Licensed to trade: SA’s first black controlled stock exchange gets green light

LONDON — After a 17 month wait, South Africa’s first black controlled stock exchange has been licensed by the Financial Services Board. Built using the once market dominant OTC platform, Equity Express, the exchange’s pre-funded trading structure opens up an entirely new avenue for SA companies keen on spreading ownership of their businesses to previously disadvantaged staffers and shareholders. Here’s the inside story from founder Anthony Wilmot. – Alec Hogg

Well, it’s a warm welcome to Anthony Wilmot who is in Johannesburg, and with some pretty good news for you, Anthony. It’s taken you a long time. You’ve had the Equity Express platform in the past but you now have been granted a Stock Exchange license. Did you guys celebrate deep into the night?

We did actually, 2 nights ago Alec, we were given the license on Tuesday but we could only get all the directors and the team together on Wednesday so, we did have a bit of a party on Wednesday night.

How long did you work on it for?

We submitted the license in March 2015, and were granted it some 17 months later.

Why so long?

Anthony Wilmot

It’s a very good question, Alec. The reason for that, I was told, that owing to the fact that there had been some lean challenges to other companies that acquired some licenses the Regulator wanted to make quite sure that they didn’t make any mistakes, that could result in a legal challenge, to the granting of our licenses. So they wanted to make sure that they did everything 100% right. I think it was really the learning that they took from the previous granting of licenses and that’s why it took so long.

How many licenses are there now?

Apparently there are 5. It’s quite difficult to believe that in an economy the size of ours we have so many but currently there is us, a company called ZAR X, a company called 4AX, a company ATX, and the JSE themselves so, that makes 5. There’s only one that has actually got listings and is trading at the moment, and that is ZAR X.

So, ZAR X is the only new one, you’ve got the JSE who is obviously the incumbent. Are you going to be going into either of those markets directly or where are you positioned?

Our sweet spots have the BEE schemes. Those were our biggest clients on our Equity Express trading platform. In fact, the company is called Equity Express Securities Exchange, so we’ve even tried to keep the branding the same so that our current client base are comfortable that the service provision will hardly change. So whilst legally the framework is completely different with the Stock Exchange license from the experience of the shareholders, buying and selling shares on the BEE Exchange, they should see the difference with respect to how they deal with the shares.

An employee works in an office at the ZAR X, South Africa’s second stock exchange, in Johannesburg, South Africa, on Tuesday, April 11, 2017. ZAR X became the first company in 130 years to take on the country’s main bourse, the Johannesburg Stock Exchange, as shares in agribusiness Senwes Group and its holding company began trading in February. Photographer: Waldo Swiegers/Bloomberg

What the framework looks like, very simply, is the exchange of a separate entity with its own board and its own set of shareholders. The regulation demands that nobody may own more than 15% of exchange – we’ve adhered to all of those. So, we have 7 shareholders in the exchange, of which 55% are black shareholders so, we’re actually, (I think), one of the first black owned Exchanges. Then Singular will apply to be a broker to be the authorised user on the Exchange, and some of our other shareholders have businesses that are involved in trading and I’m sure they’ll become brokers on the Exchange as well so, that’s how one maintains independence in terms of the structure.

That’s a big deal being the first, black controlled Stock Exchange. Who exactly, are the shareholders?

Okay, the shareholders are effectively a company called Singular International, which is not Singular Systems but a related entity, where the shareholding of that company is similar to ours. They have 15%. The management of Singular, in their various individual capacities have another 15%. Investec has 15%, their BEE Trust has 15%, a company called PAPE is the name of the company, it’s a private equity firm run by an African investor, they have 15%. A ventures, that’s headed up by an Indian lady, they have 15%, and Legae Securities, which is the first black owned stockbroker registered on the JSE, or certainly one of the bigger ones and they have 15%. So, that’s the shareholding base.

So, the BEE trust from Investec plus PAPE, the Indian lady that you mentioned, and Legae between them they have?

They have 55%, so it’s 30 + 15 + 15 + 15 + 15 + 10.

And you’re the guy who actually put it all together, Equity Express has been around for quite a long time. Why would you do this? Why would you structure a business in this way that you give other people control?

