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JSE CEO: Broad-based ownership of our economy is a critical part of economic transformation

Nicky Newton-King on the JSE’s H1 results, upgrading derivatives market tech, current listing trends, an exchange traded platform for government bonds and targeting retail investors.

JSE H1 results

SIKI MGABADELI: The JSE out with its first half results today, reporting strong growth from almost all of its divisions. Group earnings after tax increasing by 19% to R513 million, operating revenue up 17%. The headline earnings per share were up by 19% to 585.1 cents.

Nicky Newton-King is CEO and joins us now. Nicky thanks so much for your time this evening. This growth achieved even after reducing fees. Maybe tell us a little bit about that first, the rationale for reducing fees and then the growth achievement itself.

NICKY NEWTON-KING: Thanks Siki for speaking. Firstly, I think it’s important when you are able to reduce fees, to do that as quickly as you possibly can because it gives your client an opportunity to do more with you and that’s what we’ve seen. This revenue growth comes in a very volatile environment and in reducing fees we’ve managed to share the upside of that volatility with our users.

SIKI MGABADELI: Let’s talk a bit about that volatility, as you say particularly this first half where we’ve seen capital markets being rather volatile. How does that actually impact your performance?

NICKY NEWTON-KING: We charge a little bit per trade based on the value of a trade. So the more value that is traded the more our revenue grows. That’s in the equities market. In some of our other segments we charge on the number of trades, essentially number of trades. But basically the more activity there is, whether that’s value or volume, the better we do.

SIKI MGABADELI: And you’ve also seen an increase in revenue coming through from funds under management.

NICKY NEWTON-KING: Sure. So we manage a large amount of money essentially in the form of margin deposits, etcetera, and the more money there is the more we receive from funds under management. And basically the more activity that happens in the market, and the more that activity requires people to use our products and services the better we can do. We’re a fixed cost base business and you can see relatively heavy cost based business so if we can keep those costs under decent control then we can produce decent results and continue to reduce fees.

Upgrading derivatives market tech

SIKI MGABADELI: And one area where you do have to spend quite a bit is technology and we saw costs there rising by 20%. What areas of technology are you investing in?

NICKY NEWTON-KING:  We’re in the process of a massive tech implementation project, essentially the complete overhaul of our derivatives market technology.

We use technology at the moment that is nearly 15 years old and as you know the technology is essentially increasing in its speed and robustness every year and so we’ve been on a long-term programme to replace that technology and that is essentially now requiring us to invest nearly R400 million over three years, and this 20% is a reflection of more developers and on-site helping us deliver projects.

Three-day settlement

SIKI MGABADELI: One of the other highlights for the period that we’re talking about was achieving the readiness to move to a three-day settlement. You must be quite proud of that collaboration.

NICKY NEWTON-KING: Exceptionally proud. It’s a very technical project to deliver and it’s not just the JSE to deliver. It took participation from many of our stakeholders, not just the trading firms, not just the banks but also the asset managers and we moved in a manner that we think is unprecedented. We can find no other global precedent for this in which we have had zero failed trades, notwithstanding shortening the period by nearly half. And so this speaks extremely well for the manner in which the South African financial markets take investor protection and systemic risk to heart and deal with that when we transition on big projects like that. It’s a great stance and great credit for our country.

 

Listings

SIKI MGABADELI: Absolutely. Let’s talk about listings, that’s another area where obviously you want more and more market participation. In this period what sort of listings did you see?

NICKY NEWTON-KING: There were six listings, including the extremely big AB InBev listing which we were very proud to land as efficiently as we did, but listings are still down year-on-year. We had nine this time last year and it’s a difficult environment in which to attract listings because issuers are always concerned that when they come to the public market that they don’t disappoint the investors and so when there is turbulence or uncertainty issuers are typically less confident about coming to the market. And that’s what we’ve seen.

SIKI MGABADELI: Let’s look at the future. Competition coming through another exchange looking set to launch. Are you worried?

NICKY NEWTON-KING: Certainly not worried, its actually more than one entity looking for a licence. As far as I’m aware there are five other applicants looking for licences.

We’re definitely quite excited by what the potential of competition has done to the way we look at the products and services that we offer, the pricing, the speed with which we’re able to respond, so clients are benefiting even from the mere contemplation of the possibility of competition. That said, bringing in more than one exchange into this relatively small eco-system brings with it complexity.

I’m sure the regulator will be applying its mind to the public policy issues at play that come as a result of that complexity. How do you deal with investor protection, how do you deal with systemic risk, where is price made, which rules are the governing rules, etcetera, and I think that around the world when you see the advent of competition, regulators lean into that discussion publicly so that we can all engage about what is good for the country, and we’re looking forward to that conversation.

 

Government bonds’ exchange traded platform

SIKI MGABADELI: And also being innovative as a business. I understand that you’re working with National Treasury and others to develop an exchange traded platform for government bonds as well.

NICKY NEWTON-KING: Absolutely. The fact that we’re 128 years old doesn’t mean that we have stuck ourselves in the last two centuries ago. We’ve actually had to continuously evolve and that’s what you see in the government bond market traditionally, not an electronically traded market but together with Treasury and the market participants, we’ve in fact really identified how to develop an electronic market which is something we’re good at running. And now together with all the participants we’re busy going through the final stages of spec’ing that model and building it and implementing it, etcetera.

 

Targeting retail investors

SIKI MGABADELI: A big area of interest for me is around bringing in more people into the market, so more retail investors. What are you doing in that regard?

NICKY NEWTON-KING: It’s an interesting thing. This country has a relatively low savings rate so there is relatively little disposable income for people to actually even think about investing. And when there is disposable income we are competing with the telco’s, we’re competing with the Nando’s of this world, etcetera for a share of that disposable income. But whilst we’ve got the attention there, the focus needs to be on products and services which are easy to understand and cheap to execute.

So we have exchange traded funds, so we have tax free savings accounts, so we have a broad education initiative which we’ve been running for many decades actually to encourage investors to actually get more involved in the stock exchange.

We see something like the YeboYethu listing where I think we have more than 80 000 individual investors and this is an opportunity to actually start growing the retail base. Broad-based ownership of our economy is a critical part of economic transformation.

SIKI MGABADELI: We’ll leave it there, thanks Nicky. Nicky Newton-King, CEO of the JSE.

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And the misreporting of investment inflow / outflow? That has gone away, I assume.

Upgrading derivatives market tech – Oh Really Nicky

The debacle with the use of derivatives in the recent MetCI – Third Circle Funds – comedy of errors debacle, convinced me that most of the derivative dealers at the Fund Managers don’t know their ”@rses from their elbows”
I challenge you to confirm/explain, what practical and theoretical derivative courses these so-called dealers received before they started ”speculating” with investors funds!
My view is also that banks like Investec, that sells ”naked gold options” to companies like Western Areas (with infinite loss potential that eventually resulted in losses that ran into billions of rands), should be held liable under the FICA regulations…Poor old Brett Kebble must be fuming underground, as this naked option, hastened his end!

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