ZAR X, 4AX and A2X: is there room for three new stock exchanges in South Africa?

July 2017 | EXPERT BRIEFING | CAPITAL MARKETS

financierworldwide.com

Three new stock exchanges are vying to operate in South Africa’s financial markets, challenging the dominance of the 130-year old Johannesburg Stock Exchange (JSE). This raises the question of whether South Africa can accommodate three new stock exchanges given the JSE’s recent volatility. Or should the argument be broader, asking whether the introduction of new exchanges will help to achieve social, economic and transformation objectives by offering companies and investors more choices and lower costs with the benefits of technological innovation?

The three new contenders, ZAR X, 4 Africa Exchange (4AX) and A2X Markets, have been granted exchange licences by the South African Financial Services Board (FSB). ZAR X started trading in February with the listing of a leading South African agricultural business, Senwes and its holding company Senwesbel. 4AX is expected to begin trading about mid-year while A2X is due to go live in Q4 2017. The three will offer equity listings. In comparison, the JSE has a broader range of offerings including equity markets, bond markets and derivatives.

The JSE is one of the top 20 exchanges in the world by market capitalisation and is the dominant stock exchange on the African continent. It has been consistently ranked among the world’s best regulated stock exchanges for almost a decade, according to the World Economic Forum’s Global Competiveness Index. However, despite its impressive reputation, a number of South African companies have chosen to operate outside of the exchange. Instead, these companies issue shares and facilitate trades in the over the counter (OTC) market using unregulated platforms. But the FSB has recently tightened up on unregulated OTC trading, compelling a number of companies to seek alternative platforms to trade their shares.

In light of the JSE’s formidable reputation, why would companies and investors opt for the new regulated exchanges? It could be that they offer easier, more agile and more efficient trading given the benefits of technological innovation, simplified listings requirements, and a more cost-effective trading platform that offers savings in equities transaction costs.

Technological advances, including investments in fibre broadband and data centre facilities, have enabled the new stock exchanges to offer a less expensive and more efficient service.

ZAR X is hosted in a local data centre which makes it simpler for brokers to connect to the exchange, either through a “cost-effective Web portal”, or directly with a dedicated line or virtual private network connection over the internet. It allows for free real-time share price information and transaction settlement, using the real-time T+0 (trade plus zero days) settlement cycle, which allows for traders using this platform to have their transactions cleared and paid on the same day. The JSE currently offers a longer, four-day settlement cycle (T+3).

4AX also uses a web-based platform for posting and matching orders. It provides for the settlement of transactions on a payment and delivery basis, and its interface is specially tailored for banking institutions, registry, brokers, market regulators and news agencies. It also provides an issuer portal for issuers to market their company and securities.

In formulating their new listings requirements, ZAR X and 4AX have been able to simplify certain requirements that would currently apply to a main board JSE listing. By way of example, ZAR X and 4AX do not require a company seeking to list its shares to appoint a sponsor. Instead, these exchanges require individuals with the necessary experience and qualifications (including directors and employees in the organisation) to fulfil the sponsor role. This results in considerable savings for the issuer entity.

4AX’s listings requirements allow for listed companies’ meetings to be conducted entirely by electronic communication and for electronic voting at shareholder meetings. This is consistent with electronic voting capability, catered for under the South African Companies Act 71 of 2008.

In contrast, the JSE requires all meetings to be held ‘in person’ except in certain very limited instances.

Not all of the new exchanges’ listing requirements have been simplified, however, particularly in areas key to maintaining the high regulatory standards set by the FSB. This includes the general obligation of disclosure on issuers to comply with South Africa’s insider trading legislation. In the case of 4AX, the requirements in relation to notifiable transactions and related party transactions broadly mirror the requirements of AltX (the junior board of the JSE).

The new exchanges aim to fulfil South Africa’s empowerment objectives by targeting smaller companies and local communities to participate on their exchanges. The JSE’s AltX partnered with the Department of Trade and Industry to give smaller companies an opportunity to trade in a regulated market. Similarly, 4AX has partnered with the Gauteng provincial government to play a role in the Premier’s Pillars of Radical Transformation strategy and help to mobilise finance for growing township enterprises using the formal and well-regulated stock markets. This is a strategic partnership to realise the programme of transformation, modernisation and reindustrialisation of the Gauteng economy. It is seen as a driving force behind a strategy for the informal sector and previously excluded consumers from accessing a regulated stock exchange.

Well-known South African businessman Patrice Motsepe’s African Rainbow Capital has acquired an appreciable 20 percent shareholding in A2X, demonstrating the commitment of a significant black owned and controlled investment company to one of South Africa’s new exchanges.

There are a number of obvious benefits arising from the introduction of new stock exchanges in South Africa. Ultimately their long term success as a realistic alternative to the JSE is less likely to be driven by factors such as technological innovation and simplified listings requirements, and more by factors essential to the livelihood of all successful stock exchanges, namely liquidity, trading volume and the ability to attract not only local potential issuers, but also foreign investment and foreign inward listings. These factors have been key to the success of the JSE. Whether or not South Africa’s new exchanges can achieve these objectives remains to be seen.

Dimitri Cavvadas is a partner and Refentse Chuene is a candidate attorney at Fasken Martineau. Mr Cavvadas can be contacted on +27 (11) 586 6049 or by email: dcavvadas@fasken.com.

Dimitri Cavvadas and Refentse Chuene

Fasken Martineau