That’s an extremely good question. The FMA ultimately demands it. Nobody is allowed to own more than 15% of market infrastructure so, to the extent that our other newly registered exchanges are not in that position. They will get there in time. The reason we decided is, there are 2 points. The one is you do all the work, and get the license and then attribute a value to your company because of the fact that you have a license and then try and sell off your shareholding? Or do you get everybody to invest in the beginning on the same basis, and everybody shares the upside, if one is to be granted a license? And that was the basis on which I wanted to do it.

I’m a chartered accountant who spent his life in IT, and I really am not an expert when it comes to regulations or matters to do with regulation so, having other investors gave us a lot of help with the entire license process, right from the beginning. So, it just made a lot of sense to share early rather than share late, if you understand what I’m saying?

And the direct competitor, I presume that would be ZAR X, given that it was born out of a guy who actually worked for previously?

ZAR X chief executive officer Etienne Nel.

Yes, so the CEO of ZAR X used to work with me. We kind of got going with Equity Express in its early days and their model is probably, of all the Exchanges, is the most similar to ours and the reason I say that is they have got a prefunded model on the similar basis to what we have and they have a T plus nought settlement cycle, which means trade is settled the same day and we’re in the same position so, from that respect they are probably the closest to ours and I would say that they would be the closest competitor, in terms of the nature of their business and the way they’ve constructed themselves.

Just explain that, prefunded and T plus zero?

Okay so, on the JSE and all the other exchanges you can buy shares and pay for them later. In other words, the risk of settlement sits with the broker so, if a broker buys and sells a share and does not come up with the cash, (if they representing the buyer), then there could be a trade fail in the market and there are a number of insurance policies and procedures in place to ensure that never happens. Ultimately, a broker on the JSE has to have a balance sheet and give warranties to make sure that they never fail at trade.

In our market that is impossible because all the cash sits with the exchange itself and you’re not allowed to place an order on the market without it being backed by cash, sitting in a banking account. The bank account and the way we set up our market is all controlled by Nedbank. So, effectively you may not place a buy order in our market without that buy order being backed by cash so, there’s no risk of failure or default on the trade. What makes that even more exciting it means that your broker community that trades your shares on your exchange don’t have to have a balance sheet, which we hope will encourage smaller brokers to want to trade on our platform.

Are you going to let anybody trade, any broker come into pool?

To be a broker on our Exchange you need to be a FSP so, you have to be registered with the FSB and have a FSB license. That way we feel you have a minimum level of qualifications and you actually understand what’s going on, and you are regulated. The fact that you’re regulated by the same entity that regulates the Exchange really, is just a coincidence. We were trying to enforce a minimum level of ability, in terms of who would you allow to trade in your market? The JSE, for example, has quite onerous conditions for you to become a stockbroker on their market, and all the different Exchanges have their own rules.

So, it’s not necessarily just stockbrokers. It would be say, Magnus Haystek, he’s got Brenthurst Wealth, if he decided that he wanted to give an opportunity.

Yes, as long as the entity that was applying to buy and sell shares in our market was registered by the FSB and they have a FSB license which they say is registered, then he could trade. He could become a member. There are a few other qualifications, nothing which is too onerous but that’s the minimum level.

So, you’re expecting to get lots of applications?

I think it’s going to be driven more the other way around. What we’ve tried to focus on is making sure that issuers get what they want. If you bring in the quality listings to your Exchange we believe the brokering community will follow. So, it’s not that we’re not going to go and speak to brokers – of course we are but we don’t think that saying to them that these are the accounts that we currently have and these are the ones we hope to get, will be enough to move all of them. I think as the quality improves over time, so more and more will come. There is now quite a choice and I think the other thing that makes it interesting is that brokers have spent a lot of money developing software that interfaces directly with the JSE, to make their communication with their client base easy. Those sorts of interfaces still need to be built, in terms of making it fairly easy for a broker to trade in our market and, to the extent, try and help them interface any counters or issuers that are on our existing systems. So, that they’re not having to open lots of different trading systems to be able to trade.

