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Does the JSE see some competitors as more equal than others?

The exchange’s dealings with 4AX and ZAR X raise questions.

On Friday the JSE announced that it had withdrawn its appeal against the Financial Services Board’s (FSB’s) decision to grant an exchange license to 4 Africa Exchange (4AX). In a statement it noted that the decision follows “months of constructive engagement” between the two parties.

On the face of it, this is a positive step in the introduction of competition into the local market. There have been calls for some time for the JSE and the various potential new entrants to sit down together and reach agreement about the future structure of the market.

However, it appears that the JSE has been selective in who it will talk to. Despite the exchange’s head of capital markets, Donna Nemer, telling Moneyweb two months ago that the JSE was willing to engage with the other newly-licensed exchange, ZAR X, to discuss the future structure of capital markets in the country, this has never happened.

Geoff Cook, director at ZAR X (a recently licensed exchange), said that they had tried to open discussions with the JSE, but this approach had been declined. “We phoned Nicky Newton-King and suggested that the parties get around a table because this drawn out legal process was harming the market,” Cook said. “But her view was that the matter had progressed too far and needed to run its course.”

This raises the obvious question of why the JSE would be willing to engage with 4AX, but not with ZAR X.

“This is a question we have asked ourselves,” said Cook. “It’s a very strange situation where the incumbent is saying that the market needs to looked at, and we all agree with that. We can’t have a thousand exchanges. But the manner of trying to get there is somewhat peculiar. It also raises competition issues, particularity now that we are the only exchange being appealed against.”

Moneyweb asked the JSE to explain why it would engage with 4AX and not ZAR X, but it declined to provide an answer.

What further complicates the picture is that both 4AX and the JSE are appealing against the FSB’s decision to grant ZAR X a license. These appeals have now been consolidated, and will be heard together towards the end of January.

In the words of one industry player, this was a “strange dynamic”, as potential entrants into this space should be trying to introduce competition to the market. Therefore it is odd that 4AX would also be appealing ZAR X’s license.

Market integrity

Nemer had previously told Moneyweb that its concerns around the introduction of new exchanges in South Africa related to maintaining the integrity of the market when there were different players in operation.

“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 explained. “What happens if there is a 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 are protected.”

However, the JSE has now reached an agreement with 4AX on these points, which throws the need for its appeal against ZAR X’s license into question. If it is possible to come to an understanding with one new entrant, why would it not be able to do the same with another? Why does the JSE continue to follow a legal process that clearly isn’t necessary?

“I think the chosen path has delayed the potential for new competition to get up and going,” said Kevin Brady, the CEO of a third aspirant exchange, A2X. His company is still in the license application stage.

“I think these appeals have been negative ultimately for the consumers and players in the industry because they have resulted in the can being kicked down the road,” Brady added. “I think there are different ways of achieving the same goals.

“We think the FSB is treading cautiously with our application until this appeal is out of the way. The outcome will therefore be quite important for other applicants.”

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