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Alternative exchange ZAR X goes live

Settling trades faster is a draw card for the new exchange, which is eyeing five additional listings.

South Africa’s first alternative exchange ZAR X made its debut on Monday with the listing of agri-business Senwes and its holding company Senwes Beleggings (Senwesbel), which marked the disruption of a more than 50-year long monopoly enjoyed by the JSE.  

ZAR X settled and cleared the first purchase of 100 Senwes shares at R10.50 per share in ten seconds through its platform, which would normally take the JSE four days, says CEO Etienne Nel.

ZAR X uses a settlement cycle called T+0, which settles trades in real time and is “in line with global best practice” – while the JSE implemented a settlement cycle known as T+3 (trade plus three days) in 2016, which settles trades in four days.

“When you get into a ZAR X platform, the buyer is real and has money in their account. The seller also has shares in their account. The minute a [buy and sell] match happens, a trade then happens instantaneously and faster,” Nel told Moneyweb.

Unlike the JSE and global exchanges, ZAR X’s platform doesn’t facilitate short-selling, a practice of selling a stock that the seller doesn’t own. This is in order to reduce systemic risk and create liquidity for corporates, says Nel. “Investors can’t sell shares that they don’t own and get them post a sale event. In our environment, you need to do all the admin beforehand and that’s how we get the share settlement.”

Nel didn’t expect large volume trades on Monday as share trades depend on the underlying companies listed (only Senwes and Senwesbel in this case). For example, there are restrictions on trading Senwesbel shares, including that shareholders must be bona fide farmers – meaning that the investor universe and volumes traded for Senwesbel are smaller compared with that of Senwes.

Senwes, which is 52% owned by Senwesbel, is a provider of white maize across the country and stores 25% of South Africa’s grain output. The 108-year-old company focuses on precision farming services, marketing, input supply, financial services, equipment, storage and grain handling – with its subsidiaries being in joint-ventures with companies including Imperial Logistics, Hinterland, Legendary Retail Brands WesBank and Afgri.

Watch Senwes CEO Francois Strydom talk about the company below:

It grew its revenue in the first half of 2017 to R5.7 billion compared to R4.8 billion in the same period in 2016, while headline earnings per share (Heps) grew to 57.4 cents per share from 53.9 cents. Senwes has more than 180 million shares issued, with the second biggest shareholders being Grindrod Trading (which owns a 20.6% stake) and the public (owning 7.2%).

Senwes was forced to move from a previous over-the-counter (OTC) platform into a new exchange after the Financial Services Board (FSB) issued a directive that put a stop to unlicensed exchanges – extending to OTC platforms.

In the medium to long term Senwes is looking to raise capital to fund domestic and offshore growth opportunities. Says Senwes CEO Francois Strydom: “Locally we are the only company to follow this joint venture route, which is a consolidation strategy worldwide. South Africa hasn’t followed the consolidation and there are many opportunities…. We are also looking at risk-adjusted opportunities in certain parts of Europe, Australia and New Zealand.”

Early in February, the FSB Appeal Board dismissed the joint appeals of alternative stock exchange 4 Africa Exchange and the JSE, which were against the granting of an exchange licence to ZAR X. This paved the way for ZAR X to go live with its exchange.

Nel says ZAR X has five additional companies, with a minimum market capitalisation of R200 million, to list in its pipeline. On how many more listings does ZAR X need to be sustainable, Nel says: “It depends on the underlying listed company. The focus for ZAR X is to list quality companies that will trade effectively. We could do a R10 billion to R15 billion listing and it has huge amounts of liquidity for us.”

There have been two other applications for licenced exchanges with the FSB in 2016 including AX2 and YPN Exchange.

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T+0 is not the system, but it is the settlement cycle. So if it’s T+3, it means the day a trade (T) is made, it takes 3 business days from that trade date to settle it via Strate’s (the Central Security Depository) clearing and settlement system – settlement means the transaction moves from the sellers name into the buyers name and ownership is transferred at the same time payment for the shares is made.

This system is owned and operated independently from the stock exchange and Strate is a completely separate legal entity. Therefore, T+0 means this settlement cycle is real-time, or same day.

Transaction, as I understand it, means the buying/selling of something. So what does “…..the transaction moves from the sellers name into the buyers name” actually mean?

Apologies, to be technically accurate: transferring the financial instrument from the sellers account to that of the buyer.

T+0 is fantastic, and indeed state of the art.

I have two issues that I need to see solved in practical terms, not that it isn’t possible, but will it be practical?

The first issue is that foreign investors are accustomed to the international practice of trading first, and then arranging the forex to pay for the trade. The forex trade usually takes 2 days to settle. If ZAR-X wants the liquidity that international traders bring, then it will have to persuade them to do the forex leg before trading.

The second is that it requires each trade match to settle. In many cases it can take a large number of matches to fill a trade single order, and quite often the order remains only partially filled at the end of the day. As a result, many settlements are required instead of just one.

Great initiative by ZAR X as their model does not require brokers to hold risk capital which levels the playing fields with bank owned brokers.

The International market has already moved to T+2 and T+1 which de facto requires pre-funding. Locally the large brokers effectively pre-fund on the T+3 model in any case. Forex is not an issue.

Not sure what the issue is regarding filling a trade order on ZAR x JSE. In both markets you will have to execute a series of transactions which may or may not be completed by end of day. The balance will carry over the next day. If I understand ZAR X cost structure correctly, the settlement fees are percentage based on an entire order rather than a minimum cost per transaction.

End of comments.

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