People walk near the reception at the Johannesburg Stock Exchange (JSE) in Sandton, Johannesburg, South Africa. REUTERS/Siphiwe Sibeko

Anthony so far, you’ve got 3 licenses. The JSE is the incumbent. Yourself and ZAR X, who are going to be trading in a different area, and we can go into those differences in a moment. But of the other 2 licenses that are still coming, are they also going to be competing with you or might one of them be taking the JSE?

No, my understanding and, please, I’m not an expert. I don’t spend my time studying all the other Exchanges but my understanding as a layman reading the press is that A2X are focussing on the duel-list environment so, on our Exchange you can’t dual list. But on A2X they are trying to get the high quality, high traded encounters of the JSE to also list on their Exchange. So, effectively, if Naspers were to list on A2X – it would be made for a Naspers’ share on A2X, separately and independently of the JSE so, they are high volume traders. 4AX – I’m not really familiar with that exchange and exactly who they’re going after but they’re also not following a pre-funded model. So, theirs is a model where you can buy and sell your shares and pay later.

So, it’s like what you used to do previously, in the OTC market.


You are now regulated and you are now licensed, how are you different? For instance, you mentioned now that you won’t have dual listing so, if anybody who lists on your exchange they can’t list anywhere else?

Yes, that’s 100% right and the reason for that is our exchange actually has the full register sitting on it. So, the JSE nearly matches, and most of the brokers trade in an anomaly account basis. So, the JSE, at the time of matching, don’t know exactly who is buying and selling. It’s Deutsche Securities selling shares to the First National Bank, for example. In our exchange, we have the individual owners of the shares so, we have the full register sitting behind the exchange. Meaning the register is in fact setting it straight, it has to by law, but effectively the reason we need the entire register sitting on the exchange is we have the ability, from a software perspective, to enforce rules such as nobody may own more than X-percent of the shares. So, some of our biggest clients are restricted counters for example, only BEE shareholders may buy and sell shares in certain companies. Those types of rules can be actually enforced at the exchange level, which is very powerful because it means that our clients know that any rules, when I say, ‘our clients,’ I mean the issuers. Any rules that they enforce can be enforced at the exchange level so, the rules can never be broken. Whereas, certainly the other exchanges I’m not sure of all of them but I know for example, in the JSE environment, to the extent that you had a rule in your MOI, that said, ‘no shareholder can own more than 10% of the exchange.’ The only way to enforce that is to constantly monitor the register to see that nobody owns more than 10%. It can’t be enforced at the trading level, whereas in our world it can.

The other area that we’re quite proud of is we also have the ability to enforce investing rules. To the extent that you have to register and you’d have done the deal, and a lot of IT companies, for example, buy companies like this. You buy a company and you say to the company that we will issue stock in our company but you may not trade them for 3 years. So, there’s a restriction on when you can trade them. Those restriction rules we can place directly into our register as well and enforce them at the exchange level. So, the shareholders, whilst they own the common stock of that company, they cannot sell it until that date has passed and that’s all enforceable in our software.

Anthony, what happened to MTN? A lot of this all started at the time that MTN had its Black Economic Empowerment offering and it them started its own Exchange.

You are quite right. The first letter from the FSB so, the background was this. We approached the Financial Services Board, (FSB), and said to them, ‘are we allowed to trade these counters for these clients?’ And they said, ‘as long you maintain complete separation between them, and effectively, what you’re creating is an electronic exchange for that company shares only, that’s fine.’ What then happened is the MTN thing came and there was drama with that trading platform. Whether it was linked to what then subsequently transpired, I do not know but the problems were explained in November. Then they shut down over Christmas and they restarted in January, and everything pretty much got sorted out by February. But in January of that year, and if I remember correctly, I think it was 2014, it might have been 2013, I can’t remember exactly. That’s when the first letter came from FSB saying, ‘there’s proliferation in the legal exchanges,’ and they actually didn’t attack any of the people who were doing the work. So, we never even got a letter from the FSB, as Equity Express or Singular Systems. It was our clients that got the letter and said, ‘the basis on what your shares are being traded for your shareholders is no longer legal, please do 1 of 4 things.’ And the 4 choices they gave them was list and recognise an exchange, and the only recognised exchange at that point in time, was the JSE, cease all illegal activity, change the basis on which you trade your shares and lastly, apply for a Stock Exchange license. So, those were the 4 choices. All the companies chose, 2 of our clients that were trading on the old basis. We came up with a new base, which is called OTC Express, which was effectively a trading platform where people had matching to buy or sell shares and there was no matching. So, in consultation with the FSB it’s clear for everybody to understand that if there’s matching you must have an exchange license. If you want to set up an OTC market, you’re allowed to, as long as there’s no matching. So, our OTC Express, effectively, is like Gumtree on steroids. It allows buyers and sellers to find one another, negotiate a price and the quantity between themselves. Once they’ve done that then come to us and tell us what they’ve negotiated and then we will ensure that the shares are transferred between the buyer and the seller and the seller gets their money. So, we provide security around the process but we’re not involved with the negotiation or the price setting at all, and we don’t do any matching. So, that’s what it is, in essence. So, 2 of our clients chose to trade on an OTC basis. Some of our clients went to the JSE and the other clients continued trading on the old matching basis, which meant that they were allowed to do trading on that basis until they had been prevented to do so, by the FSB.

