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Four years have passed since the introduction of alternative exchanges in South Africa, which have styled themselves as challengers to the JSE’s powerful monopoly that spans more than a century.
First published in Daily Maverick 168 weekly newspaper.
But there will still be a long way to go before the stock exchange is democratized and SA moves to more competition, as measured by the regulatory issues facing one of the longest running alternative exchanges.
ZAR X is a small exchange that launched in February 2017 and has since managed to bring seven company listings with a combined market capitalization of 5 billion ren on its platform.
ZAR X is on the wrong side of the law and its stock exchange license has been temporarily suspended by SA’s financial market regulator, effectively blocking the sale and purchase of shares and listing on its platform for three months. This will hurt ZAR X’s financial health and liquidity profile as it generates money from the fees it charges brokers for executing trades on its platform.
The Financial Sector Conduct Authority (FSCA) is annoyed that ZAR X has not observed aspects of the Financial Market Act since 2019. It requires exchanges to keep enough money – at least six months of their operating expenses – on their balance sheets for rainy days. Regulators place high demands on the exchanges as their collapse could jeopardize the safety of public investments.
In an interview with DM168, FSCA Commissioner Unathi Kamlana said the agency was forced to suspend ZAR X’s license after the regulator failed to convince the exchange to improve its liquidity profile for two years. Kamlana acknowledged that his decision “was not taken lightly” as “SA needs more competition in the licensed foreign exchange market”. That doesn’t necessarily mean regulators are sloppy or offer smaller players special treatment, he said.
ZAR X’s liquidity problems are isolated. Kamlana says he’s not worried about the financial health of the other three alternative exchanges, namely A2X Markets, Africa Exchange and Equity Express Securities Exchange. These switches were also launched in 2017 with the promise of charging low fees from brokers and companies that wanted to be listed on their platforms.
Some industry players believe it will take years for alternative exchanges to scale up to compete with the JSE while promoting competition and financial inclusion. The blame lies directly with the regulators.
Kevin Brady, CEO of A2X, said he respects the role of regulators in protecting investors and the financial system in general, but hasn’t done enough to support smaller exchanges.
“We would like them to act more forcefully and urgently on elements that contribute to a level playing field. The odds are still against the new exchanges.
“We say we don’t want any special treatment. We want regulators to look at the small exchanges from a proportionality perspective and what is appropriate for risk management on each exchange, ”Brady told DM168.
A2X is the JSE’s most direct competitor. 54 companies are listed on its platform (through secondary listings) with a market capitalization of almost 5 trillion ren.
The power of the JSE
Alternative exchanges still depend on the JSE systems for their wealth.
Stock trades in South Africa are still processed, or settled, through the JSE technology infrastructure – primarily the JSE broker deal accounting system. If the system is down, stock deals cannot be processed. Brady said A2X has asked regulators for many years for permission to set up its own financial market clearing system, but nothing has borne fruit. He wants independence from the JSE.
In another case where regulators dragged their feet, A2X was recently given permission to list exchange-traded funds and exchange-traded bonds on its platform after it applied to add other investment vehicles to its license. It took months to get approval.
Etienne Nel, CEO of ZAR X, previously complained that the supervisory authorities were also imposing onerous management requirements on alternative exchanges. The exchanges need to recruit very experienced members to their boards of directors and also set up investment committees to assist management in their decision-making processes.
Nel said that while having experienced board members is important, finding talent can be costly and time-consuming. The JSE can easily deal with red tape given its financial strength and size, while smaller exchanges cannot, he said. DM168
This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click on here.