CAPE TOWN – The JSE has suggested that it may be time for it and other industry players to sit down and discuss the future structure of capital markets in South Africa. This follows this week’s decision by the Appeal Board of the Financial Services Board (FSB) to dismiss an urgent application by the JSE to suspend the regulator’s decision to grant an exchange license to ZAR X.
The JSE’s application was lodged on the basis that market fragmentation is taking place without a framework having been put in place for this to happen.
“The reason for the appeal was not about us,” the JSE’s director of capital markets, Donna Nemer told Moneyweb. “It is more a concern about the market and the market structure.
“We have raised these points with the regulator and will continue to do so in a very cooperative manner, but because the licenses have already been granted, our question is: do we fragment the market and then try to figure it out, or is it best to figure our market structure first and then fragment that market?” Nemer added. “That is the way most countries in the world have progressed. They have put the structure in place first, and then granted licenses.”
She argued that the high regard in which South Africa’s capital markets are held internationally makes this particularly important.
“We think there is a lot at stake here,” Nemer added. “South Africa is well known for its market quality and high regulatory standards and this plays a significant role in attracting investment.”
The JSE is concerned that granting new exchange licenses without a clear framework in place could jeopardise this.
“If we have different players with different settlement cycles, different forms of technology, how is the overall market going to operate when these exchanges need to interact with each other?” Nemer asked. “What happens if there is at trade on one exchange linked to another exchange, and that exchange goes down? Or if a trade fails on one exchange, but not the other? These are things we feel need to be clarified so that the rules are clear and the interests of investors of protected.”
Nemer said that it may be best for the JSE, ZAR X and other aspirant exchanges to meet and come to an understanding about how this can be achieved.
“I think the time has come that all the vested interests need to sit down and discuss how we ensure that the quality of this market that is recognised all over the world is maintained and we all participate in a way that is conducive to that,” she said. “We would be happy to sit with ZAR X, the regulator and other participants in the market and discuss how we promote a healthy market and healthy competition.”
In response, ZAR X director Geoff Cook said that they would certainly welcome this type of discussion.
“We also have concerns about the well-being of the market,” he told Moneyweb. “We would welcome the opportunity to sit down with the JSE and other aspirant applicants to consider what is good for this market.”
What has concerned ZAR X, however, is that the process of appeals that the JSE has followed has created the perception that it is against competition.
“If the JSE’s concern is capital markets as a whole, then the appeal should have been addressed to the regulator before the license process started its course,” he said. “It’s no use appealing against us if you have a problem with the structure generally. We submitted our application in terms of the Financial Markets Act (FMA), and relied on the FSB to assess it.
“The FMA sets out the obligations of an exchange quite clearly,” Cook added. “But structurally, there isn’t a centralised listing authority, or a centralised regulator that would essentially set national policy on things like the number of exchanges that should be licensed, and I agree that these issues should be discussed.”
He said that already one other exchange has been licensed and he is aware of other applicants, and therefore it is necessary to come to an understanding about what level of fragmentation is actually good for the market.
“Fragmentation is not necessarily a bad thing because it drives down costs and boosts competition,” Cook said. “But if you get too fragmented, it starts becoming farcical. If additional exchanges don’t bring anything new to the market but rather detract from it that can’t be in the best interest of the capital market.”
For Nemer, the key issue remains that the gains that South Africa has made in terms of developing the quality of its markets need to be protected.
“We do believe our capital markets are an asset to a country and because we are well recognised for our capital market quality and regulation we want to ensure that that status quo is maintained,” said Nemer. “That’s because we do believe it attracts investment and makes a positive contribution to the development of the economy.”
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