But Anthony, what happened to MTN? Are they on the JSE now or, where are they?

MTN are listed on the JSE, after that letter came out that said, ‘you must regulate your affairs.’ Then the whole scheme came to an end, I think it was towards the end of last year. In other words, there was a termination date, their scheme unlocked so most schemes unlock. For example, Yebo Yethu scheme that one, (the Vodacom one) that unlocks in, I think, in 2018, and the Sasol and Inzalo scheme also unlocks in 2018. So, what it means is that those BEE shareholders will receive normal Sasol shares and those schemes will unwind and those companies will have to do another BEE scheme or do something else. In other words, that BEE structure ceases to exist. So, that MTN BEE structure ceased to exist (I think it was last year), and they’ve now done another one that is not yet being traded. So, they’ve issued new shares and their scheme, well I think they’ve used the same name, MTN Zakhele and that scheme is being administered by a bank, I think it’s Nedbank, I’m not sure exactly who does it but I think they look after the scheme for them but those shares are not being traded at the moment.

Did you manage to retain enough clients to make this Exchange viable or are you going to have to look for new ones?

I think so. Our biggest client has always been Multi-Choice. We’re still very close to Multi-Choice. We still run their scheme. They still trade on a matching basis on Equity Express, on permission granted by the FSB. Obviously, now that we have a license we will obviously talk to them actively to see if we can get them to list on our Exchange. Then we have one client, who’s expressed a great interest in moving from our OTC platform and becoming listed. So, definitely we think we’ll keep them. At our peak we looked after Vodacom, Sasol, and a few others and those were the ones we lost. Vodacom went to the JSE. TWK went to ZAR X, Sasol went to the JSE and Thembeka shut shop. Thembeka was the BEE partner for PSG. So, we have lost a few. Yes, it’s been difficult for us over the last few years because all I’ve seen is a trickle of clients leaving us but I am proud to say, I don’t think it’s been over our service levels. It’s strongly been around all of the uncertainty that’s been created so, the best news for us is this Exchange and it’s given us certainty to be able to provide an offering to our clients that they are currently used to, in a legal environment.

So, you’ll be looking for me in particular, BEE type schemes of major companies?

It’s just that we’ve got really quite good at that and the numbers are astronomical in terms of the numbers of shareholders. So, just what we’ve got left, if you included Sasol, they had 200,000 shareholders. MTN has 136,000 shareholders. I was at the Naspers AGM and then it was actually told to us that Naspers, that they’ve got 70,000 shareholders so, now that’s the most valuable company in SA. Well, Phuthuma Nathi their BEE scheme, has 89,00 shareholders, and Media24’s BEE scheme is short of 100,000 so, the numbers of people you’re dealing with is astronomical. The reason this would have been difficult for the JSE to deal with in their broker environment is the average broker has 5 – 10 thousand clients, max. When you suddenly say to them, ‘are you prepared to take on another 100 thousand?’ Then they say to you, ‘well we build a private client wealth base, what other investments have they got?’ And we say, ‘no, they are small investors in Phuthuma Nathi.’ Most of those brokers are just not interested in changing the infrastructure. So, in our Equity Express section of our business we’ve got 50 full time share dealers that deal with the needs of shareholders, taking telephone calls, and dealing with all the issues. So with a R2bn dividend – our call centre goes ballistic over dividend times because shareholders all want to know where their dividend is, when it’s going to be paid, how was it calculated? You can just imagine if you’ve got 89,000 shareholders what level of communication activity you deal with. It’s not only the telephone calls you also get an equal number of emails. So, it’s just as large administrative workload that comes onto your organisation when you try and support such a large shareholder base.

