custody, in which case acceptance will only be effective on receipt of the coins by the client out of safe custody. Upon acceptance of the coins, payment will be made either by the JSE member to the client, in the case of a sale, or direct to the JSE member, in the case of a purchase. A Kruger-Rands register must be maintained to record all coin movements and balances. This is separate to the equities register. Kruger-Rands purchased on behalf of clients must be allocated as soon as possible after coming into the possession of the JSE member and either be delivered or offered for delivery (provided the coins have been fully paid for)..40 JSE members may not deal in Kruger-Rands on behalf of non-residents. The import and export of gold coins is controlled by the Exchange Control Regulations and requires the prior approval of the Exchange Control Department of SARB..41 Where a JSE member is authorised to hold Kruger-Rands in safe custody on behalf of a client, the JSE member must: have an approved mandate signed by the client, unless one exists in respect of other securities held in safe custody; seal and mark the coins, and deposit them with a financial institution or alternatively they may be kept in a suitable container in the JSE member's safe or in the JSE member s safe in a strong room; and maintain a register of mandates and a safe custody ledger of Kruger-Rands..42 Delivery of Kruger-Rands by a JSE member to a purchasing client shall only be effected against positive identification of the purchaser or its duly authorised representative. Delivery shall take place personally to the purchaser or its authorised representative against the issue of an official receipt or, alternatively, by registered post with the JSE member retaining the postal slip, subject to the purchaser consenting to this form of delivery in writing and acknowledging full responsibility for the risk involved. Money Market.43 The "Money Market" comprises: the placement and borrowing of funds, either on call or on fixed deposit (sometimes called "term deposit"); 46

the trading of money market instruments such as banker's acceptances, negotiable certificates of deposit, treasury bills and commercial paper..44 This Guide will use the term "money broking activities" to refer to that part of a JSE member's money market operation that involves the placement of funds on behalf of clients..45 Although money market activity does not fall within the scope of the JSE s business, some JSE members are materially involved in this area and there are JSE rules that deal specifically with how JSE members should conduct their money broking and money market instruments activities. Money broking.46 JSE members conducting money broking activities may either open an account at a bank in the name of the JSE member, which is maintained by the JSE member, or they may open an account in the name of the client..47 If the account is in the name of the client, then the bank should forward statements of account directly to the client and the JSE member merely needs to ensure that the statement contains certain relevant information relating to deposits and withdrawals, the terms of the deposit and the fee charged by the JSE member. As this type of arrangement is totally transparent to the client, the rules regulating such accounts are fairly limited..48 Where the JSE member opens and maintains an account in the name of the JSE member, the JSE member is effectively pooling client funds, and the JSE member is responsible for reporting to its clients. This type of arrangement requires more stringent controls, and the rules dealing with this type of activity are far more extensive..49 JSE members authority to pool client funds in the money market is derived from a special dispensation granted to JSE members in the Banks Act. The conditions under which JSE members may pool clients money market funds are contained in a schedule to the Banks Act issued under Government Notice R1202 of 22 September 1998 in Government Gazette 19283. The JSE rules (Rule 5.270.4) then state that the JSE member must comply with the conditions in the Government Notice. Auditors therefore need to refer to the Government Notice to familiarise themselves with the relevant conditions..50 Some of the key requirements in the Schedule to the Banks Act are that: the arrangement between the JSE member and its client shall be set out in a prescribed mandate (refer Annexure to Banks Act Schedule); the JSE member shall operate a separate bank account/s for money broking transactions, which shall be reconciled daily and shall bear interest if not zeroed daily; the JSE member shall monthly furnish each client with a statement produced by the BDA system or such other system as the Director: Surveillance may approve, and which reflects certain information relating to amounts invested and withdrawn, names of the banks with whom transactions have been concluded, rates of interest received by the JSE member, amount of interest paid to the client and the fee charged by the JSE member; and the JSE member shall balance borrowers (banks) to lenders (clients) on a daily basis..51 In terms of Rule 5.270.1, prior written approval from the JSE Committee is required for a JSE member to conduct money broking activities..52 JSE members may only act as agents for their clients in their money broking activities. This means that they must place clients funds with a bank on the day they are received. Rule 5.200.1 prohibits a JSE member from holding a client's funds in the firm's account overnight. If unable to deposit the money with a bank on the client s behalf on the day it is received, the JSE member must deposit the funds with JSET. If within three business days the funds have still not been deposited with a bank, they must be returned to the client. 47

Money market instruments.53 Trading in money market instruments normally takes place over the telephone, with deals usually being confirmed in writing. Settlement is made directly between the parties concerned and takes place on the same day the transaction is confirmed. It is relevant for risk management purposes to note that these products are not exchange traded, and as a result counterpart risk should be appropriately addressed as part of normal audit procedures. JSE Rule 5.280 regulates transactions in money market instruments by JSE members. Some of the key conditions are that: JSE members may only trade as principal in money market instruments with institutional, governmental, public and corporate clients that meet certain criteria; the syndication of monies for the purpose of purchasing a money market instrument is not permissible; money market instruments held by a JSE member on behalf of a client shall be held in a safe custody account with a bank, and the relevant safe custody rules shall apply to such holdings; and a JSE member acting for a client on a discretionary basis or holding money market instruments in safe custody should obtain an appropriate mandate from the client. 48

APPENDIX B RISKS INHERENT IN A STOCK BROKING ENVIRONMENT AND TYPICAL CONTROL PROCEDURES The following are generic risks that are prevalent in the stock broking industry, including the typical controls that JSE members implement to mitigate them. The list specifically excludes those risks that are inherent to any business control environment, for example the risk of inappropriate segregation of duties. Their exclusion from this list does not imply that these risks are not evident or important in a stock broking environment. [The full names are contained in Appendix D] Risk Examples of control procedures Possible audit procedures 1 Transactions entered into on behalf of clients may be disputed by clients 2 The JSE member may be held responsible for a failed STRATE settlement 3 The JSE member may suffer loss as a result of credit or counterparty risk All telephonic conversations are taped to allow the client s authority and agreed terms to be verified Authorised discretionary mandates are obtained from clients where the JSE member is authorised to make investment decisions on their behalf Exchange-traded purchase orders are only executed for controlled clients if such clients have available funds on deposit with JSET Exchange-traded sale orders are only executed for controlled clients if such clients have available dematerialised scrip Regular monitoring of uncommitted or uncovered trades Credit checks are performed on all new account applications, especially where credit is to be extended to the client Exchange-traded purchase orders are only executed for controlled clients if such clients have available funds on deposit with JSET Where credit is extended to clients, appropriate management authorisation of the amount and duration of credit is to be obtained Credit reports reflecting debit cash balances and unsettled client transactions are reviewed daily Enquiries of management, supported by representation from the JSE member s lawyer to detect any unresolved disputes with clients that may result in a loss to the JSE member Auditors are required to report on the control system in place to ensure that authorised mandates are in place for safe custody and managed account clients Perform subsequent events testing in order to detect trades outstanding at year end that subsequently fail Review unsettled trades at and subsequent to year end to detect any potential loss due to credit risk Review the Potential Loss (POTLOS) report and ensure that impairment has been appropriately recognised for amounts or losses on client accounts that are potentially irrecoverable Review the extent of unsettled OTC trades, as these are not controlled in the STRATE environment Review compliance with the JSE s carry account rules, if applicable 49

4 Unauthorised trading may take place on a client s account. In addition, this activity may be concealed from the client OTC purchases are only effected for clients when the purchase price/initial margin has been received by the JSE member. OTC instruments are only delivered to clients once confirmation of payment has been verified Securities lending books are properly controlled with effective collateral management and proper assessment of the capacity of borrowers to meet their obligations Contract notes are dispatched to clients on a daily basis notifying them of transactions on their accounts Monthly statements are mailed to clients under the control of appropriately segregated JSE member staff or outsourced vendors All relevant client particulars are approved in writing by the client when an account is opened and any changes thereto are also supported by a written request from the client, to ensure that contract notes and statements of account are being sent to the correct address An appropriate person approves all new account loadings and amendments to client particulars via the CLVER screen on BDA Separation of duties is enforced between those responsible for dealing and for client account administration Purchase and sale orders are only executed for controlled clients if such clients have available funds on deposit with JSET or securities in custody with the JSE member Credit reports reflecting debit cash balances and unsettled client transactions are reviewed daily The daily transaction blotters are reviewed to identify transactions that may not fit the profile or investment objectives of a particular client and may, therefore, not have been authorised by the client Ensure that all securities lending transaction are adequately collateralised Review the controls over the production of client statements to ensure that all transactions recorded on client accounts are correctly reflected on the statements without undue interference or manipulation Review the segregation of duties around the mailing of client statements Print a negative circularisation message on at least all year end client statements Positively circularise a sample of client accounts at year end Review the controls over the verification of client details on the acceptance of a client, including sample testing new account loadings on the daily PAHDIN report Review the controls over the maintenance of client details, including sample testing changes on the PAHDIM report Review the POTLOS report and perform appropriate procedures to establish whether transactions that have resulted in actual or potential losses were authorised by the clients. Consider including material debit balances or potential losses in the positive circularisation 50

5 Unauthorised override of JSE brokerage rate policy may take place 6 An authorised deal may be incorrectly recorded, or not recorded at all 7 Client funds may be used inappropriately to fund the JSE member s operations, i.e. non-segregation Review of client master file change information by independent JSE members of management Analytical review of daily JSE brokerage statistics Contract notes are sent to clients to confirm the accurate recording of all deals Confirmations received from counterparts, if applicable, are reviewed by staff independent of the dealing function Statements are sent to clients on a monthly basis Reconciliation of the BDA blotter to the dealers deal sheets Separate bank accounts are maintained and reconciled daily for the receipt of client deposits Deposits allocated to client accounts in the BDA system are automatically swept from the JSE member s bank accounts to JSET on a daily basis Review of daily JSET Account Balances report to ensure that all client credit cash balances are held by JSET Review of bank reconciliations on a daily basis to identify unpaid sweeps, unprocessed client deposits and long outstanding payments Review of daily Credit Control Report to ensure that there are no material credit cash balances on delpay client accounts, which should be deposited with JSET Review controls over changes to JSE brokerage rates maintained on the client master file Inspect evidence of analytical review and follow-up Review the systems in place to confirm deals with counterparties, where applicable Print a negative circularisation message on at least all year end client statements Positively circularise a sample of client accounts at year end Inspect bank reconciliations for evidence of unallocated client deposits (since these will not be swept to JSET) and unpaid sweeps Inspect bank reconciliations for evidence of payments to clients outstanding for an unreasonable period as these represent funds withdrawn from JSET currently held in the JSE members bank account and therefore not segregated Inspect the general ledger for suspense accounts used to record unallocated client deposits. Unallocated deposits should be kept in a separate client account in the BDA system to ensure that they are swept Review the JSET Account Balances report and ensure that the total of all client credit cash balances agrees with the amount held by JSET Review the Credit Control Report and ensure that there are no material credit cash balances on accounts loaded with a Delpay indicator which would not have been swept to JSET 51

8 Receipts from clients may be allocated to the incorrect account, or not allocated at all 9 Unauthorised payments may be made to clients, or authorised payments may be made to the incorrect client 10 Unauthorised journal transfers between client accounts Statements are sent to clients on a monthly basis Bank reconciliations are performed on a daily basis Unidentified client deposits are allocated based on confirmations from the client and not solely on instructions from the client account handler Controls over maintenance of client particulars as per 4 above All telephonic conversations are taped to allow the client s authority to be verified Client master file information captured in respect of new account openings, including bank account details, are independently agreed to the information provided in writing by the client Instructions from clients to change bank account details are only implemented if received in writing from the client The electronic payments functionality on BDA prevents an electronic payment being generated if the client s bank account details have been changed on BDA but the change has not been verified on the system by an authorised official Where payments are made by cheque, clients are required to sign a receipt when the cheque is delivered to the client All third party payments are requested in writing by the clients Inter-account transfers are approved, in writing, by the clients unless they are correction of errors Journal entries are authorised by an appropriate official prior to being processed PFINTR is reviewed by an independent official Print a negative circularisation message on at least all year end client statements Positively circularise a sample of client accounts at year end Review the controls over the production and distribution of client account statements and the maintenance of client details as per 4 above Inspect bank reconciliations for evidence of unallocated client deposits (since these will not be swept to JSET) Review the controls over the allocation of deposits to the correct client accounts Examine a sample of client deposits and ensure that they are allocated to the correct accounts Review the processes in place to control the initial capture of or change in client banking information as per 4 above Test the controls over the generation and delivery of cheques Test the controls over third party payments Circularise client accounts at year end Review the controls over the production and distribution of client account statements and the maintenance of client details as per 4 above Test controls over journal entries on client accounts Circularise client balances at year end Review the controls over the production and distribution of client account statements and the maintenance of client account details as per 4 above 52

