Pri­vate stock ex­change ZAR X got its ex­change li­cence and listed its first com­pany in Fe­bru­ary. Now it’s ready for the next step – open­ing up the in­vest­ment mar­ket to all lev­els of so­ci­ety.

Finweek English Edition - - FRONT PAGE - By Natalie Greve Ed­i­to­rial@fin­

in the early 1990s, then ju­nior stock­bro­ker Eti­enne Nel would have had lit­tle idea that he would, some two decades later, lead a le­gal stand-off against Africa’s largest bourse – the JSE. Nel would have found it even less prob­a­ble that he would soundly emerge the le­gal vic­tor in each of the JSE’s four at­tempts to con­test the li­cens­ing of his self­con­cep­tu­alised pri­vate stock ex­change.

Re­gard­less of his ap­par­ent lack of sooth­say­ing abil­i­ties, this has in­deed be­come the case, af­ter the in­vest­ment spe­cial­ist was in Au­gust last year awarded an ex­change li­cence from the Fi­nan­cial Ser­vices Board (FSB) for ZAR X, be­com­ing South Africa’s first ad­di­tional stock ex­change in al­most 60 years.

“I didn’t wake up one morn­ing 20 years ago and de­cide I wanted to open my own ex­change,” he tells fin­week. “It wasn’t even pos­si­ble at the time, as the ex­change was a closed boys’ club.

“It came over a 10-year pe­riod of this grow­ing re­al­i­sa­tion that the cap­i­tal mar­ket space re­ally needs more com­pe­ti­tion and that there was a mas­sive need for an al­ter­na­tive trad­ing plat­form and cap­i­tal-rais­ing mech­a­nism to the JSE.”

On 10 Fe­bru­ary, the FSB Ap­peal Board dis­missed the ap­peal of the JSE against the FSB’s grant­ing of an ex­change li­cence to ZAR X.

The judg­ment, which awarded full costs to ZAR X, fol­lowed the fi­nal hear­ing in a se­ries of four JSE ap­peals against the li­cence, be­gin­ning in 2015.

“The judg­ment vin­di­cates our be­lief that the... ap­peals have been vex­a­tious, aimed at pre­vent­ing us from en­ter­ing the mar­ket and, ul­ti­mately, elim­i­nat­ing us as a com­peti­tor,” ad­vances ZAR X di­rec­tor and co-founder Ge­off Cook. “At our re­quest, the Com­pe­ti­tion Com­mis­sion has launched an in­ves­ti­ga­tion into whether the JSE’s ap­peals amount to an abuse of dom­i­nance.”

ZAR X’s tri­umph over the ex­change be­he­moth has un­ques­tion­ably ush­ered in a new era in do­mes­tic share trad­ing – a de­vel­op­ment that clearly has the JSE some­what jit­tery.

And if Nel’s claims about ZAR X are founded, per­haps the nerves are war­ranted.

Mar­ket dis­rup­tor

Dub­bing ZAR X a tech­nol­ogy-based mar­ket dis­rup­tor, he says the of­fer­ing opens 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 re­main rel­e­vant in a fi­nan­cial ser­vices sec­tor that is be­ing pro­foundly dis­rupted by dig­i­tal, mo­bile, and so­cial tech­nolo­gies,” he com­ments.

It fur­ther places 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, Nel ex­plains.

Through ZAR X, South Africans are able to ac­cess the stock mar­ket at a lower cost and with lim­ited bar­ri­ers to en­try, en­cour­ag­ing a sav­ings and in­vest­ment cul­ture, he says.

By al­low­ing for zero safe-cus­tody fees, he adds that the ex­change gives peo­ple in the un­banked sec­tor an op­por­tu­nity to grow their in­vest­ment base with rel­a­tively small in­vest­ments, only pay­ing fees when they trans­act.

Ad­di­tion­ally, the com­pany’s web­site pro­vides free real-time share trad­ing data on the com­pa­nies listed

on the ex­change – a ser­vice that in­vestors on the JSE have to pay for.

“We cre­ated ZAR X as a growth cat­a­lyst, broad­en­ing the mar­ket and in­creas­ing ac­cess to it at the same time.”

With a fo­cus on cre­at­ing longer-term in­vest­ment value, ZAR X does not per­mit high-fre­quency trad­ing, deriva­tives, or naked short-sell­ing.

Re­stricted trad­ing

On the is­suance side, Nel be­lieves the ex­change’s in­tro­duc­tion of a novel prin­ci­ples-based list­ing regime re­duces the com­plex­i­ties as­so­ci­ated with list­ing, giv­ing com­pa­nies that would other­wise not con­sider list­ing an op­por­tu­nity to do so.

If a com­pany – and its se­nior staff – is reg­is­tered with the ap­pro­pri­ate reg­u­la­tor or in­dus­try body, ZAR X does not vet it over and above this, un­like the JSE.