It’s very exciting though. You’re now legal. You’ll be able to allow people to do their trades. They’re all prepaid, you know who they are and there must be other applications, no doubt. When does it all begin?

I think so. We are very excited also about our shareholder base. We don’t believe they were to become shareholders in this company because they are philanthropic. We think they would like to make a return on their investment. I think we’re hoping that they will also bring us some new listings. The key part of the model is that not only does the exchange get the benefit of singular systems existing clients, we’re hoping to get new ones. So, I don’t have any new ones yet. It’s very early days for us and having so many exchanges now, I think the competition is going to be fierce but certainly, it’s new territory for me and it’s certainly very interesting.

So, when do you kick off?

We are not allowed to start trading until we’ve completely finished all this testing with Strate. I have got a confirmation from them that the earliest date that they can give us the final sign-off is the 28th November so, I will be delighted if we could get going early in December. Obviously, any later than that you must go through New Year but that’s where we are placed at the moment. I would like to get going quite quickly. We do have one client that is in a great hurry to get going so, I have a feeling that it’s going to happen quite quickly. Luckily on the software side we are completely ready. It really is just a question of getting the final sign-off from Strait.

And longer term, what do you see? How do you see this market developing because 5 Stock Exchanges for a country the size of SA sounds like a little over traded?

It’s become a fiercely competitive environment so, I don’t know. I just believe that if you focus on the needs of the issuers and one of the things that I always say to companies is, ‘who are the 4 most vested investments in your organisation?’ I think the answer is very simply, if a company fails the people that feel it are mostly the employees. Followed probably by the customers, and then the suppliers, and then the shareholders. Shareholders lose everything because they are always last in the queue but essentially, there isn’t really a huge amount of time spent by most SA corporates on actively trying to look after the interest of their shareholders from the point of view of communicating, and trying desperately to hold their hand. I’ve seen with the likes of the share schemes we’ve been looking after the model is a little different because what we’re effectively offering these companies is an ability for them to look after their shareholders directly. Whereas, in the JSE model the typical approach has been raise capital, list on our exchange, and the brokering community will look after you. Now, what happens if your shareholders aren’t experienced shareholders and they’ve never worked with stockbrokers? What happens if those stockbrokers don’t really want to deal with them? So, that’s the market that we’ve found that has worked well for us because effectively, we explain the issues why it’s in their interest to look after their shareholders, and for that we can charge a fee, and for that we can build the ability to service their shareholders in a manner that we feel that a lot of shareholders are not necessarily serviced. When there’s no connection between the issuer and who do the shareholders go to, to get help to trade their shares?

But want about rationalisation? I understand it completely but with 5 Exchanges do you expect there’ll be mergers?

I don’t know. I think all 5 could survive fine, if we had a growing, healthy SA environment economy. I think right now our situation is a very tough one. So, I think it’s really going to be a function of the patience that shareholders have with the investments that they’ve made on these different trading platforms and what negotiations take place as different Exchanges find that the economic model hasn’t translated into what they hoped it would be so, I don’t know. I have not been approached by anybody in terms of this process because we haven’t had an exchange license. Now that we have one, maybe there will be some approaches. At the moment, our strategy will be one of looking after the interest of our customers and our client base and just establishing ourselves. It’s too early. We obviously, haven’t travelled a long enough road to know about the viability of the thing in total but we are very hopeful. We’ve certainly done our numbers on the basis that we believe it will pan out for us but yes, you’re right, I think 5 is a lot.

Anthony Wilmot from Singular Systems, the proprietor behind Equity Express, which now has a Stock Exchange license. Congratulations Anthony, we look forward to your progress.