11 Misappropriation of securities 12 Improper use of one clients dematerialised securities to settle a short position of another client or to settle a proprietary short sale All XOPs are authorised by an appropriate official prior to being processed Daily XOP reports are reviewed by an independent official All transfers out of the demat location on BDA are authorised by an appropriate official prior to being processed All written instructions (fax or e- mail) to the JSE member s CSDP to transfer securities out of the JSE member s securities custody account are authorised by the appropriate officials Access to Merva to facilitate the transmission of SWIFT instructions to the JSE member s CSDP relating to the transfer of securities out of the JSE member s securities custody account are strictly controlled and only appropriately authorised officials are permitted to transmit such instructions The PLOCMV reports are reviewed by an independent official to ensure that transfers out of the demat location have been authorised Scrip counts of all non-demat locations on BDA are conducted at least weekly using the POPLOC report All exceptions on the PCSDRC report are examined, explained and followed up by an independent official Controlled client sale orders are only executed if the JSE member is holding sufficient dematerialised securities on behalf of the client Monitoring of the Controlled Client Exception (PCCEXP) report prior to settlement to ensure that all uncovered controlled client sales are rectified prior to settlement by either obtaining the securities from the client or borrowing them Monitoring of proprietary sales to ensure that the JSE member will have sufficient securities with its CSDP and reflected in its float on settlement day to settle these deals Monitoring of the PCSDRC report to identify the use of controlled clients securities to settle other clients sales or proprietary sales Test controls over XOPs on client accounts Test controls over transfers out of the demat location on BDA Test controls over written instructions to the JSE member s CSDP and/or Merva instructions relating to off-market transfers out of the JSE member s securities custody account Examine evidence that the JSE member is conducting scrip counts at least weekly and adequately following up any discrepancies Examine evidence that the JSE member is reviewing the PCSDRC report and adequately dealing with exceptions Perform a scrip count on all locations reflected on the POPLOC report Review the PSCDRC report and ensure that there is a satisfactory explanation for all exceptions Review the report obtainable from JSE Customer Services of all open XOPs and ensure that all securities representing open long positions on client accounts can be accounted for Circularise client balances at year end Review the controls over the production and distribution of client account statements and the maintenance of client account details as per 4 above Review the PCSDRC report as part of the surprise and mandatory scrip counts and ensure that controlled clients securities have not been improperly used to settle other deals Examine evidence that the JSE member reviews the PCSDRC and PCCEXP reports on a daily basis and takes appropriate action to remedy any exceptions and prevent recurrences 53

13 Misappropriation or mismatch of clients money market funds 14 Misappropriation of bonds 15 Kruger-Rands held in safe custody may be misappropriated On a daily basis, reconcile investment accounts (monies placed with third parties) with lenders (clients) balances, using the PMMBOR report Reconcile investment accounts with third party monthly statements Money broking statements are sent to lenders (clients) on a monthly basis Controls over maintenance of client particulars as per 4 above Controls over journals and payments as per 9 and 10 above All GOPs are authorised by an appropriate official prior to being processed Daily GOP reports are reviewed by an independent official All instructions to the JSE member s settlement agent to transfer bonds out of the JSE members account in the central depository are authorised by the appropriate officials All transfers out of the CD location on BDA are authorised by an appropriate official prior to being processed All positions in the CD location on POPLOC report are agreed to the statement received from the JSE member s settlement agent on at least a monthly basis Scrip counts of all locations on BDA other than CD are conducted at least weekly using the POPLOC report Coins are held in safe custody with a banking institution or in a suitable container in the JSE member s safe or in the JSE member s safe in a strongroom Access to the coins is strictly controlled Coins held in safe custody are clearly marked to allow for easy identification of their owner A register of Kruger-Rands is maintained, in compliance with JSE regulations Random counts of the coins are performed by a person not responsible for custody of the coins Clients are required to sign a written receipt when Kruger-Rands are removed from safe custody Circularise money broking clients accounts (lenders) and third party investment accounts (borrowers) Reconcile balances on borrowers accounts to statements received from those borrowers Ensure that borrowers and lenders balance per the PMMBOR report Test controls over journals and payments as per 9 and 10 above Review the controls over the production and distribution of client account statements and the maintenance of client details as per 4 above Test controls over GOPs on client accounts Test controls over transfers out of the CD location on BDA Examine evidence that the JSE member is reconciling positions in the CD location with statements received from its settlement agent on a monthly basis Review the reconciliation of the positions in the CD location with the settlement agent as at the year end Circularise client balances at year end Review the controls over the production and distribution of client account statements and the maintenance of client account details as per 4 above Perform a scrip count on all bonds reflected in all locations on the POPLOC report other than CD Review the report obtainable from JSE Customer Services of all open GOPs and ensure that all bonds representing open long positions on client accounts can be accounted for Perform a full count of Kruger-Rands during both the surprise and mandatory scrip counts Review the appropriateness of access rights to the location in which Kruger- Rands are held in custody. Circularise client balances at year end 54

16 Misappropriation of funds invested in unit trusts 17 Misappropriation of securities or funds in respect of foreign investments 18 The JSE member may suffer loss due to misdeals 19 The JSE member may breach the JSE s capital adequacy requirements Instructions to a unit trust management company to withdraw funds or transfer units between client accounts are authorised by appropriate officials All positions in unit trusts in the JSE member s portfolio system are agreed to statements received from the unit trust management company on a monthly basis Instructions to foreign intermediary, management company or custodian to withdraw funds or securities are authorised by appropriate officials All foreign investments in securities or funds are agreed to statements received from the foreign intermediary, management company or custodian on a monthly basis All telephonic conversations are taped to allow the client s authority and agreed terms to be verified Instances of any misdeals are fully documented to allow for preventative actions to be implemented Daily monitoring of capital requirements, in particular any material changes in risk requirements Submission of DC1.6 returns to the JSE on a monthly basis Test controls over the withdrawal of funds from unit trust investments and interaccount transfers Reconcile the unit trust positions in the JSE member s portfolio system with statements received from the unit trust management company Circularise client balances at year end and ensure that unit trust positions in the JSE member s portfolio system that are not reflected on BDA are included in the circularisation Review the controls over the production and distribution of client account statements and portfolio statements and the maintenance of client account details as per 4 above Test controls over the withdrawal of foreign investments Reconcile the foreign investments in the JSE member s portfolio system with statements received from foreign intermediaries, management companies or custodians Circularise client balances at year end and ensure that positions on foreign investments in the JSE member s portfolio system that are not reflected in BDA are included in the circularisation Review the controls over the production and distribution of client account statements and portfolio statements and the maintenance of client account details as per 4 above Inspect a sample of documentation signed by the senior dealer as evidence of acknowledgement of misdeals, in accordance with the JSE member s misdeal policies and procedures Review the JSE member s computation of capital available at year end, and reconcile the position to the audited annual financial statements Consider the impact of any accounting misstatements identified during the course of the financial year on the JSE member s capital position at the time and include it in the long form report if it would have caused a capital shortfall for a material period 55

20 The JSE member may suffer cash flow/liquidity problems due to the size of required settlements 21 The JSE member may suffer material loss due to market price movements 22 A JSE member may suffer loss due to operational risk, eg. reputational risk inadequate control environment override of controls reliance on BDA and SETS connectivity Regular monitoring of upcoming settlements Acceptable trading/potential loss limits are established for proprietary trading positions, both intraday and end of day, particularly for geared instruments (eg. derivatives). This may include stop loss limits Where securities lending transactions are secured by shares as collateral, security in excess of the amount of the loan is obtained to provide protection against price movements Implement appropriate procedures to value written options in order to measure potential exposure accurately Implement a formal policy to govern the maximum price risk exposure before the risk is hedged, and the acceptable hedging mechanisms allowed An internal audit function operating under the instruction of the audit committee is established. This function should prioritise the risks that the JSE member faces, and perform risk audits appropriately Access to critical systems, including BDA, is in line with the appropriate allocation of key functions and the segregation of incompatible functions, and is controlled by an appropriate official Consider the liquidity of current assets as part of a subsequent events review to ensure that the JSE member is able to meet its settlement obligations on an ongoing basis Review the JSE member s proprietary trading limits in view of its available capital Review the JSE member s valuation of written options contracts at year end, using a specialist where required Review the activities of the JSE member s internal audit function Ensure that all incompatible functions have been adequately segregated and that BDA accesses are in line with this structure, with reference to the SECFN and SECIF screens on BDA and the PFUSEC report Ensure that the control over BDA accesses via the SECFN function on BDA is maintained by an appropriate official 56

23 A JSE member may suffer liquidity problems or a loss due to interest rate risks in its money market operations The terms of money market deposits received from clients should match those of the instruments in which the funds are invested, from both an interest rate and liquidity perspective Consider the liquidity of current assets as part of a subsequent events review to ensure that the JSE member is able to meet its settlement obligations 57

APPENDIX C STANDARD BDA ACCOUNTS Certain general ledger accounts in the BDA system are standard default accounts, the most common are set out below. Account BDA Control Account BDA Sub- Accounts Stock control 10900 All "S" type accounts Deal adjustment account Put through account Quantity suspense account 10611 All "DA" type accounts DESCRIPTION This control account reflects all open positions on stock accounts, including misdeals accounts. The underlying sub-accounts are loaded as S type accounts on BDA. All positions on stock accounts are automatically marked-to-market by BDA in the overnight batch run if the JSE member elects this option, otherwise the positions will remain at cost. Each stock account must have a linked transfer instruction to transfer any unrealised or realised profit or loss to a separate general ledger account, otherwise the profit or loss will remain as part of the cash balance on the stock account. This account reflects all open positions on allocation/suspense accounts. These are loaded as DA type accounts on BDA. Included in this category are two default sub-accounts, namely the Deal Adjustment Account (40030) and the Reverse Substitution account (40980). These accounts should be squared daily and no profit and loss is allowed on a DA type account. The one exception to this rule relates to average pricing where the rounding on allocation could cause a small difference. 10603 40022 There is only one Put through sub-account (40022) and it is loaded as a PT type account on BDA. This account facilitates the processing of trades where orders are automatically matched in SETS between two clients of the same JSE member. This account should always net to zero and there should be no financial balance. The entries processed in BDA to this account are automated. 10629 40154 There is only one Quantity suspense sub-account (40154) and it is loaded as an OB type account on BDA. This account facilitates the balancing of DLXOP (equity) and GLXOP (bond) entries. The account should always net to zero and have no scrip or financial balances. Default account 10595 40006 Any financial or deal transactions (including financial upload transactions) processed during the batch run to a client account that is deactivated or invalid will be posted to this account. This account must be cleared on a daily basis. These errors are also reflected on the PCOMPR report. 58

Account BDA Control Account BDA Sub- Accounts DESCRIPTION Share rights 12138 40162 This account is used for the processing of certain Corporate Action entries. It reflects securities due to the JSE member by the issuer in respect of certain corporate actions (e.g. new issues or corporate actions on certificated positions) prior to the settlement date of the corporate action. Financial balances on the account usually relate to amounts paid to an issuer in respect of an application or take up of securities pending the allocation of such securities to the JSE member. Items on this account should be cleared or settled once the corporate action has been finalised. Any open scrip or financial positions beyond the period of the relevant corporate actions should be investigated. Entitlements Balancing account Dividends - ex locations Dividend Rounding 10827 Dividends - ex stock Clients Control Account JSE brokers Control Account Agents Control Account JSE Trustees (Pty) Ltd - 2345684 This account appears in the client ledger and is used where a rounding difference occurs between the total quantity of securities allocated to the JSE member by an issuer as a result of a corporate action and the total quantity allocated by the JSE member to its clients. Short positions reflected on this account should be bought in because the JSE member would be short at its CSDP in that particular security. The shortfall will be reflected on the JSE member's PCSDRC report. 12104 This account reflects cash and liquidation dividends due to the JSE member by issuers. BDA automatically debits this account when the dividend is processed by the JSE. This account should be balanced/reconciled weekly. This account is used where a financial rounding difference occurs between the total amount of a dividend paid to the JSE member by an issuer and the total amount allocated by the JSE member to its clients. Any material amounts should be investigated. 12203 BDA no longer uses this account for system processing. Therefore any balance on this account should be investigated. 12542 All C type accounts 12567 All B type accounts 12500 All A type accounts This is the control account for all accounts loaded as account type C. It reflects the net total funds owing to or from the JSE member's clients. This is the control account for all accounts loaded as account type B. It reflects the net total funds owing to or from other JSE members. This is the control account for all accounts loaded as account type A*. It reflects the net total funds owing to or from foreign JSE members. All deals on these accounts are transacted on a principal basis. 12336 This account is used to record local client funds held at JSE Trustees. The balance per this account should balance with the actual funds held at JSE Trustees on behalf of the JSE member's local clients as reflected on the PJSETB report. 59