“This is per­form­ing the role of reg­u­la­tor of the reg­u­la­tor. We just don’t think that’s prac­ti­cal – all it does is take time and it is costly,” he says.

When pressed on whether the softer list­ings cri­te­ria open the ex­change up to pos­si­ble gov­er­nance abuse, Nel main­tains that ex­ist­ing South African leg­is­la­tion is enough of a de­ter­rent.

“We be­lieve the Com­pa­nies Act of 2008 is a su­perb piece of leg­is­la­tion and that the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors is a proper reg­u­la­tor of an au­di­tor, and so on and so forth. Who are we to sec­ondguess those reg­u­la­tors and those pieces of leg­is­la­tion?” he ad­vances.

Ex­pand­ing on the ex­change’s strat­egy, Nel out­lines that ZAR X will drive its own list­ings on a pri­mary board, while a sec­ondary in­vest­ment en­ti­ties mar­ket will of­fer trade in ex­change-traded funds, ex­change-traded notes, struc­tured prod­ucts and pref­er­ence shares.

ZAR X will also of­fer what it calls a “rev­o­lu­tion­ary” re­stricted mar­ket, in which it will pi­o­neer a con­cept called “con­trolled liq­uid­ity”.

“In this mar­ket, the is­suer has rules as to who can buy a share, typ­i­cally ev­i­denced in black eco­nomic em­pow­er­ment (BEE) struc­tures. For ex­am­ple, only black South Africans may buy and sell these shares.

“This of­fers cor­po­rate SA BEE in per­pe­tu­ity. It’s ba­si­cally a game-changer. Who says you can’t have an ex­change where only black peo­ple can trade?” he mulls.

Lever­ag­ing its tech­nol­ogy plat­form, ZAR X will also be able to pre-ap­prove po­ten­tial share­hold­ers based on ad­di­tional pa­ram­e­ters, such as gen­der, oc­cu­pa­tion and re­li­gion.

“For ex­am­ple, we were re­cently ap­proached by a BEE struc­ture that is women-owned, and don’t want to di­lute its em­pow­er­ment eq­uity by al­low­ing men to buy shares.

“Another ex­am­ple could be a Shari’ah fund in which only Mus­lims could in­vest,” he ex­plains.

Nel down­plays the po­ten­tial of op­po­si­tion to these pa­ram­e­ters on the ba­sis of pos­si­ble un­con­sti­tu­tion­al­ity, ar­gu­ing that this regime will, in fact, en­hance greater fi­nan­cial in­clu­sion.

He adds that there has never been a mech­a­nism by which an in­di­vid­ual with a low to av­er­age in­come could in­crease his or her 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. We are very pas­sion­ate about fi­nan­cial in­clu­sion. We want to sup­port rad­i­cal eco­nomic trans­for­ma­tion by giv­ing black South Africans the abil­ity to trans­act their BEE shares.

“There has been a blink­ered ap­proach to BEE. It was with in­ter­est that I’ve read some com­ments in the me­dia about how BEE needs to be relooked at. Trevor Manuel has said it, Thuli Madon­sela has said it and the Black Man­age­ment Fo­rum has said it,” he ar­gues.

Big play­ers

Fol­low­ing the FSB’s judg­ment in its favour, ZAR X of­fi­cially launched its op­er­a­tions with the list­ing of SA in­te­grated agri-busi­ness Sen­wes and its hold­ing com­pany, Sen­wes­bel, on 20 Fe­bru­ary.

The group is also cur­rently in talks with sev­eral com­pa­nies in­ter­ested in list­ing – the small­est of which has a mar­ket cap­i­tal­i­sa­tion of R6bn.

“ZAR X is acutely aware of the fact that we only have one rep­u­ta­tion. We would not do any­thing to jeop­ar­dise that by bring­ing a ques­tion­able list­ing onto the mar­ket, so we’d rather err on the side of cau­tion and con­ser­vatism and bring fewer com­pa­nies but more ro­bust bal­ance sheets onto the mar­ket and build cred­i­bil­ity that way,” he tells fin­week.

Nel de­scribes Sen­wes as an apt blue­print for the cal­iber of com­pa­nies the ex­change is hop­ing to at­tract, adding that he would be “very happy” if the ex­change had R50bn worth of list­ings on board by the end of 2017.

“We al­ready have R2.7bn through Sen­wes – so I only have another R47.3bn to go,” he quips.

“By bas­ing its op­er­at­ing model on the lat­est tech­nol­ogy, ZAR X has an agility and flex­i­bil­ity older stock ex­changes do not nec­es­sar­ily en­joy.”

Ge­off Cook Di­rec­tor and co-founder of ZAR X

Eti­enne Nel CEO of ZAR X

The ZAR X bell is ready to ring in new list­ings.

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