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Capitalism is not perfect. But history shows that as a way to uplift society, it beats the pants off alternatives. Especially when capitalism is allowed to operate without the dead hand of excessive State intervention through regulation or, worse, taxpayer-funded competitors. On the other hand, as free enterprise rewards meritocracy those supporting it need also be mindful of the reputational risks of side effects. Admiration quickly turns to envy when the public believes the system is being rigged by fat cats. And nothing delivers that message more forcefully than the promotion or protection of monopolies. Once the epitome of an old boy’s club, the Johannesburg Stock Exchange has for decades enjoyed a monopoly. No matter how sensible the idea seemed internally, its attempt to block a newly licensed competitor ZARX was wrong. With the Financial Services Board now having rejected its appeal, the JSE’s approach shapes up as a monumental blunder. It is now on the back foot. Not a great place for Goliaths when Davids are approaching. – Alec Hogg
Yesterday’s FSB Appeal Board judgement dismissing the consolidated appeals of the JSE and 4AX against the FSB’s granting of an exchange licence to ZAR X allows ZAR X to proceed with much needed financial market innovation. The exchange will focus on facilitating investment and savings for ordinary South Africans and providing business with a more efficient and cost effective method of accessing capital.
The FSB judgement awards full costs to ZAR X. It follows the final hearing in a series of four JSE appeals against the licence, beginning in 2015.
The licence was granted on 31 August 2016.
The JSE had initially also appealed the granting of an exchange license to 4AX but dropped the appeal after the two companies agreed to cooperate in the financial markets. They both appealed the granting of the ZAR X licence.
“The judgement vindicates our belief that the JSE and 4AX appeals have been vexatious, aimed at preventing us from entering the market and, ultimately, eliminating us as a competitor,” says ZAR X director, Geoff Cook. “At our request, the Competition Commission has launched an investigation into whether the JSE’s appeals amount to an abuse of dominance, which is prohibited under Section 8 of the Competition Act.”
Pending the outcome of the FSB appeals, acting in the best interests of its issuers and the market, ZAR X postponed its intended September 2016 start date.
“This week’s judgement gives the market the confidence that the FSB followed a rigorous process in ensuring that ZAR X’s license application fully complies with the Financial Markets Act and best international regulatory standards,” Cook says.
ZAR X’s first listing will take place before the end of February, with more issuers being announced in the next few weeks.
The exchange will break new ground by placing the traditional world of high finance at the disposal of ordinary South Africans and organisations for whom the cost and administration of owning shares has historically been out of reach.
In the process, ZAR X will open up an entirely new investment market in which inclusiveness will broaden South Africans’ capacity for wealth creation and accelerate the entrenchment of a savings culture across all levels of society.
By basing its operating model on the latest technology, ZAR X has an agility and flexibility older stock exchanges do not necessarily enjoy. This enables it to continuously adapt to market needs and, thereby, remain relevant in a financial services sector that is being profoundly disrupted by digital, mobile, and social technologies.
“It also enables us to remain relevant to the ever-evolving transformation needs of South Africans and the businesses they will build in the next several decades,” says ZAR X CEO, Etienne Nel.
Focused deliberately on building an investment culture for South Africans, ZAR X does not permit high frequency trading, derivatives, or naked short selling.
The exchange’s introduction of a principles based listing regime reduces the complexities associated with listing, giving companies that would otherwise not consider listing an opportunity to do so. The approach is particularly significant for restricted entities such as BBBEE vehicles, enabling them to list and trade their shares in a way that ensures the sustainability of their empowerment credentials.
ZAR X promotes financial inclusion further by enabling ordinary South Africans to access the stock market at a minimum cost and with limited barriers to entry, encouraging a savings and investment culture. By allowing for zero safe custody fees, ZAR X gives people in the unbanked sector an opportunity to grow their investment base in a cost effective manner with relatively small investments. They will pay fees only when they transact.
Through its advanced technology, ZAR X is the only stock exchange in Africa to offer real time settlement, by means of which funds and shares are received immediately after transacting. This reduces trading risk for buyers and sellers alike and promotes liquidity.
“Our purpose in establishing ZAR X was to simplify the process of owning and trading in shares so that any South African could own shares,” Nel says.
“Since 1994, BBBEE initiatives have significantly increased the number of people wanting to acquire a shareholding in listed businesses and derive the benefits of sound commercial activity. But there has never been a mechanism by which an individual with a low to average income could increase his investment portfolio via a stock exchange. Not only have the cost barriers to entry been too onerous, but the processes have been incredibly complex and convoluted.
“The effect has been exclusion of large parts of society from investment in businesses. It has also limited the market. The vast majority of South African businesses either don’t qualify for listing in the current environment or don’t want to spend the time and money on complying with onerous exchange rules. In turn, this has constrained the ability of businesses to raise capital for growth. Clearly, this has a downstream impact on job creation.
“We created ZAR X as a growth catalyst, broadening the market and increasing access to it at the same time.”