Account JSE Trustees Non- Resident Control Account - Interest paid JSE Trustees Control Account - Interest Received Non-managed Fees received from clients' interest JSE broker netting account Non-controlled Substitution Account BDA Control Account BDA Sub- Accounts DESCRIPTION 12849 This account is used to record non-resident client funds held at JSE Trustees. The balance per this account should balance with the actual funds held at JSE Trustees on behalf of the JSE member's nonresident clients as reflected on the PJSETB report. 12468 Managed clients that have funds at JSE Trustees earn interest, which is accrued at BDA month-end. This account is automatically debited with the gross amount of interest earned by the JSE member and the client accounts are automatically credited with the net amount of interest earned by the clients after deducting the JSE member's turn. The interest received from JSE Trustees by the JSE member is credited to this account by the JSE member in order to clear it. 12831 This is the equivalent of Account 12468 for interest earned by non-managed account clients. 12732 JSE members are entitled to retain a portion of the interest earned at JSE Trustees as an administration fee. This turn is credited to this account. 12013 BDA has three netting accounts through which controlled account deals are netted and settled. These accounts should at any point in time reflect the net amount of five days unsettled trades on controlled accounts. All deals on these accounts are automatically generated by BDA. Account 12013 is the control account for the three netting accounts. 40360 JSE broker netting account - main netting account for all main board trades 41657 Ring fenced net settlement - Rand = N - Net account for trades reported to SETS and not settled in Rands 41665 Ring fenced net settlement - Rand = Y - Net account for trades reported to SETS and settled in Rands 12005 BDA has three accounts through which noncontrolled account deals are settled. These accounts should at any point in time reflect the net amount of five days unsettled trades on noncontrolled client accounts due to settle through the CSDPs of those clients. All deals on these accounts are automatically generated by BDA. Account 12005 is the control account for these three accounts. 40600 Non-controlled Substitution account - Main account for all main board non-controlled client trades 41681 Ring-fenced substitution account Rand = N - Account for trades reported to SETS and not settled in Rands. 41699 Ring-fenced substitution account Rand = Y - Account for trades reported to SETS and settled in Rands. 60

Account Loan General Ledger Account Proprietary Loan General Ledger Account Loan Proprietary Control Account Collateral Proprietary Control Account BDA Control Account BDA Sub- Accounts DESCRIPTION 10652 All "LL" This is the control account for all securities lending type accounts. The accounts of parties that lend accounts securities to the JSE member or its clients are loaded with an "LL" account type. 10660 All "LB" This is the control account for all proprietary type borrowing accounts where the JSE member accounts borrows securities on a proprietary basis. These accounts are loaded with an "LB" account type. 10678 41616 A system control account to keep the proprietary loans created on LB accounts in balance 10686 41608 A system control account to keep the collateral positions created on LB accounts in balance 61

APPENDIX D REPORTS AVAILABLE ON BDA The following are the most commonly referred to BDA reports available to JSE members and JSE member auditors. A complete listing of reports is available from the JSE s BDA report processing manual. Auditors should be aware that those BDA reports that they require for audit purposes should be requested from the JSE Customer Services Division prior to the close of business on the last day of the reporting period or the effective date of a surprise audit, as many of these reports can only be produced on the day and will not be available subsequently. Description Report name Used for BDA/BMA RECONCILIATION PBMERC 62 To highlight discrepancies between the BDA and BMA systems that are to be resolved. BLOTTER SUMMARY PDDLSM The report is produced in three sections: company summary, branch summary and partner summary, to display the total basic, JSE brokerage, surcharge, purchases and sales per control account. BLOTTER PDBLOT To list all equity dealings, including exceptions (deal adjustments and predated deals) for the day. The report will also display the JSE brokerage, split down to branch and partner level, for the day and month to date. OPEN DEALS (BATCH RUN) POPACC To list all accounts with open deals and scrip items and their financial balances. This report can also be generated for specific account types only. DAILY STOCK SCAN PSTKSC To identify daily share balance for COMMON ERROR REPORT PRINT JOURNAL & CSHBK LISTINGS PCOMPR PFINTR stock accounts. To identify all errors or potential errors detected during the overnight processing. This report must be checked daily. To identify all cashbook and journal entries processed the previous day. The cashbook section is divided into payments and receipts for the various banks used by the JSE broker and is used to assist the JSE brokers in balancing BDA to their bank statements. SCRIP AT LOCATION POPLOC To list all accounts with scrip positions in the various locations. SCRIP MOVEMENT PLOCMV To lists all scrip movements for the day. EXCEPTIONAL OPENINGS PDEXCP To list all XOP and GOP transactions for the day, printed on 2 separate reports. OLD OPEN DEALS POPDLS To list all accounts with old open

Description Report name Used for SUMMARY STATISTICS PSTATS 63 deals and their financial balances. To display various daily and month-to-date JSE member statistics. UNDER COVER LIST PUNCOV This report is produced in three sections listing the following: 1. Undercover report listing totals for cover amounts 2. Carry accounts that are under cover. 3. Undercover carry accounts trading balances. Sections 1 and 2 will only be displayed if the undercover amount is greater than zero FINANCIAL ACCOUNT BALANCES JSE BROKERAGE ANALYSIS X-REF JSE BROKERAGE ANALYSIS PBALSA PBRKAN PBRKXR To list clients with their financial balances per balance type. To provide an analysis of daily and monthly JSE brokerage figures. To view the month to date dealing analysis per market segment. CREDIT CONTROL PCCREP To assist JSE members in controlling client financial balances. The report is divided into different sections highlighting clients with credit and debit cash balances and suggested payments. GENERAL LEDGER LISTING JSET ACCOUNT BALANCES MANAGED CLIENT MANDATES PGLPRT PJSETB PMNDTE To list all general ledger account transactions and balances. To list of all managed and controlled client accounts and their cash/free balances at JSE Trustees. This report must be checked daily to ensure that JSE Trustees balances. To list all managed clients as per selected parameters. Used to highlight managed accounts without mandates loaded on BDA. POTENTIAL LOSS POTLOS To display accounts with actual and potential losses exceeding the value of cash or securities held on the account. MONTHLY CLIENT STATEMENTS NON-CONTROLLED EXCEPTION REPORT CONTROLLED CLIENT EXCEPTION REPORT PCLISN PNCEXP PCCEXP To produce statements during the course of the month dependent on the parameters selected below. This request will predominantly be used by auditors doing spot checks. To highlight non-controlled client deals that have not been committed to by the client s CSDP. To highlight controlled client deals with insufficient funds or securities to settle the deal.

Description Report name Used for SETTLEMENT DETAILS PDSETL To reflect each deal for settlement over a five day settlement period and indicate whether noncontrolled client deals have been committed to and whether there are sufficient funds or securities to settle controlled client trades. SETTLEMENT SUMMARY PDSETS To summarise of PDSETL over a five day settlement period. DAILY SETTLEMENT PDSETT To reflect each deal for settlement on a particular settlement day and the settlement status thereof. LIST OF SWEEP TRANSACTIONS DAILY CSDP RECONCILIATION LIST OF LENDERS PER BORROWER PAUDSW PCSDRC PMMBOR To identify all transactions on client accounts that make up the totals of the sweeps to and from JSET. This is an exception report to highlight any differences between the uncertificated securities balances held by the JSE member s CSDP and the client and proprietary balances reflected in BDA, per security. To reflect the balance per client (lender) for each money broking balance code on BDA and the total per balance code, and the balance on each borrower s control account representing the borrowing leg of each balance code. These amounts should balance on a daily basis. LIST NEW ACCOUNTS PAHDIN To list the particulars of all new client accounts loaded on a daily basis. LIST CHANGES PAHDIM To list all changes to client particulars on a daily basis. LIST OF FUNCTIONS SECURITIES PFUSEC To list the Update and Enquiry accesses to each BDA function per User ID. 64

APPENDIX E GUIDANCE ON CSDP RECONCILIATIONS The auditor is required to report on the results of the mandatory and surprise scrip counts, which include a review of the PCSDRC report produced by the BDA system as at the dates of those mandatory counts. It is therefore important for auditors to familiarise themselves with this report, to understand the reasons for exceptions reflected in the report and to be able to report on these exceptions in the long form report. The basic concept of the PCSDRC report is to compare the total quantity of shares reflected in the JSE member s BDA records as being held on behalf of the JSE member and its clients to the quantity held by the JSE member s CSDP and to reflect any exceptions on the report. It is important to note that the report only reflects exceptions in the balancing process. The explanations set out below may assist auditors in understanding the nature of the items appearing in certain of the columns in the report. BDA Qty 39008 CS The Uncertificated Securities Control Account (A/C 39008) reflects the balance of all dematerialised securities held by the JSE member on behalf of its controlled clients, in its float (proprietary positions and securities not yet allocated to clients) and in electronic pledge (float securities pledged to the JSE member s bank). The balance on this control account for each security should always agree with the total of the client balances plus the JSE member s float, which includes any float securities in electronic pledge. The balancing of the client, float and pledge positions to the control account is represented on the Open Deals by Nominee (NMDLS) screen on BDA. The securities reflected in Account 39008 and held by the JSE member s CSDP are reflected in BDA in location CS. The securities reflected in each client s account are held in location 00, representing the third and fourth digits of 39008. Therefore, clients dematerialised securities are held in Control Account 39008 and the control account holds the securities with the CSDP. The 00 position on the client s account and the CS position on the control account are only updated on settlement day. Nominee Qty 39008 Open Account 39008 reflects dematerialised securities held in location CS but it may also reflect open deals, which may appear in the abovementioned column on the PCSDRC report. These open deals represent open purchases on Account 39008 after settlement has taken place on T + 5, which are still awaiting the allocation of securities from the float. Under normal circumstances, securities delivered by the market through STRATE or delivered by another controlled client through the JSE member s own BDA records are transferred into the JSE member s float on settlement day and are allocated to the open purchases on Account 39008. The allocation closes down the open purchase and moves the securities into location CS, thereby increasing the CS holdings in Account 39008. Therefore, the 00 position on the purchasing client s account will increase with the quantity of shares purchased, the CS position on Account 39008 will increase by the same quantity and the CSDP balance will also increase by the same quantity as they will have received the shares. All three of these balances will therefore remain in balance. However, if for certain reasons there are insufficient securities in the float on settlement date to allocate to an open purchase, the purchase remains open and the CS holdings on Account 39008 are therefore not increased. The typical reasons why there may be insufficient securities in the float to allocate to controlled client purchases on settlement date are: a controlled client or the JSE member itself has sold securities which they neither hold and has either not borrowed the securities for settlement purposes or has borrowed them but the JSE member has not processed the loan on BDA; or 65

securities held by the JSE member in the float, which should be allocated to controlled client purchases, have been either lent out or put up as collateral for a securities loan. It should be noted that BDA allocates securities to each purchasing controlled client s account provided the client has paid for the purchase, regardless of whether sufficient securities are available in the float to support the allocation. The open nominee purchases on Account 39008 therefore represent the allocations to controlled (nominee) clients that are not actually supported by securities in the float. In these instances, the allocation of securities to the purchasing client s account will increase the 00 position on the client s account but as mentioned above, the CS position on Account 39008 will not increase and the CSDP balance will also not increase because the CSDP will not have received the shares. This will result in an imbalance as the total quantity of shares reflected on client accounts in location 00 will be greater than the quantity reflected in location CS on Account 39008 and the quantity held by the CSDP. Open nominee purchases after settlement date appear on the left-hand side of the NMDLS screen without an asterisk and reflecting a settlement date of zero. Including this particular column on the PCSDRC report enables a user of the report to identify the difference between the quantity of securities that the JSE member should be holding on behalf of controlled accounts and the quantity actually held by the CSDP. An open nominee purchase will result in the Total BDA Quantity being greater than the CSDP Total because the total quantity of securities that the JSE member should be holding on behalf of controlled accounts will be greater than the quantity actually held by the CSDP. BDA Qty Loc EP Account 39008 also reflects dematerialised securities held in location EP (Electronic Pledge). In terms of the JSE rules, JSE members are entitled to pledge unallocated float securities to a third party, which would typically be their bank. Securities are therefore transferred by the JSE member within BDA from location CS to the EP location based on their daily pledge requirements. The abovementioned column on the PCSDRC report therefore reflects the quantity of the relevant securities held in location EP within Account 39008. Total BDA Qty As stated above in relation to open nominee purchases, the Total BDA Qty represents the amount of securities that the JSE member should be holding on behalf of all controlled accounts rather than the amount of securities that the JSE member is actually holding with its CSDP. Total CSDP After the close of business on each day, each CSDP acting on behalf of a JSE member firm transmits a SWIFT message (MT 535) to the JSE reflecting the closing balance on the day of each security held by the CSDP on behalf of the JSE member. The balances reflected in those SWIFT messages are automatically fed into BDA and it is those balances that are reflected in the abovementioned column on the PCSDRC report. BDA Qty Loc RD Certificated securities that a JSE member has submitted to its CSDP for dematerialisation are reflected by the JSE member in BDA in location RD, representing Scrip Awaiting Dematerialisation. There are instances where a CSDP may update the balance in a JSE member s Securities Custody Account in respect of securities that it has dematerialised on behalf of the JSE member prior to the JSE member reflecting the dematerialisation in its BDA records. This would result in the CSDP s balance being greater than the BDA Total for that particular security, which would be reflected as a difference on the PCSDRC report. 66

