The Financial Services Board (FSB) has invited public comment on an application by a company called ZAR X for an exchange licence.
The JSE is currently the only licensed exchange in the country and if ZAR X’s application is successful, it will be a historic development in the local market and the first new exchange licence to be issued in 120 years.
ZAR X CEO Etienne Nel says that although other applications may have been lodged with the FSB, this is the first to have ever reached the public comment stage. ZAR X submitted its application on 27 March. “This is an indication that the FSB considers our application to be operationally and commercially sound.”
The application comes after the FSB in July last year published a notice in the Government Gazette relating to over-the-counter (OTC) trading of shares.
The notice compelled companies trading in their own shares to regularise such exchanges by ceasing their activities, obtaining a licence or obtaining an exemption. In terms of the FSB interpretation of legislation they were in fact operating unlicensed exchanges. The exemptions granted initially are fast expiring and no further exemptions are being granted.
The FSB would not commit to any timeline, but ZAR X hopes to obtain its licence before the end of the year.
The FSB would not disclose how many applications it has received for exchange licences, saying it is bound by the secrecy provisions of the FSB Act. Moneyweb earlier reported that 4AX intended to lodge a similar application.
It is not clear how many “in-house” OTC trading platforms currently exist. The FSB says the Registrar of Securities Services doesn’t know how many parties are currently doing OTC trading, as he currently does not regulate OTC trading platforms.
The motivation
Nel has 17 years of stockbroking experience, 10 years of OTC trading experience and is the co-founder of the Equity Express OTC platform (currently the only third party OTC platform). Early this year he partnered with former Investec group head of compliance Geoff Cook and attorney Graeme Wellsted (also a former Investec man) to establish ZAR X. Cook is also a former chairman of the Compliance Institute of South Africa.
The company has a team of executives who comply with the FSB “fit and proper person” requirements, ready to assume their positions as soon as it gets the green light from the FSB.
He says ZAR X engaged extensively with the FSB before submitting its application in March. It has developed a trading platform that will be easy to operate and secure. These systems and processes will be audited as part of the licensing process.
Nel says ZAR X will be targeting lower LSM individuals as potential shareholders in the listings it aims to brings to market. It wants to give the man in the street access to financial services. “The average OTC-trade is R12 000.”
In that respect it will not be a competitor to the JSE, but rather complement it. It may however develop into an “incubator” for the JSE, Nel says, “with companies listing on ZAR X and as they grow moving its listing to the JSE”.
Nel says the OTC market consists largely of black economic empowerment share schemes and agricultural companies. He estimates the numbers at 650 000 and 40 000 shareholders respectively, valued at about R30bn in total.
These are the companies ZAR X will initially invite to list once it is licensed, as well as small companies hoping to access capital and increase their liquidity.
ZAR X will have no concept of short selling and no derivative trading will be allowed, he says. “Our focus is not on high frequency trading.”
The cost of listing will be lower than on the JSE. The focus will be on electronic communication and publishing of financial results in the media won’t be required. Like the JSE, ZAR X will have its own news service for company announcements.
“Our listing requirements have been tailor-made for this market,” Nel says.
Listed companies will have the option of appointing an outside advisor or have their company secretary, attorney or auditor fulfill that role. Of the companies that have so far committed to listing on ZAR X, about 70% have elected to have the company secretary as advisor.
Nel says the OTC market currently excludes a large part of the capital pool, because it is unregulated. This may change after the formalisation of the industry, which means that institutional investors, including pension funds may invest in this market in future.
He further believes the new system will ensure more realistic pricing of shares and will ensure transparency through regulation.
“We want to simplify and revolutionise capital markets like the cellphone did for telecommunications. We have simplified trading, but without compromising governance,” he says.
The public has until 3 August to comment on the ZAR X application. Thereafter the FSB will process the submissions it received. From there the application is referred to an independent committee and only if it passes that scrutiny will a licence be issued.
