The Prudential Authority has published proposals to amend the rules on commercial paper issuance, including new definitions, a minimum size for issuers, and a new regulatory return

On 13 July 2023, the Prudential Authority (PA) issued Prudential Communication 8 of 2023, describing its intention to make amendments to the Commercial Paper Exemption Notice, 1994 (CP Exemption Notice) to enhance the safety and soundness of the commercial paper market.

In addition to issuing the Communication, the PA has published draft amendments to the CP Exemption notice and a draft position paper about the proposed amendments.

The CP Exemption Notice relates to the provisions of section 11(1) of the Banks Act, 94 of 1990 (Banks Act). In terms of this section, no person may conduct the "business of a bank" unless they are a public company and registered as a bank in terms of the Banks Act. The PA may designate certain activities as not being the "business of a bank" for purposes of the Banks Act.

One of those activities is the acceptance of money from the general public against the issue of commercial paper in terms of the CP Exemption Notice. The CP Exemption Notice aims to enable corporates to access the domestic capital market by issuing commercial paper to raise short-term funding from other institutional investors to fund their business/operational activities.

The CP Exemption Notice in its current form establishes that commercial paper is broadly a written acknowledgement of debt. This is irrespective of whether the maturity period is fixed or based on a notice period, or whether the rate is fixed or floating, and debentures or any interest-bearing written acknowledgement of debt has been issued for a fixed term. 

Since 2018, the PA has been consulting on amendments to the CP Exemption Notice, with the objective of promoting and enhancing the safety and soundness of the commercial paper market and its market participants. 

Among the notable proposed amendments now published is an enhancement to the definition of "commercial paper". This would explicitly reduce the term structure of commercial paper issuances to 364 days, aligning with international practice and with the generally-accepted purpose of the CP Exemption Notice.

The draft amendment has introduced the requirement for all issuers, other than the central government or issuers where the CP is backed by a central government guarantee, to have net assets exceeding ZAR 100-million at a point in time no earlier than 18 months prior to the proposed issuance, as certified by the issuer’s auditors.

Another important proposed amendment is to require new issuers to obtain regulatory approval for placing documents from the PA before issuance.

The PA also proposes to introduce a new regulatory return for compliance and monitoring purposes. It said this would be used to collate economic statistics only and not primarily for supervisory purposes. 

Juristic persons that may be issuers would include state-owned companies and municipalities, and the PA proposes enhanced disclosure requirements for placing documents.

Other proposed amendments include enhanced and expanded definitions and the introduction of new definitions which are meant to be ancillary and support the above amendments. 

The PA has included an industry questionnaire in its publications and a comments template. A copy of the draft amendments and draft position paper can be found here. The Communication stipulates that comments must be made to PA-Standards@resbank.co.za for the attention of Ms Videshree Rooplall on or before 15 August 2023.

Written by Dawid de Villiers, Partner, Karen Couzyn, Partner & Mateen Memon, Associate from Webber Wentzel