The quantity reflected in the Loc RD column on the report is essentially a memorandum figure and is not part of the balancing function as it is not included in the Total BDA Quantity. This figure is provided for information purposes to assist JSE members in identifying whether the difference between the Total BDA Quantity and the CSDP Total arises from securities in location RD, which may have actually already been dematerialised by the CSDP and therefore are included in the CSDP Total. SAFIRES Qty 39008 Open The principle behind any amounts reflected in the abovementioned column is similar to that applicable to the Open Nominee Purchases. These amounts also represent open purchases on Account 39008 after settlement has taken place on T + 5 but the difference between the open SAFIRES purchases and the open Nominee purchases is that the open SAFIRES purchases represent purchases by the market or by a non-controlled client (i.e. SAFIRES deliveries) that cannot be closed down, whereas the open Nominee purchases represent purchases by a controlled account that cannot be closed down. The reasons why both the open SAFIRES purchases and the open nominee purchases cannot be closed down are both the same. If there are insufficient securities on a controlled client s account or the JSE member s proprietary account to settle sales executed on such an account, that shortfall in securities to be delivered by the seller will result in the opposite purchase not being closed down. The opposite purchase is either by another controlled account in respect of open nominee purchases or is a purchase by the market or a noncontrolled client in respect of open SAFIRES positions. However, open SAFIRES purchases are treated differently on the PCSDRC report to open nominee purchases. If there are sufficient securities in a JSE member s custody account at their CSDP to settle any sales to the market or to a non-controlled client, the CSDP will commit to settling those sales regardless of whether the underlying controlled account sellers have sufficient securities in their BDA accounts. This could result in the CSDP delivering securities that the underlying seller is not actually holding, and this in turn will result in the total quantity of securities held by the CSDP being less than the total quantity reflected by the JSE member on BDA as being held on behalf of the underlying controlled accounts. Effectively, the JSE member may have used one or more clients securities to settle another client s sale, which would be a contravention of the rules. A sale of securities on behalf of a controlled account that does not hold those securities or has not borrowed the securities has no effect on the overall 00 positions on controlled accounts or on the CS position on Account 39008. Both of these positions would remain the same. However, the CSDP balance would decrease because the CSDP will deliver the securities if there is sufficient quantity in the JSE member s custody account and this would cause an imbalance, as the CSDP total would be less than the CS position on Account 39008 and the total 00 positions on controlled accounts. Therefore, an open SAFIRES purchase is reflected on the PCSDRC report as a memorandum figure, as it is not included in the Total BDA Quantity. It is provided on the report for information purposes to assist JSE members in identifying whether the reason for the CSDP Total being less than the Total BDA Quantity is that the CSDP has delivered securities that were not actually reflected on a selling controlled account, as represented by an Open SAFIRES purchase. Open SAFIRES purchases after settlement date appear on the left hand side of the NMDLS screen with an asterisk and reflecting a settlement date of zero. The following is a list of common reasons for exceptions on the PCSDRC report: Total BDA Quantity greater than Total CSDP with no Open Nominee or open SAFIRES positions - Transfer of a client s portfolio to another JSE member, which has been processed by the CSDP but has not yet been processed on BDA by the delivering JSE member. - Return of securities borrowed by the JSE member effected by the CSDP but not yet processed on BDA by the JSE member. 67

- Delivery of securities collateral by the JSE member effected by the CSDP but not yet processed on BDA by the JSE member. - Receipt of securities borrowed by the JSE member processed on BDA by the JSE member but not yet effected by the CSDP. (It should be noted that JSE members should not increase their holdings in BDA before they have confirmation of receipt of the securities.) - Return of securities collateral provided by the JSE member processed by the JSE member on BDA but not yet effected by the CSDP. (As indicated above, JSE members should not increase their holdings in BDA before they have confirmation of receipt of the securities). Total BDA Quantity less than Total CSDP with no Open Nominee or Open SAFIRES positions - Securities dematerialised by the CSDP but BDA not yet updated by the JSE member. Securities still reflected in location RD. - Transfer of a client s portfolio from another JSE member that has been processed by the CSDP but has not yet been processed on BDA by the receiving JSE member. - Receipt of securities borrowed by the JSE member effected by the CSDP but not yet processed on BDA by the JSE member. - Return of securities collateral provided by the JSE member effected by the CSDP but not yet processed on BDA by the JSE member. - Return of securities borrowed by the JSE member updated on BDA by the JSE member but not yet effected by the CSDP. - Delivery of securities collateral provided by the JSE member updated on BDA by the JSE member but not yet effected by the CSDP. Total BDA Quantity greater than Total CSDP with an Open Nominee position but no Open SAFIRES position - Purchase on a controlled client s account was settled by the client after T + 5 but there were insufficient securities in the float to support the allocation to the client s account. The float securities may have been lent out by the JSE member or provided as collateral against a securities loan. - A controlled client or the JSE member s proprietary account sold securities that they did not hold and had not borrowed in order to settle on T + 5. As a result, an allocation of securities to a purchasing controlled client could not be supported by securities available in the float. This indicates a possible breach of Rule 14.140.12. Total BDA Quantity greater than Total CSDP with Open SAFIRES and Open Nominee positions - Corporate action (e.g. Rights Issue) updated on BDA in the batch run on the evening before Record Date (RD - 1) but the CSDP records are only updated on Record Date (RD). Total BDA Quantity will exceed Total CSDP by the quantity of the corporate action for one day (usually a Friday). Total BDA Quantity greater than Total CSDP with an Open SAFIRES position but no Open Nominee position - A controlled client or the JSE member s proprietary account sold securities that they did not hold and had not borrowed in order to settle on T + 5. As a result, a delivery to the market or to a non-controlled client was effected by the CSDP out of the JSE member s total holdings but that delivery used another party s securities. This indicates a possible breach of Rule 14.140.12. 68

Total BDA Quantity equal to Total CSDP with an Open SAFIRES position but no Open Nominee position - A controlled client or the JSE member s proprietary account sold securities that they did not hold but the JSE member borrowed sufficient securities to settle the sale on T + 5. The receipt of the loan was effected by the CSDP but not yet processed on BDA by the JSE member. The above list of exceptions is not exhaustive, but represents the most common reasons for differences on the PCSDRC report. In the event that a JSE member provides a different reason to those mentioned and an auditor is uncertain as to whether the difference on the report could be caused by the reason offered by the JSE member, the auditor is advised to contact the Surveillance Division to obtain its advice regarding the validity of the explanation provided by the JSE member. The main objective of the review of the PCSDRC report is to enable the auditor to report on whether the securities held by the JSE member s CSDP are in agreement with the JSE member s BDA records. Most of the reasons listed above represent timing differences between the processing of entries in BDA by the JSE member and the processing of securities movements by the JSE member s CSDP. However, certain of the reasons may represent instances where the JSE member has used one client s securities to settle another client s sale or a proprietary sale. In submitting the long form report to the JSE, the Survellance Division has requested that the auditor should provide reasons for any exceptions reflected on the relevant PCSDRC report in sufficient detail to enable the division to identify those exceptions that could amount to rule breaches. It should be noted that the difference on the PCSDRC report in respect of a particular security could be caused by a number of reasons, resulting in a net quantity being reflected as the difference on the report, which would need to be analysed to determine the underlying reasons for the difference. If the difference relates solely or partly to an open Nominee or open SAFIRES position, the underlying transactions or entries that caused those positions need to be identified. In order to identify those transactions, auditors should examine the open sales after settlement on T + 5 either on the Controlled Client Exceptions report (PCCEXP) or on the online Open Deals By Share screen (SHDLS). It is also important to note that, in order to verify whether the reason provided by the JSE member for a particular difference is correct, the auditor should establish how the difference was cleared, as the action taken by the JSE member or its CSDP to rectify any imbalance will usually evidence the initial cause of the difference. 69

APPENDIX F JSE CONSOLIDATED MANDATE SPECIAL GAZETTE NUMBER: 203 DATE: 7 October 2003 MINIMUM REQUIREMENTS FOR JSE MANDATES Attached, for the attention of JSE members, is a copy of a revised consolidated mandate, setting out the prescribed minimum terms and conditions for this document. The proposed amendments reflect the environment that exists subsequent to the implementation of STRATE and other minor amendments. It is important to bear in mind that a number of additional more substantial amendments to take into account money laundering legislation and the resultant impact on the extent of JSE regulation is currently being discussed at the JSE. In all likelihood, additional compulsory amendments, to take this into account, will be implemented in the first half of next year. The changes set out in the attached mandate may, at the discretion of the JSE member, be included in the JSE member's mandate. There is, however, no obligation to amend existing mandates to reflect the said changes. Should you have any questions in respect of this gazette and the attached mandate, please contact the writer on 011 520 7259 or garyc@jse.co.za. G. CLARKE 8 October 2003 Company Secretary 70

CONSOLIDATED MANDATE GENERAL TERMS AND CONDITIONS 1 This is a mandate as contemplated in the rules (the rules) of the Johannesburg Stock JSE Securities Exchange South Africa (the JSE) and the relevant legislation. 2 The words and phrases used in this mandate shall, unless the contrary appears, have the meaning ascribed to them in the rules, the Stock Exchanges Control Act, 1985 (SECA), the Financial Markets Control Act, 1989 (the FMCA) or any replacement act or acts and any relevant conditions promulgated under such acts (together, the applicable legislation). 3 By your signature at the foot of this document and on the Schedules annexed hereto, you authorise us to manage your investments as set out in 5.1 to 5.8 (the investments) subject to the terms and conditions contained herein and in the Schedules annexed hereto and subject also to the applicable legislation. We shall, in particular, in managing your investments comply with all relevant provisions of the rules. 4 This mandate shall commence on the date of signature hereof by you, and may be terminated in writing forthwith by either party to the other party. 5 Our management of the investments set out below shall be conducted on the basis set out in the attached "Limited discretion" or "Full discretion" Schedule as the case may be. To this end, you hereby appoint us as your duly authorised agent on your behalf to purchase and sell and to enter into any transaction in accordance with the "Limited discretion" or "Full discretion" Schedule, both in the Republic of South Africa and, if and when permitted by law, in foreign countries in respect of the following: 5.1 listed and unlisted securities and financial instruments, provided that in relation to derivative instruments you have first also signed the "Derivatives Schedule" that is annexed hereto [JSE members to draft appropriate Schedule] and, in respect of foreign securities and financial instruments, you have first signed the "Foreign Investment Schedule" that is annexed hereto, and contains important information in relation to the risks inherent in such investments; 5.2 money market instruments as defined in the rules, including but not limited to, notes, negotiable certificates of deposit, commercial paper or other debt instruments; 5.3 warrants to subscribe for the investments referred to in 5.1 and 5.2 above; 5.4 depository receipts or other instruments relating to the investments referred to in 5.1, 5.2 and 5.3 above; 5.5 unit trusts and similar schemes; 5.6 Kruger-Rands and similar investment coins and, subject to any statutory regulations, bullion; 5.7 investments similar or related to any of the foregoing or contemplated in the applicable legislation; and 5.8 any other securities or financial instruments set out in the "Particulars Schedule" annexed hereto. 6 Unless specifically authorised by you to do so in terms of the "Dual Capacity Schedule" annexed to this agreement, we shall not in our capacity as managers of your investments in terms of this mandate take a position against you, nor sell to you for our own account any investment owned by us, nor buy from you any such investment for our own account. 71

7 Unless otherwise specified in the "Particulars Schedule" hereto: 7.1 you warrant that all such investments as you may deliver or cause to be delivered to us in terms of this mandate are not subject to any lien or charge and that they shall remain free of any such lien or charge while they are held by us in safe custody; 7.2 all investments other than cash and bearer instruments managed by us in terms of this mandate shall be registered in your name or the name of... as nominee on your behalf and for your benefit, unless they are bearer instruments and are thus not capable of being so registered; and 7.3 all such investments shall be held by us in safe custody (in fungible consolidated share certificate form where appropriate) on your behalf subject to the applicable legislation and, in particular, the rules. 8 8.1 Your investments comprising listed uncertificated securities shall be held by us in safe custody, reflected as an electronic entry in a central depository or electronic scrip or nominee registry as approved by the JSE and subject to any applicable legislation, the rules, the terms of this mandate or any other agreement between us. 8.2 If we are not an account holder in such depository or registry, we shall be entitled to create an electronic entry in respect of the investments in the depository or registry through a participant of our choice. 8.3 Notwithstanding anything contained in 7.2, unless you notify us to the contrary, any such investments shall be held to your order via the participant s nominee or our nominee. 9 You authorise us to hold in safe custody or hold any such investments in fungible consolidated share certificate form ( jumbo certificates ) and to move such investments from one electronic entry record to another or withdraw any such investment from safe custody for the purpose only of: 9.1 transferring the investments to you or your order or upon termination of our mandate. In such case, the investments will be sent at your risk to such destination by courier or registered post to your address stipulated in the "Particulars Schedule" or to such other address as you notify us in writing; 9.2 dealing with the investments as may actually be required in fulfilling this mandate; 9.3 lodging the investments on your behalf with any person or entity in terms of an order of court or a special resolution of the issuer of the investments; where the investments are held in jumbo certificates with other investments not owned by you, to facilitate the sale of such other investments; 9.4 any other lawful purpose in terms of this mandate. It is specifically recorded that we may not exercise the rights attaching to any investments for our own purpose or interest but may only act in accordance with your instructions. 10 10.1 All cash deposits including interest, dividends, proceeds of disposals and cash, received by us for your account arising from the management of your investments in terms of this mandate, shall be paid by us for your credit and in your name directly into JSE Trustees (Proprietary) Limited (JSET) in terms of the rules unless we pay the cash over to you on receipt. 10.2 Where this mandate is terminated, or where you have instructed us by notice in writing to realise and repay to you any portion of the investments under our management, we shall pay any cash into your bank account as stipulated in the "Particulars Schedule" annexed hereto. 72

