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JSE begins to absorb OTC market

New exchanges under threat?

MTN Zakhele’s listing on the JSE last week was a milestone for both the JSE and the securities exchange landscape. By relaxing its listing requirements to include BEE shares previously traded on over-the-counter (OTC) platforms that have been declared unlicensed exchanges by the Financial Services Board (FSB), the JSE has become the first-mover in catering for share schemes that are required to find alternative platforms on which to trade their shares.

There are a number of companies that have applied to the FSB for exchange licenses in order to serve this market, but now that the JSE is able to offer that service, those companies will be at a disadvantage.

4AX and ZAR X are two proposed exchanges that seek to become lower-cost alternatives to the JSE, with the latter having already completed the public consultation phase of the application process.

“The JSE employed some delaying tactics in the public consultation process that gave it a leg up, allowing it to relaunch its platform after changing its regulations first,” says ZAR X CEO Etienne Nel, who is nevertheless unperturbed by the MTN Zakhele listing because its trading volumes have paled in comparison to prelisting figures. At the time of the listing, only 3 000 of the 102 000 MTN Zakhele shareholders had been registered with JSE.

“It doesn’t really impact on our business model at all. If you look at the volumes that have been trading on the JSE, compared to when it was trading OTC, it is chalk and cheese,” he says.

“The success of the market depends on volume of trading activity. The JSE is effectively trying to provide a patch-job solution for something that our systems and processes are specifically designed for.”

But Nel appreciates that it’s all business at the end of the day and it was the JSE’s prerogative to compete in a new market.

Donna Oosthuyse, director of capital markets at the JSE, says that she is aware of other exchanges that are entering the market and supports them because it means equity investing will become more accessible.

Says Oosthuyze: “We are certainly going to do our best to put our best offering on the table, but from a general perspective, we do encourage competition and want to see more activity in the investment area from black people. Empowerment is a national imperative and the participation of black people, in the cycle of investing, is critical.”

Primarily for JSE-listed companies

Craig Gradidge, an investment and retirement planning specialist at Gradidge Mahura Investments, says the JSE’s BEE board relaxing its regulations to include more flexible trading schemes may not have any material impact on new exchanges potentially entering the market, because their cost structures may still be very different compared to the JSE’s.

There is also a disparity in that the shares trading on the JSE BEE board – Sasol’s SOLBE1 shares, MTN Zakhele and, by the end of this month, Sasol Inzhalo – are all linked to stocks already on the JSE, and that is not necessarily the case for other share schemes.

Said Gradidge: “Multichoice’s Phutuma Nathi, for example, is not linked to a listed share. Whereas, with the others, the underlying asset is a listed share. So Puthuma Nathi may decide not to list on the JSE if it would be cheaper to do so elsewhere.

“Something else to consider is that the company listing on the JSE’s BEE board already has a working relationship with the JSE, so it might be the case that it was just simpler to list on a platform where they are familiar with the process.”   

Oosthuyze says that, while they were initially approached by the listed companies to facilitate trading within the BEE schemes they were already running, any other BEE scheme that meets their criteria, whether it is listed or not is free to approach them and can be listed on the JSE’s BEE board.

Plenty of fish in the sea

The primary market for new exchanges will be private companies looking to raise capital, so the JSE’s presence is unlikely to present any real threat. And, those who would have been interested in the new entrants are unlikely to have been phased by the new development.

“The guys that have committed to us are 100% onside,” says Nel. ”If anything, there is a heightened level of interest in our offering following the public comment phase. We’ve got a lot of clients coming from the OTC market and four private companies that have not raised equity on a public market before.”

At the end of the day, ZAR X will be catering for those companies looking to raise capital but are unable to afford or meet the relaxed requirements of the JSE.  And these may not be only small players either.

Said Nel: “There will be some brand new private listings and a mix of SMEs. And the guys that have approached us are not necessarily small. The one group that has approached us have been self-funded until now. But they’re now looking to raise R500 million”.

ZAR X is now in the post public consultation stage of its exchange application process and, after having secured a 40% BEE ownership partner, the company plans to be operational by the second quarter of 2016.

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