(Changes paragraph four to clarify that bourse operator already prohibits uncovered short-selling, and will now implement stricter enforcement rather than ban it)
* Central bank raises credit lines to cash-strained banks
* Bourse considers shorter trade as volumes, margin calls jump
By Mfuneko Toyana
JOHANNESBURG, March 21 (Reuters) - South Africa’s central bank announced a raft of emergency liquidity measures on Friday to ease the stress on banks caused by the coronavirus outbreak, while the stock exchange regulator may take its own steps as surging volatility tests financial stability.
The South African Reserve Bank’s (SARB) move follows a 100 basis point cut to its main lending rate on Thursday to help the flagging economy and comes amid severe liquidity strains in funding markets.
Central banks the world over have been slashing interest rates and pumping trillions of dollars into the financial system, helping trigger a 1% recovery in global stock markets on Friday.
The head of the Johannesburg Stock Exchange (JSE), which is Africa’s biggest and one of the top 20 in the world by market capitalisation, told Reuters on Friday the bourse was considering shortening trading hours and enforcing stricter enforcement of rules prohibiting uncovered short-selling to ease the growing liquidity crunch.
“What’s concerning about the current selloff is it’s been persistent and lasting ... for over two weeks now,” Leila Fourie, chief executive of the JSE, said in an interview.
“Our market cap was 17 trillion rand at the beginning of the year. Now it’s at 12.5 trillion. That’s 4.5 trillion rand wiped off the exchange.”
South African assets have come under huge strain in the past two weeks as the coronavirus has rapidly spread around the world, and some local banks have struggled to access short-term funds.
As of Friday South Africa had more than 200 confirmed coronavirus cases, but no reported deaths yet.
Since the beginning of February the rand has plunged more than 10%, bond yields have risen to all-time highs and around 4.5 trillion rand ($259 billion) has exited the JSE in heavy selling across emerging markets.
The effects of South Africa’s selloff have been magnified by an economic recession and a looming credit downgrade to subinvestment by Moody’s.
A jump in volatility to levels last seen a decade ago, and thinning liquidity caused by increasing margin calls and algorithm-triggered selling, drained money from markets.
“In recent days, as financial markets have come under increased pressure with the spread of the COVID-19 pandemic, the SARB has observed liquidity strains in various funding markets,” the bank said in a statement, less than 24 hours after announcing its policy decision.
The bank announced three changes on Friday aimed at the money market, which facilitates shorter-term borrowing by banks and the government, usually through instruments with durations ranging from overnight to 12 months.
“The Standing Facilities lending rate – the rate at which the SARB provides liquidity to the commercial banks – will be adjusted lower to the repo rate, from the prevailing rate of the repo rate plus 100 basis points,” the bank said in its statement.
Other measures included daily fixed-rate auctions to provide liquidity to clearing banks, with an interest rate equal to the repurchase rate, currently at 5.25%.
The bank said additional money market liquidity would result in the current money market shortage declining below the current target level of 56 billion rand ($3.24 billion).
“The (rate) cut yesterday did not do enough to normalise interbank market conditions,” said George Glynos, director and head of research at ETM Analytics.
“This is an indication that pressures on interbank markets through credit constraints is building significantly. The measures are timely and the SARB has been quick off the mark, but we’ll have to wait and see if they work,” said Glynos.
The equity exchange said it was still considering emergency measures after seeing volumes more than double to around 680,000 deals a day from an average of 280,000, while mandatory trading halts leapt 2,000%.
“The margin calls have been unprecedented, and at exorbitant levels,” said JSE chief Fourie.
“We are in the process of engaging about whether to shorten trading times and widening the circuit breakers. We should make a decision in the not too distant future.”
$1 = 17.3861 rand Reporting by Mfuneko Toyana Editing by Alexander Winning, Angus MacSwan and Frances Kerry