10.3 You authorise us to retain or to withdraw from any cash deposited by us on your behalf in JSET such amounts as are actually required to: 10.3.1 pay for investments purchased on your behalf; 10.3.2 effect such other payments as are strictly necessary in the operation of this mandate; and 10.3.3 discharge a debt due to us from you whether in respect of the management fees due under this mandate or otherwise. 11 Nothing in this mandate affects your right to require us to pay to you or to your order, on written request from you, any cash deposited by us on your behalf in JSET or to deliver to you, or, in respect of uncertificated securities, transfer to your order, on request, any investments held by us on your behalf. 12 In consideration for the services to be provided by us in terms of this mandate, we shall be entitled to the management fees set out in the "Fees Schedule" annexed hereto as amended from time to time and signed in writing by both of us. We are specifically authorised to realise any investment held by us in terms of this mandate should there be insufficient cash available to settle our monthly fee. Should our mandate be terminated during any calendar month, our fee in respect of that month shall be payable on the date of termination. 13 We shall furnish you with a monthly statement of account showing details of any change in the investments held on your behalf, including any cash held by JSET on your behalf at the date of the statement of account. Such details shall include but shall not be limited to the period for which the investments were held and the amount of interest paid by JSET in respect of the cash held by JSET on your behalf. 14 Subject to that set out above, if we for any reason cease to be a JSE member of the JSE, this mandate shall automatically terminate with immediate effect. 15 We choose as our respective domicilium citandi et executandi for the purpose of the service of all notices and process pursuant to this mandate our respective physical addresses appearing on the "Particulars Schedule" annexed hereto, or such other physical and postal addresses as may be stipulated by notice in writing. 16 16.1 No addition to or variation or amendment of this mandate shall be binding unless contained in a written document signed by or on behalf of both of us. 16.2 No term, provision, condition or representation relating to the subject matter hereof, not contained herein or in the annexes hereto shall be binding on either of us. 16.3 Any notice given in terms of this mandate shall be given in writing and shall be deemed, unless the contrary is proved, if: 16.3.1 delivered by hand, to have been received on the date of delivery; 16.3.2 transmitted by facsimile or email, to have been received on the date of transmission; and 16.3.3 sent by post, to have been received 10 days after the date of posting. 16.4 The Schedules annexed hereto, if signed by or on behalf of both of us, shall be binding on us as if specifically incorporated into the mandate until cancelled by notice in writing as contemplated herein. 73

SIGNED at... on this the... day of...200... AS WITNESS: for NAME OF CLIENT SIGNED at... on this the... day of...200... AS WITNESS: for NAME OF JSE MEMBER FIRM 74

STRICTLY CONFIDENTIAL PARTICULARS SCHEDULE PERSONAL DATA SURNAME:...... FIRST NAME:... TITLE:.... KNOWN AS:.... IDENTITY NUMBER:.... PROFESSION:..... POSTAL ADDRESS:...... POSTAL CODE:..... STREET ADDRESS:.... POSTAL CODE:...... BUSINESS ADDRESS:.... POSTAL CODE:...... TELEPHONE: HOME: (...)...... BUSINESS: (...).... TELEFAX: HOME: (...)... BUSINESS: (...)..... BANK:...... BRANCH:..... ACCOUNT NO:.... OTHER SECURITIES IN WHICH WE MAY INVEST:...... SPOUSE/NEXT OF KIN:...... HOME LANGUAGE:...... JSE BROKER/ADVISER/ATTORNEY/ACCOUNTANT:... INTRODUCED/REFERRED BY:........[OTHER DETAILS REQUIRED BY JSE MEMBER FIRMS] 75

SIGNED at...... on this the..... day of...19... AS WITNESS:.for NAME OF CLIENT SIGNED at...... on this the..... day of...19... AS WITNESS: for NAME OF JSE MEMBER FIRM 76

FULL DISCRETION SCHEDULE By your signature to this Schedule, you authorise us to manage your investments at our sole and full discretion in order to achieve the investment objective set out below. This means that our mandate is an unlimited mandate to act on your behalf in order to achieve the investment objective without it being necessary to obtain further authority or consent from you to effect any transaction in investments in terms of the mandate to which this is attached. It is recorded that your investment objective is: (a) to achieve maximum dividend income compatible with security of capital; or (b)... SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF CLIENT SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF JSE MEMBER FIRM 77

LIMITED DISCRETION SCHEDULE By your signature to this Schedule, you restrict our discretion in the management on your behalf of the investments more fully described in clause 5 of the mandate as follows: 1 Our right to purchase and sell such investments on your behalf may only be exercised by us on: *1.1 your instruction and prior consent; *1.2 the instruction of your investment adviser.................. in respect of each transaction. *delete whichever is not applicable, unless both 1.1 and 1.2 apply. 2 You hereby indemnify us and hold us harmless against all and any losses that you may suffer as a result of any action or omission on our part pursuant to any instruction from you or your said investment adviser, as the case may be, whether as a result of the investment adviser acting outside the scope of his mandate from you or otherwise. SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF CLIENT SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF JSE MEMBER FIRM 78

DUAL CAPACITY SCHEDULE *1a. *1b. By your signature hereunder, you authorise us to have a personal interest as principal in any transaction for the purchase and sale on your behalf of the investments referred to in clause 5 of the mandate signed by you, provided that we disclose such interest to you prior to executing any transaction in which we may have such personal interest; or By your signature hereunder, you authorise us to have a personal interest as principal in any transaction for the purchase and sale on your behalf of the investments referred to in clause 5 of the mandate signed by you. Unless so requested by you in writing, we are not obliged to disclose such interest to you specifically prior to entering into any transaction in which we may have such a personal interest. * delete whichever is not applicable. 2. Where we so act as principal with a personal interest in any transaction for the purchase or sale of such investments on your behalf, we will not be entitled to charge you a fee as JSE brokerage or commission in respect of such transaction. SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF CLIENT SIGNED at... on this the... day of...19... AS WITNESS: for NAME OF JSE MEMBER FIRM 79

FOREIGN INVESTMENT SCHEDULE 1 By your signature to this Schedule, you appoint us as your duly authorised agent on your behalf to purchase and sell and to enter into any transaction in investments that are listed or traded primarily outside the Republic of South Africa (foreign investments), in accordance with the terms set out in the mandate of which this Schedule forms part. 2 You agree that in executing this mandate, we may act through a third party of our choice. We shall ensure that such third party will in respect of your foreign investments, give a similar undertaking and comply with similar obligations as those with which we undertake in terms of the mandate. 3 All cash deposits including interest, dividends, proceeds of disposals and cash, received by us for your account arising from the management of your foreign investments in terms of this mandate, shall be held in a trust account separate from our assets or those of the third party unless it is paid over to you on receipt. 4 All investments other than cash or bearer instruments shall be registered and, where applicable, held in a central depository or electronic scrip registry, in the name of a nominee on your behalf and for your benefit, subject to any relevant legislation. 5 We shall submit to you for payment, or may recoup from you, any management fees charged by the third party for the management of your foreign investments, and these shall be payable [JSE member firms to insert basis on which fees to be paid]. 6 We shall furnish you with a monthly statement of account showing details of any change in the foreign investments held on your behalf, including any cash held on your behalf at the date of the statement of account. Such details shall include but shall not be limited to the period for which the foreign investments were held, the person by whom they are held and where, and the amount of interest paid in respect of the cash held on your behalf. 7 By your signature hereto, you acknowledge that you have been informed of the risks inherent in the investments set out above and, where appropriate, have been handed copies of any specific risk disclosure documents published from time to time by specific financial markets. In addition, you accept that such risk could result in financial loss to you. 80

(Note: See conditions in the notice from the Registrar of Stock Exchanges dated 11 July 1997, which provides that a mandate shall contain full particulars of the risk profile pertaining to such investments and the conditions subject to which and the manner in which the client is participating therein. Additional disclosure must, if necessary, be made). SIGNED at... on this the... day of... 19... AS WITNESS: for NAME OF CLIENT SIGNED at... on this the... day of... 19... AS WITNESS: for NAME OF JSE MEMBER FIRM 81

CLAUSES WHICH JSE MEMBERS COULD CONSIDER INCLUDING IN THE CONSOLIDATED MANDATE JSE members could consider including all or some of the following clauses in their mandates with clients: By your signature hereto, you acknowledge that you have been informed of the risks inherent in the investments set out above and, where appropriate, have been handed copies of any specific risk disclosure documents published from time to time by specific financial markets. In addition, you accept that such risk could result in financial loss to you. You hereby indemnify the firm and hold us harmless against: - any loss incurred on your behalf pursuant to any bona fide investment made by us in terms of this mandate; and - any and all claims, damages, liabilities, costs and expenses, including reasonable attorneys fees that may be brought against us by reason of the operation of your account. Nothing herein contained shall however absolve the firm from liability for loss suffered by you or any other person through any act of fraud, theft, bad faith, dishonesty or gross negligence on our part or on the part of our employees. Should this mandate be terminated for any reason, no penalty shall become due to either party in respect of such termination. Such termination shall not, however, affect any outstanding order or transaction placed on your behalf prior to the termination of the mandate or any legal rights or obligations that may then already have arisen. By your signature hereto, you acknowledge that the firm is authorised to visit or telephone you to discuss investments without having been expressly invited by you so to do. You hereby indemnify the firm and hold us harmless in respect of any income tax or other tax or levy of whatsoever nature in respect of which you may become liable or which may become payable pursuant to anything done by us on your behalf in terms of this mandate, and in particular: - tax on interest accruing for your benefit on any cash amount deposited by us in terms of this mandate; and - tax on the increase in value of any investment administered or managed by us on your behalf and for your benefit. Furthermore, you undertake to refund to us on demand any amount that we may be called upon to pay by any revenue authority in respect of any such interest or gain accruing for your benefit, and further authorise us to pay any such amount out of the investments or realised proceeds of the investments managed by us on your behalf or under our control. You hereby indemnify us and any third party with whom we contract on your behalf and hold us and any such third party harmless from: - any loss incurred on your behalf pursuant to any bona fide investment made by us in terms of this mandate; and - any and all claims, damages, liabilities, costs and expenses, including reasonable attorneys fees, that may be brought against us by reason of the operation of your account. Nothing herein contained shall, however, absolve us from liability for loss suffered by you or any other person through any act of fraud, theft, bad faith, dishonesty or gross negligence on our part or on the part of our employees. The aforegoing notwithstanding we assume no liability whatsoever for any act of fraud, theft, bad faith, dishonesty or gross negligence on the part of any third party as mentioned above, or on the part of any such third party's employees. Nor do we assume any liability in the event of the insolvency or subsequent sequestration or liquidation of such third party's estate. 82

You consent to our recording any telephone conversations between yourself and any JSE member of our staff and acknowledge that this is an international practice and is used solely for the purpose of resolving any disputes that may arise concerning telephonic advice or instructions. You acknowledge that neither we nor any third party whom we instruct on your behalf will be required to make any payment to your order without written instructions to that effect from yourself together with an indemnity in this regard. We are specifically authorised at any time upon not less than one calendar month's notice in writing to you to cede and assign all our rights and obligations in and under this mandate to any third party that is authorised to manage investments in terms of the applicable legislation and that is a JSE member of the JSE. Such cessionary and assignee shall, unless this mandate is thereupon terminated by you, assume all such rights and obligations with effect from the first day of the calendar month following such notice period. Failing such termination, you shall be deemed to have consented to such cession and assignment. In the event that we are a partnership, this mandate shall endure notwithstanding that the partnership is dissolved by operation of law, for any reason other than the sequestration of the partnership provided that the partnership remains a JSE member of the JSE. Where confirmation of a transaction is transmitted to you through an electronic medium, the firm will not be liable to you or any other person receiving the confirmation for or in respect of any direct, indirect or consequential liability, loss, damage or cost of any kind or nature arising by virtue of the fact that the confirmation is sent through an electronic medium, whether or not as a result of the destruction of data, system malfunction, interruption of communication links or any other problem over which the firm has no control. Notwithstanding anything contained in the mandate previously entered into by you with the firm, upon the introduction of a central depository or electronic scrip registry as approved by the JSE, your investments shall be deposited by the firm for safe custody in such depository or registry subject to any relevant legislation and the JSE's rules. If the firm is not a participant in such depository or registry, the firm shall be entitled to deposit the investments in the depository or registry through a participant of the firm's choice. Unless you notify the firm to the contrary, any such investment shall be held in an account in the name of..., or, if the firm is not a participant, in an account in the name of the nominee of the participant with whom the firm deposits your investments. 83

