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ZAR X to settle trades faster than the JSE

On track for September launch.

JOHANNESBURG – Hoping to rival the Johannesburg Securities Exchange (JSE), newly licensed ZAR X will launch on September 1 with real-time settlement, it said on Wednesday.

The announcement comes just days after the JSE implemented a new four-day settlement cycle, known as T+3 (trade plus three days).

Preparatory work with central securities depository, Strate and Computershare was necessary to develop the technology driving the T+0 settlement system, “which puts ZAR X in the global forefront of rapid, safe and simple settlement”, according to ZAR X CEO, Etienne Nel.

Until Monday, the JSE was one of the only exchanges in the world to have been on a T+5 settlement cycle. The change to T+3 will significantly reduce the risks involved in trading on the exchange, while also enhancing liquidity. (Read more about that here).

“From the outset ZAR X offers same-day or T+0 settlement, with enhanced security as transactions are pre-funded,” Nel noted.

While definitely less risky, a T+0 settlement cycle can introduce difficulties. For example, it is not always possible for stockbrokers to pre-fund trades, since securing funds – and even stock – can take time.

Even on a T+3 cycle, market participants expect to see more trades roll, i.e. a situation where scrip has to be borrowed from securities lending desks to facilitate settlement. Stockbrokers need to secure affirmation from banks to stand surety for their trades before they make them, or face higher margining fees (effectively an insurance levy) from the JSE.

“We are trying to de-risk it for the broking community,” countered Nel, who explained that on a T+3 model, brokers need to either have their own balance sheet – or access to someone else’s, such as a bank’s – to carry the share transactions they put through.

Individuals wanting to buy shares on ZAR X, however, will have to provide the cash upfront to stockbrokers. “Your money needs to be in the ZAR X trustee account, cleared and ready to go. Similarly, a seller must have free and unencumbered shares in an electronic format that they are able to sell,” said Nel.

“T+0 actually reduces capital adequacy requirements for brokers, and investors get their cash same day, which increases market liquidity dramatically,” he added. “Time will tell whether or not it’s a hindrance, but we think real-time settlement is the way forward.”

Mobile share trading with ease

“Technology developed specifically for the new stock exchange is designed to cut costs and red tape, while enabling share-trading by mobile phone or hand-held device,” said Nel.

“Simplified processing and fast settlement are achieved without a price premium,” Nel said, noting that ZAR X’s approach does away with lengthy compliance documentation and achieves cost efficiencies through modern technology and zero legacy issues.

Its concentration on equities only, with no short selling or trading in futures and derivatives, also saves costs, according to Nel.

“Cost efficiencies permit several investor-friendly add-ons, including a free custody service, which drives financial inclusion to all South Africans previously excluded from formal investing,” said Nel.

Issuers seeking to list on the exchange will have a choice of a main board for company listings, an investment products market for trading structured products and exchange traded funds (ETF), and a “restricted market” for trading BBBEE shares and other securities that can only be bought and sold across a narrow investor base.

“Listing of restricted shares in the ZAR X space makes it possible for transformed companies to retain or enhance their empowerment profile in perpetuity,” commented Nel.

“Simplified, affordable and accessible share-trading systems – sometimes via cell-phone – has the potential to promote greater equity ownership, particularly among lower-income groups that were previously excluded from full participation in the economy,” Nel said.

ZAR X will submit its final report to the FSB in the coming weeks for final approval prior to going live.

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