APPENDIX G SUMMARY OF GENERAL REQUIREMENTS FOR MANAGED ACCOUNT MANDATES Consolidated Mandate General Terms and Conditions The management of the client s investments must be conducted either on a full discretion or a limited discretion basis, as described more fully in the Full Discretion and Limited Discretion Schedules. These terms can either be incorporated in the mandate itself or set out in a separate schedule. The mandate should provide for the immediate termination thereof, in writing, by either party to the other party. The mandate and/or the attached schedules should contain a list of the securities, financial instruments and other investments in which the JSE member is allowed to deal on behalf of the client, with specific disclosures in relation to the risks inherent in derivatives and foreign investments. The JSE member must confirm that unless it is specifically authorised to do so in terms of the Dual Capacity Schedule, it will not sell any investment to or buy any investment from the client directly for its own account, nor take a position against the client. Unless otherwise specified in the Particulars Schedule: - the client must warrant that any instruments delivered to the JSE member are free of any lien or charge and shall remain free of any such lien or charge while they are held by the JSE member in safe custody; - all investments managed by the JSE member shall be registered in the client s name or in the name of the JSE member s nominee company; and - all such investments shall be held by the JSE member in safe custody on behalf of the client, subject to the applicable legislation and the JSE rules. Investments in listed uncertificated securities shall be held by the JSE member in safe custody reflected as an electronic entry in a central depository, electronic scrip registry or nominee register as approved by the JSE, and subject to any applicable legislation, the JSE rules and the terms of the mandate. The JSE member shall be entitled to create an electronic entry in respect of these investments in the depository or registry through a participant of its choice, and the investments shall be held via the participant s nominee or the JSE member s own nominee. The JSE member shall be authorised to move the client s investments from one electronic record to another or withdraw such investments from safe custody only for the purpose of: - transferring the investments to the client or its order or, upon termination of the mandate, as notified by the client in writing; - dealing with the investments as could be required in fulfilling the mandate; - lodging the investments on behalf of the client with any person or entity in terms of an order of court or a special resolution of the issuer of the investments; or - any other lawful purpose in terms of the mandate. All cash deposits received by the JSE member arising from the management of the client s investments shall be paid by the JSE member into JSE Trustees unless when paid over to the client. 84

The JSE member shall be authorised to retain or to withdraw from any cash deposited by the JSE member in JSE Trustees such amounts as are required to: - pay for investments purchased on the client s behalf; - effect such other payments as are necessary in the operation of the mandate; and/or - discharge a debt due to the JSE member by the client. The JSE member shall be entitled to management fees for the services provided by it in terms of the mandate, as set out in a Fees Schedule signed by the client and the JSE member. The mandate may authorise the JSE member to realise any investment held by it in terms of the mandate to settle any outstanding fees if insufficient cash is available on the account. The JSE member shall provide a monthly statement of account to the client showing details of any change in the investments held on the client s behalf, including any cash held by JSE Trustees on behalf of the client at the statement date. If the JSE member ceases to be a JSE member of the JSE, the mandate shall automatically terminate with immediate effect. No variation or amendment of the mandate shall be binding unless contained in a written document signed by both parties. No term, provision, condition or representation relating to the subject matter of the mandate not contained in the mandate or in the schedules thereto shall be binding on either the client or the JSE member. The mandate should be signed and dated by the client and an authorised representative of the JSE member. Particulars Schedule This schedule should contain the client s personal particulars, including its full names, ID number, postal address and bank account details. The schedule should be signed and dated by the client and an authorised representative of the JSE member. Full Discretion or Limited Discretion Schedule This schedule must state whether the client s investments are to be managed at the JSE member s sole and full discretion without the JSE member obtaining any further authority or consent from the client to effect any transactions, or whether the JSE member is only permitted to purchase and sell investments on the client s instructions and prior consent or on the instruction of the client s investment advisor. A Full Discretion Schedule must contain details of the client s investment objectives. If investments may only be purchased or sold on the instruction of the client s investment advisor, the identity of that person or entity must be clearly stated. The schedule should be signed and dated by the client and an authorised representative of the JSE member. 85

Dual Capacity Schedule (Optional) This schedule authorises the JSE member to have a personal interest as principal in any transaction with the client, if the client elects to give the JSE member that authority. If such authority is given by the client, the client must indicate whether or not the JSE member must disclose its interest as principal in the transaction to the client prior to executing any transaction. If this schedule is relevant to the arrangement between the JSE member and the client, it should be signed and dated by the client and an authorised representative of the JSE member. Foreign Investment Schedule (Optional) This schedule appoints the JSE member as an agent to deal on the client s behalf in investments listed or traded outside the RSA, if the client elects to give the JSE member that authority. If such authority is given by the client, the JSE member shall be entitled to act through a third party of its choice and will ensure that such third party will give a similar undertaking and comply with similar obligations in respect of the client s foreign investments as those contained in this mandate. All cash deposits received by the JSE member arising from the management of the client s foreign investments shall be held in a trust account separate from the JSE member s assets or those of the third party, unless it is paid over to the client. All foreign investments shall be registered in the name of a nominee on the client s behalf and, where applicable, held in a central depository or electronic scrip registry, subject to any relevant legislation. The JSE member may recoup from the client any management fees charged by the third party for the management of the client s foreign investments. Similar provisions relating to statements of account as contained in the Consolidated Mandate should be incorporated in this schedule in relation to the client s foreign investments. The client must acknowledge that it has been informed of the risks inherent in foreign investments and, where appropriate, has been handed copies of any specific risk disclosure documents published from time to time by specific financial markets. If this schedule is relevant to the arrangement between the JSE member and the client, it should be signed and dated by the client and an authorised representative of the JSE member. 86

APPENDIX H PRO-FORMA REPORTS TO THE JSE AND SCHEDULE OF REPORTING DEADLINES Report Page Timing Year end report to the Executive Committee of the JSE Securities Exchange 92 3 months after financial year end Report to the Executive Committee of the JSE Securities Exchange on the Annual Reconciliation Statement 97 Report to the Executive Committee of the JSE Securities Exchange on the surprise scrip count 3 months after financial year end 99 Once in each six month period 87

The Executive Committee The JSE Securities Exchange South Africa c/o The Director - Surveillance 2 Gwen Lane Sandown SANDTON Dear Sirs REPORT OF THE INDEPENDENT AUDITORS OF THE JSE MEMBER TO THE EXECUTIVE COMMITTEE OF THE JSE SECURITIES EXCHANGE SOUTH AFRICA (THE JSE) Introduction We have audited the attached annual financial statements of [name of JSE member]set out on pages to for the year ended (referred to in part 1 of this report), reviewed compliance with certain provisions of the Stock Exchanges Control Act 1985 (the Act), the Regulations promulgated thereunder (the Regulations) and the Rules and Directives of the JSE (the Rules and Directive) for the year ended at that date (referred to in part 2 of this report) and carried out certain agreed procedures detailed below (referred to in part 3 of this report). The annual financial statements, the maintenance of an effective system of internal control over mandates and compliance with the Act, and Regulations and the Rules and Directives are the responsibilities of the directors. Our responsibility is to report on these annual financial statements, our review of compliance with the Act, the Regulations and the Rules and Directives and the agreed upon procedures. This report is furnished solely for your information and should be used only for this purpose. PART 1 REPORT ON FINANCIAL STATEMENTS Scope We conducted our audit of the annual financial statements in accordance with the statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes: examining, on a test basis, evidence supporting the amounts and disclosures included in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Audit Opinion In our opinion the annual financial statements fairly present, in all material respects, the financial position of [name of JSE member] at and the results of its operations and cash flow information for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice, and in the manner required by the Companies Act, the Stock Exchanges Control Act, the Regulations and the Rules and Directives (Regulation 6(1)(c) and Directive DB1). 88

PART 2 REPORT ON REVIEW OF COMPLIANCE WITH THE ACT, REGULATIONS AND RULES AND DIRECTIVES Scope We conducted our review of compliance with certain provisions of the Act, the Regulations and the Rules and Directives in accordance with the statement of South African Auditing Standards applicable to review engagements. These standards require that we plan and perform the review to obtain moderate assurance that [name of JSE member] complied with the Act, the Regulations and the Rules and Directives during the year ended. A review is limited primarily to enquiries of the JSE member s personnel regarding the sections of the Act, the Regulations and the Rules and Directives relevant to the stock broking business and regarding the steps taken by management to comply with them, together with the inspection of supporting documentation and the analytical review of information, where applicable, and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Opinion Based on our review, nothing has come to our attention that causes us to believe that [name of JSE member] did not comply with, or contravened the following provisions of the Act, the Regulations, the Rules and Directives: Section 14 of the Act, relating to separation of funds of JSE members and other parties (Section 43(2)(b)(iv)(aa)); Sections 22, 23 and 25 of the Act, relating to the buying and selling of securities (Section 43(2)(b)(iv)(aa)); Sections 36, 37 and 38 of the Act, relating to the marking, recording, alienation, borrowing against and repledging of securities (Section 43(2)(b)(iv)(aa)); Regulation 4 relating to accounting records (Directive DA and Sections 43(2)(b)(i) and 43(2)(b)(iv)(bb)); Regulation 5(3)(d) relating to capital adequacy (Directive DC2 and Section 43(2)(b)(iv)(bb)); Rules 5.170.10, 5.200.1, 5.210.1, 5.220.1, 5.225.1, 5.290, 14.60.10 and 14.60.11 relating to the operation of trust accounts (Section 43(2)(b)(iv)(cc)); Rules 4.55, [applicable to a broking JSE member (equities)] and 4.220 [applicable to a CSM] relating to financial resources requirements (Section 43(2)(b)(iv)(cc)); Rule 14.60.13 relating to the issue of receipts (Section 43(2)(b)(iv)(cc)) Rule 5.140, relating to the safe custody of certificates relating to securities (Section 43(2))b)(iv)(cc)); and Rule 14.90, relating to the borrowing and lending of securities belonging to clients (Section 43(2)(b)(iv)(cc)). Based on our review, nothing has come to our attention that causes us to believe that client securities entrusted to the JSE member or for which the JSE member was accountable to any person were not registered and held in accordance with the Act, the Regulations and the applicable mandates (Regulation 6(1)(a)). Based on our review, nothing has come to our attention that causes us to believe that [name of JSE member] did not maintain adequate capital for a material portion of the period under review (Regulation 6(1)(b)). PART 3 FACTUAL FINDINGS REPORT We have performed the procedures agreed with you and described below, which we have carried out in compliance with the provisions of the Act, the Regulations and the Rules and Directives. Our engagement was undertaken in accordance with the statement of South African Auditing Standards applicable to agreedupon procedures engagements. The responsibility for determining the adequacy or otherwise of the 89

procedures agreed to be performed is that of the JSE. Our procedures were performed solely to assist you in evaluating compliance with the provisions of the Act, the Regulations and the Rules and Directives regarding the mandatory scrip count, the maintenance of managed account cash balances, and the maintenance of an effective system of internal control over mandates, and should be used by you only for this purpose. Mandatory scrip count In compliance with Section 43(2)(b)(iii) of the Act and Directives DG1.7.2 and DG1.7.3 we have performed the procedures agreed with you and described below in order to satisfy ourselves that the securities, bonds, Kruger-Rands and documents of title which, according to the relevant accounting records, are held by on its own behalf and on behalf of other persons, including securities held in safe custody, were in the possession of on. Our agreed procedures and findings are summarised as follows: we counted the securities, bonds, Kruger-Rands and documents of title in possession of We obtained confirmation regarding the securities, bonds, Kruger-Rands and documents of title which were not in the possession of, but which were held by or deposited with any other person on behalf of we inspected the reconciliation of the safe custody records of. with those of the custodian bank, central depository and/or central depository participant and: - We agreed the reasons provided by the JSE member for all reconciling differences between BDA and the CSDP as per the PCSDRC report reflected in the Appendix to the return submitted to the JSE; - we obtained from the JSE member the explanations recorded below regarding the cause of each reconciling item reflected in the Appendix and inspected records supporting the explanations provided; - we obtained from the JSE member the explanations reported below regarding how each reconciling item reflected in the Appendix was resolved and inspected records supporting the explanations provided. We inspected transfer office receipts confirming the existence of securities lodged with issuers for registration. We obtained positive confirmation of the securities, bonds, Kruger-Rands, documents of title and cash balances of clients from a sample of clients [state details of sample size] and negative confirmations from other clients. We report that the results of our agreed procedures were satisfactory [state exceptions where applicable]. The explanations obtained regarding the cause of each reconciling item and how each item was resolved are set out below: Managed account cash balances In compliance with Directive DG 1.7.4, we have performed the procedures agreed with you and described below in order to satisfy ourselves that the cash held by JSE Trustees (Pty) Limited and banks is in accordance with the managed accounts of clients in the financial records of. on.. Our agreed procedures and findings are summarised as follows: We obtained independent confirmations of the cash held by JSE Trustees (Pty) Ltd and banks and agreed these confirmations to the financial records of.. We report that the results of our agreed procedures were satisfactory [state exceptions where applicable] 90

Mandates With reference to Directive DG 1.7.5.2, we report that we have performed the procedures agreed with you and described below in order to establish whether adequate controls exist to ensure that signed mandates are held for controlled and managed account clients: Through enquiry of management of the JSE member, we identified and documented the key controls discussed with management, that address the control objectives listed below in respect of mandates for controlled and managed account clients: A signed mandate is obtained from each controlled and managed account client. Each signed mandate contains the minimum requirements prescribed by the JSE in the form of a proforma mandate. Accounts for which mandates are still outstanding are identified. Remedial action is taken to address outstanding mandates. We selected a representative sample of both controlled and managed account clients and tested, through inspection and observation, whether or not the key controls identified above have operated during the financial year under review [Note: as set out in paragraph [XX] of the Audit Guide, the JSE Surveillance Department requires a minimum sample size of 50 mandates to be tested]. Based on the information provided to us by management regarding the manner in which (name of JSE member) identifies in its records those controlled and managed account clients for which mandates are still outstanding, we identified all controlled and managed accounts for which the records of (name of JSE member) reflect that a prescribed mandate has not been obtained from the client and documented explanations provided by management as to why prescribed mandates had not been obtained. We identified all client accounts in respect of which the JSET Account Balances BDA report reflects that funds were held by the JSE member as at (financial year end date) but which were not reflected in the records as being managed accounts, and: - checked whether prescribed mandates were, in fact, held on behalf of those clients; and - documented explanations provided by management as to why prescribed mandates were not held for those clients (where applicable). We report that the results of our agreed procedures were satisfactory [state exceptions where applicable]. Our testing addressed the following key controls identified to us by management in respect of mandates for controlled and managed account clients: The explanations obtained from management as to why prescribed mandates were not held for controlled and managed account clients are set out below: Professional Indemnity Insurance In compliance with Directive DF and as a supplement to the above report, we confirm that we are in possession of a valid Professional Indemnity Insurance policy, the cover under which exceeds the sum of Seven and a Half Million Rand. The policy was issued by P I Insurance JSE brokers (Proprietary) Limited of P O Box 9329, JOHANNESBURG 2000. 91

Independence of auditors In compliance with Directive BO and as a supplement to the above report, we confirm that all partners and staff engaged on the audit declared prior to the commencement of the audit that they were fully conversant with the provisions of the Directive and declared at the date of the conclusion of the audit that no business has been transacted by them with between the commencement of the financial period under review and at the date of the auditor s report thereon. Because the above procedures do not constitute either an audit or a review made in accordance with statements of South African Auditing Standards, we do not express any assurance on compliance with the provisions of the Act, the Regulations and the Rules and Directives. Auditor Registered Accountant and Auditor Chartered Accountant CA(SA) Date Address 92

The Executive Committee The JSE Securities Exchange South Africa c/o The Director - Surveillance 2 Gwen Lane Sandown SANDTON Dear Sirs REPORT OF THE INDEPENDENT AUDITORS OF [NAME OF JSE MEMBER] TO THE EXECUTIVE COMMITTEE OF THE JSE SECURITIES EXCHANGE SOUTH AFRICA ( THE JSE ) ON THE ANNUAL RECONCILIATION STATEMENT AS AT [YEAR-END DATE] Scope In compliance with JSE Directive DB 1.6, we have performed certain agreed procedures described below regarding the attached annual reconciliation statement at the above date. Our engagement was undertaken in accordance with the statement of South African Auditing Standards applicable to agreed-upon procedures engagements. The financial information is the responsibility of the directors. Our responsibility is to report on the results of the agreed-upon procedures. This report is furnished solely for your information and should be used only for this purpose. Findings Our agreed-upon procedures and findings are as follows: 1. We have checked the annual reconciliation, which we have initialled for purpose of identification, between the DC 1.6 return and the annual financial statements as at YEAR-END DATE, and we report that the reconciliation has been performed in terms of DB 1.6. 2. We have checked the casts and calculations of the annual reconciliation statement, and we report that the casts and calculations of the annual reconciliation statement were accurate. Yours faithfully Auditor Registered Accountant and Auditor Chartered Accountant CA(SA) Date Address 93

[NAME OF JSE MEMBER] ANNUAL RECONCILIATION STATEMENT OF ADJUSTED LIQUID CAPITAL AS AT [YEAR-END DATE] 1 Adjusted Liquid Capital (refer para 3) R As reflected on DC 1.6 return dated.. As computed per the annual financial statements as at. Difference in adjusted liquid capital (refer para 2) 2 Reconciliation of Net Difference in Adjusted Liquid capital Increases: Audit adjustments (details) Decreases: Audit adjustments (details) 94

[NAME OF JSE BROKER] ANNUAL RECONCILIATION STATEMENT OF ADJUSTED LIQUID CAPITAL AS AT [YEAR- END DATE] 3 Calculation of Adjusted Liquid Capital Ordinary share capital Preference share capital Share premium account Per DC 1.6 Per AFS Difference R R R Reserves Audited retained earnings (or accumulated losses) Unaudited profit (or loss) Owners equity Subordinated loans Guarantees received Total capital reserves Less: Impaired capital Intangible assets Deferred tax asset Guarantees provided Material holdings in credit institutions Available capital resources Less: Illiquid assets Fixed assets, net of related secured loans Investments in unlisted securities Minimum JSE rights Risk margin requirements of SAFEX, BESA and other markets Margin on non-controlled uncertificated securities transactions Unsecured loans Debtors over 30 days Prepayments Adjusted liquid capital 95

The Executive Committee The JSE Securities Exchange South Africa c/o The Director Surveillance 2 Gwen Lane Sandown SANDTON Dear Sirs REPORT OF THE INDEPENDENT AUDITORS OF [NAME OF JSE MEMBER] TO THE EXECUTIVE COMMITTEE OF THE JSE SECURITIES EXCHANGE SOUTH AFRICA ( THE JSE ) IN COMPLIANCE WITH JSE DIRECTIVE DG 1.8 SURPRISE SCRIP COUNT Scope In compliance with JSE Directive DG 1.8, we have performed certain agreed procedures described below in respect of a surprise scrip count carried out on [date]. Our engagement was undertaken in accordance with the statement of South African Auditing Standards applicable to agreed-upon procedures engagements. The responsibility for determining the adequacy or otherwise of the procedures agreed to be performed is that of the JSE. Our responsibility is to report on the results of the agreed-upon procedures. This report is furnished solely for your information and should be used only for this purpose. Our agreed-upon procedures and findings are as follows: In compliance with Directive DG1.8.1 we have performed the procedures agreed with you and described below in order to satisfy ourselves that the securities, bonds, Kruger-Rands and documents of title which, according to the relevant accounting records, are held by.on its own behalf and on behalf of other persons, including securities held in safe custody, were in the possession of.. on.. Findings Our agreed procedures and findings are summarised as follows: We counted the securities, bonds, Kruger-Rands and documents of title in possession of. We obtained confirmation regarding the securities, bonds, Kruger-Rands and documents of title which were not in the possession of, but which were held by or deposited with any other person on behalf of. We inspected the reconciliation of the safe custody records of with those of the custodian bank, central depository and/or central depository participant and obtained explanations for all reconciling differences between JSE broker Deal Accounting and the Central Securities Depository Participant as per the Daily CSDP Reconciliation report. We inspected transfer office receipts confirming the existence of securities lodged with issuers for registration. It was not considered necessary to obtain confirmation from any clients as no material discrepancies were revealed during the course of our surprise scrip count [if applicable]. We report that the results of our agreed procedures were satisfactory [state exceptions where applicable]. Because the above procedures do not constitute either an audit or a review made in accordance with statements of South African Auditing Standards, we do not express any assurance on the scrip positions as at [date]. Had we performed additional procedures or had we performed an audit or review of the financial statements in accordance with statements of South African Auditing Standards, other matters might have come to our attention that would have been reported to you. 96

Our report is solely for the purpose set forth in the first paragraph of this report and for your information, and is not to be used for any other purpose or to be distributed to any other parties. This report relates only to the accounts and items specified above, and does not extend to any financial statements of taken as a whole. Yours faithfully Auditor Registered Accountant and Auditor Chartered Accountant CA(SA) Date Address 97

APPENDIX I GLOSSARY OF TERMS AND ACRONYMS American Depository Receipt (ADR) American option Arbitrage transaction At-the-money Back-to-back link BDA Bear sale Bearer securities Beneficial Owner Benefit Distribution BESA Call option Capital adequacy Carry account Carry transaction CASA CD An ADR is a negotiable certificate that trades in the USA (either on an exchange or over-the-counter) and which is backed by shares that are listed on a non-us stock exchange. An option that can be exercised at any time prior to its expiry. A transaction where a JSE member, for its own account, purchases or sells securities on one stock exchange with an intent to sell or buy those securities on another stock exchange in order to profit from differences in prices between the two exchanges. The purchase and sale are normally concluded simultaneously. An option is at-the-money when the price of the underlying instrument is equal to the option's exercise price. Is the linking of a receipt to a delivery for on-delivery. A delivery can only be made once a receipt is completed successfully. JSE broker Deal Accounting A transaction involving the sale of securities that the seller does not own. Securities issued so that the holder of the certificate is considered to be the owner of the securities. Income is usually payable upon coupon presentation. The true owner of the securities, as opposed to the apparent legal owner or the custodian or a nominee through whom the securities may be held and/or in whose name the securities may be registered. A distribution made by companies to holders of their securities in the form of cash or securities, usually in proportion to their holding. Cash benefits include dividend and interest payments. Securities distributions include rights, bonus and other entitlement issues. Also known as Entitlements and Corporate Actions. The Bond Exchange of South Africa An option that gives the holder the right, but not the obligation, to purchase the underlying asset. Sufficient capital must be held in the business at all times to enable the JSE member to meet its settlement obligations and to wind down without other market participants or its clients experiencing any losses. A client's account where credit has been advanced to the client by a JSE member for the purchase of securities with listed shares as security. A transaction where the JSE member purchases and pays for securities on behalf of a client without the client paying for them on settlement date. The JSE member extends the client credit and holds the securities purchased pledged as security. Uncertificated and Administration of Securities Act Central Depository 98

Certificate Certified Scrip Clearing Clearing and Settlement System Compliance officer Contract Note Contractual Settlement Controlled client Convertible Securities Corporate Actions Counter Coupon A paper document, also known as physical scrip, attesting to the holder's ownership of an issuer's stock or debt obligation. It is required for settlement of transactions in certificated securities and often also for collection of income. A certificate may be bearer or registered. Depending on the country, a certificate may indicate the name of the issuer, specific type of the share/debt, serial number, interest rate (if debt), quantity (number of shares or par value of debt), name and address of shareholder, paying agent, and tax-related information such as country of domicile of beneficial owner. Coupons, if any, are normally attached to the certificate but may also be issued separately. The marking of a transfer deed by the transfer secretary of a company to show that the relevant share certificate is in its possession. The process, in conjunction with settlement, of determining accountability for the exchange of money and securities between counter parties to a transaction. Clearing creates binding statements of obligation for securities and/or funds due. The system that collects, processes and transmits the information which enables settlement. This includes information on trades, scrip holdings, released scrip, funds commitment, CSD transfers and SARB settlement account entries. The person appointed by a JSE member to ensure compliance by the JSE member with the provisions of legislation such as SECA, and the JSE rules and directives. This is a note that the JSE broker is required to send to a client recording the details of a purchase or sale of securities, including the commission payable, the Uncertificated Securities Tax and the settlement period. The market convention whereby the parties to a transaction in uncertificated securities have a contractual obligation to cause such transaction to be settled on the settlement day. A client whose funds and uncertificated securities are under the control of a JSE member and who settles via the JSE member Securities issued in one form with provisions allowing them to be converted into securities in another form. For example, debt instruments that can be converted into common or preferred stock, subject to specified circumstances. Any action by an issuer of investments, or by another party in relation to the issuer, affecting an investor's entitlement to investments or benefits related to those investments. This includes, but is not restricted to, takeovers, capital restructuring and related activities, rights issues, stock conversions, scrip dividends and redemptions. Also known as Entitlements or Benefit Distributions. A single listed instrument, such as Harmony options. When referring to the number of counters on STRATE, this figure includes each instrument issued by a particular issuer. When referring to the number of companies on STRATE, this figure refers to the number of listed companies that have issued securities that are settled via STRATE. A small document attached to a bearer bond or share certificate that, when detached and presented to the issuer of a security or its agent(s), entitles the holder to exercise the right embodied in the coupon (interest, dividend payment or subscription right). 99

Coupon rate CSAs CSDP CSM Delpay Dematerialisation Derivative DFP DVP ERD European option Exercise price Failed Settlement Instruction Failed trade FICA FMCA FSB Fungible Securities Futures contract GAAP The interest rate payable by the issuer on the nominal value of a bond. Custody and Settlement Agents Central Securities Depository Participant Custody and Settlement JSE member Settlement Type The process of converting certificated securities into uncertificated securities. A contract whose value is dependent on the performance of some underlying asset or market indicator. Includes exchange traded and over-the-counter futures and options, as well as more complex instruments such as caps, floors, collars, down and outs and swaptions. Delivery free of payment Delivery versus payment Electronic Report Distribution An option that can be exercised only on its expiry date or any other agreed dates during the option period. The specified price at which the underlying asset may be purchased or sold upon the exercise of an option, also referred to as the strike price. A securities transaction that fails to settle on time; i.e. the securities and cash are not exchanged as agreed on the settlement date. Any securities transaction that does not settle on the contracted settlement date because one of the settlement parties does not meet the settlement conditions. A failed trade may have negative consequences for the party at fault, including buy-ins and penalties. Financial Intelligence Centre Act Financial Markets Control Act Financial Services Board Securities that are equivalent, being of the same class and issued by the same issuer, and are therefore substitutable and interchangeable. A contract to buy or sell a specified quantity and quality of a specified asset (be it a commodity, a financial asset or a notional asset) on a specific date, at a price determined at the time the contract was entered into. Statements of Generally Accepted Accounting Practice Gilt A debt issued through the Treasury, public entities and municipalities, with the principal and interest guaranteed by the government. Also referred to as gilt-edged security or gilt-edged stock. GOPs Gilts Exceptional Open Position (bonds scrip journals) 100

Guarantee Fund Hedge IFIA Immediate deal Immobilisation Initial margin Intermediary In-the-money ISIN Jobbing JSE JSET Lodgement Date Marking-to-market A fund maintained by an exchange to recompense investors when a JSE member firm fails to meet its obligations and is placed into default by the exchange. A transaction taken to reduce risk by taking a position that offsets an existing or anticipated exposure to a change in market prices. Inspection of Financial Institutions Act A transaction in bonds where delivery is to take place on the date of the transaction or the following business day; or a transaction in any other listed security where delivery is to take place before the next settlement period directly between the parties concerned. Immobilisation is the central storage of share certificates or documents of title in the vault of a CSD. Each depositor (participant) is entitled to a share of the depository's entire holding of each class of security in the proportion of its deposit to the aggregate holding, and such records are maintained electronically. Transfers between participants are recorded electronically, without the need for any physical movement of the certificates or documents, unless they are withdrawn from the depository. The deposit required by SAFEX from both parties to a futures contract as a performance guarantee. It is payable by noon on the day after the contract was traded. A collective term for professional securities industry participants that act as go-betweens. An intermediary typically stands between issuers and investors. Intermediaries include JSE members, financial institutions, banks and custodians. An option is in-the-money when there is a net financial benefit to be derived from exercising the option immediately. A call option is inthe-money when the price of the underlying instrument is above the exercise price, and a put option is in-the-money when the price of the underlying asset is below the exercise price. International Securities Identification Number Where the JSE member buys or sells a security with the intention of selling or buying those securities before settlement, for its own account. As such there is only a net financial settlement with no delivery of securities. JSE Securities Exchange JSE Trustees (Pty) Ltd Last date by which certificated securities should be lodged with the Transfer Secretary to be entitled to a corporate action, for example, rights, bonuses and dividends. The process of recalculating the exposure in a trading position in securities, options or futures contracts. In exchange traded contracts the exchange clearing house marks JSE members positions to market each day using closing market prices. JSE members have to maintain a certain minimum level of margin at the exchange clearing house and post additional margin if the marking-to-market process reduces margin below the minimum. 101

Minimum cover Money Transfers NCS Net Settlement Netting NMDLS Nominee Non-controlled client Non-Demat Odd Lots Off-market trade Off-market transfer On-market trades Option Order OTC Out-of-the-money In relation to a carry account it represents securities to the value of twice the amount owed by the client. The sending (or movement) of funds or securities or of a right relating to funds or securities from one participant to another by (a) conveyance of physical instruments/money; (b) accounting entries on the books of a financial intermediary; or (c) accounting entries processed through a funds and/or securities transfer system. Non-managed cash and scrip account The settlement of scrip or funds, or both, based on the arithmetical sum of trades in the same class of securities for settlement on the same day by the same person. A process of summing trades to arrive at a Net Settlement position. This means settlement of cash or securities balances by summing all credits and countervailing debits for a given day or session, then moving cash or securities only in the amount of the net total. Netting schemes immediately satisfy the obligations incurred from any specific settlement without eliminating payment risk, since the participants remain exposed to each other until the end-of-period clearance of the net remainder. Open Deals by Nominee A company formed for the specific purpose of registering securities in its own name on behalf of other persons, and administering those holdings. The nominee maintains a record of beneficial owners. In registered markets, the issuer as a supra-nominee generally uses a central depository. A client who has appointed its own CSDP. Non-dematerialised or certificated Securities in a quantity other than in Round Lot or a multiple thereof. They often arise as a result of a bonus or rights issue. A trade that is executed by two parties other than through a licensed exchange. A transfer of securities from one party to another, not arising from a trade on an exchange. Trades that are conducted on a licensed exchange and are subject to its Rules. A contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset or a portion thereof, at a predetermined price, during a specified period. An offer to sell, or a bid to buy, an agreed quantity of securities at a fixed or determinable price. Over the Counter An option is out-of-the-money when there is no benefit to be derived from exercising the option immediately. A call option is out-of-themoney when the price of the underlying instrument is below the exercise price and a put option is out-of-the-money when the price of the underlying asset is above the exercise price. 102

Over-the-counter options PAHDIM PAHDIN Partly Paid PCSDRC Pledge PMNDTE POTLOS Proxy Proxy Voting Put option Put-through RD Record of Depositors Redemption Register of JSE members Registered Owner Options traded outside an exchange or formalised market. They are usually designed to suit the client's needs (in terms of underlying assets, expiry dates, etc) and are settled directly between the option buyer and seller. List Changes List New Accounts Bonds or equities on which the holder has paid only part of the face value at the time of issue and is due to pay the balance in one or more instalments, usually but not always at set dates and in set amounts. Review the Daily CSDP Reconciliation The use of securities as collateral in a financial transaction. Securities may be pledged electronically within a central depository, or physically outside of a central depository. Print Managed Client Mandates Potential Loss Written authority to act or speak for an absent shareholder at shareholder meetings. Depending on the regulations of the market, the party acting on behalf of the shareholder may be a nominee, custodian, lawyer, JSE member firm or local representative. Acting or speaking for an absent shareholder on issues surrounding the management of the company at shareholders' meetings. Depending on the regulations of the market, the party acting on behalf of the shareholder may be a nominee, custodian, lawyer, JSE member firm or local representative. An option that gives the holder the right, but not the obligation, to sell the underlying asset. A transaction where both the purchase and sale of a security are dealt with by a single JSE member on behalf of different clients. Record Date A record showing the holdings of all participants that hold securities in the CSD, in a particular issue and class of security on a specified date. Partial or full return of the debt or shares to the issuer in exchange for a consideration. A register, maintained by the company's Transfer Secretary, that contains the identity and shareholdings of those in whose names the securities have been issued. It can also be known as the Register of Shareholders. The party registered as the owner in the Register of JSE members. This may be the true owner, a fund, unit trust or nominee. 103

Registration Registration Time Rematerialisation Repurchase Agreement Reverse substitution RFP Rights Issues Rolling settlement RVP SAAS Safe balance scrip SAFEX SAFIRES Same-day Funds SARB SATRIX Securities The recording of legal title to securities in the books of the issuing company by its Transfer Secretary. Securities held in the CSD are registered in the Register of JSE members in the name of the CSD Nominee. Transfers within the CSD arising from transaction settlements or otherwise require no entry in the Register of JSE members, since the title change is recorded electronically in the CSD participant's records. The time it takes to list the ownership of securities in the records of the issuer or its transfer secretary/registrar. The issue of certificates to permit the physical withdrawal of previously dematerialised securities positions held at the central depository. In most depository markets, the position must be realigned into depository holding for resale. In some countries, rematerialisation is permitted only to satisfy a cross-border transaction where physical certificates are required. Two simultaneous transactions: the purchase of securities (the collateral) by an investor from a bank or dealer; and the commitment by the bank or dealer to repurchase the securities at the same price at an agreed future date and rate timeously. The delegation of a previously substituted obligation back to the JSE member following a non-controlled client s failure to commit to settling the trade. Receipt free of payment Rights to buy additional securities through an issue granted to existing holders of the original securities. A settlement environment in which transactions (securities and funds) become due for settlement a set number of business days after the trade date. Receipt versus payment South African Auditing Standards All securities, Kruger-Rands and documents of title held by a JSE member, other than those lodged with a bank in safe custody. South African Futures Exchange South African Instruments Realtime Instruments Settlement System The term used to describe a cash payment of which the receiver has constructive use on the day of receipt, for example funds that can be used immediately to fund a payment to a third party. South African Reserve Bank Satrix securities are listed contracts that replicate the dividend and price performance of a particular index. They provide the same returns as would be received had the investor directly purchased shares in each company in the relevant JSE index. 104

Scrip Lending Scrip settlement Scripless Trading SECA SECFN SECIF Segregated account SENS The Securities Exchange News Service SETS Settlement Instruction [SI] Stock accounts Straddle Substitution Suspended Securities SWIFT Tainted Scrip Collateralised loan of securities for a limited period of time. This involves the transfer of securities to the borrower with an agreement for the borrower to replace them in due course with identical securities. Normally, the borrower will deposit collateral with the lender to cover the value of the borrowed stock, and will pay the lender a fee. The lender retains the benefits and risks of price movements on the stock and the borrower assumes an equal and opposite price risk. Where the option or future is settled by delivery of the underlying asset. A trading system where the settlement is carried out by book entries rather than by the movement of share certificates. Stock Exchanges Control Act User/Function Maintenance screen on BDA Function Code OP-ID Enquiry screen on BDA An account that separately identifies an investor's securities and does not depend entirely on records maintained by the investor's custodian or service providers. On 18 August 1997, the Listings Division of the JSE introduced a real time news service for the dissemination of company announcements and price sensitive information. SENS aims to ensure early, equal and wide dissemination of all information that is expected to have an effect on the prices of securities that trade on the JSE. It improves communication between listed companies and the investing community. Stock Exchange Trading System Instruction, arising out of a trade [which might have taken place either in a formal trade market such as a Stock Exchange or at open market such as off-market], submitted to the Clearing House [STRATE in this case], for clearing and settlement. These are accounts in the JSE brokers records reflecting the JSE broker s proprietary position in securities and financial instruments. The purchase and sale of similar bonds (that have redemption dates within three years of each other) on the same account for the same settlement date. The delegation of a JSE member s settlement obligation to the CSDP of a non-controlled client. Securities that are restricted from being transferred, withdrawn or used for settlement of trade. Securities may be suspended as a whole or at account level. Suspension could also be for a part of the holding in an account. Society for Worldwide Interbank Financial Telecommunications Scrip that has been tampered with, thus misrepresenting genuine proof of ownership, or stolen. 105

Tick size The specified parameter or its multiple by which the price of an exchange-traded security may vary when trading at a different price from the last price, whether the movement is up or down from the last price. Transfer Secretary An individual or organisation that maintains the Register of JSE members on behalf of the issuer of securities, and issues certificates on behalf of the issuer. A Transfer Secretary also handles corporate actions. Uncertificated Securities Securities that in terms of Section 91A of the Companies Act, 1973, are transferable without a written instrument and are not evidenced by a certificate. Uncertificated Securities Tax The tax payable in respect of the issue of, and change in, beneficial ownership in any securities that are transferable without a written instrument and are not evidenced by a certificate. UST Variation margin VAT Warrant Withholding Tax WX XML XOPs Uncertificated Securities Tax The profit or loss on a futures contract that is settled in cash by noon the next day. SAFEX marks-to-market all futures contracts at the end of each day. Value Added Tax The right to purchase or sell shares (the underlying security) at a specified date in the future and at a specified price. Tax on share dividends, coupon payments or bank deposits that is deducted at source from payments to investors. Exercise of Warrants extensible Markup Language Electronic Open Positions 106