An agreement has been signed which allows banks to enter the inner stockbrokers’ circle. Jacques Magliolo reports on this and other changes at the stock exchange
Chaos was averted at the Johannesburg Stock Exchange last month, but not completely eliminated. The JSE and the Council of South African Banks (Cosab) reached an agreement to provide institutions with trading powers from November, thereby preventing banks’ threats of setting up an alternative exchange.
However, while these threats have now been eliminated, a question mark still hangs over the future of banking- stockbroking in this country and signifies an uncharted role for the exchange.
In addition, JSE executive president Roy Andersen — backed by the JSE committee — knew, before signing the agreement, that stockbrokers would not easily give up their privileged position as having sole right to trade shares.
Yet over the past year Andersen has compromised little and has shown a strength seldom displayed by previous exchange leaders. He has not strayed from his intention of retaining the ideals of the exchange, while still showing willingness to adopt a policy of aligning the exchange to that of international stock markets.
His attitude is displayed by permitting banks into the inner stockbrokers’ circle, but simultaneously enforcing a unified system for all members. This includes a single surveillance system for all trades and one mechanism for trading shares.
It took a year to debate and finalise the Cosab agreement, which outlines criteria and timing for the admission of banks as members of the JSE. As part of the negotiated agreement, the JSE was able to obtain an undertaking from Cosab to co-operate on the restructuring of both the JSE and the settlement system for equity transactions.
Initial thoughts that Andersen had capitulated and sold out stockbrokers were not correct. He has also been able to push through, for stockbrokers, a dual trading system. This will permit all members of the exchange to trade for both their clients and their own book. Another benefit negotiated for stockbrokers is a limited liability clause to protect personal assets against company losses.
Dual trading will take place after non-stockbroking firms become full corporate members in November and after shares are traded via computer in 1996. This is, however, subject to approval by members of the exchange, and to the necessary Act being passed by Parliament.
Andersen says: “This timeframe is to enable non- stockbrokers (both local and foreign) to purchase up to 30 percent of member firms from July and for this percentage to increase to 100 percent on November 8. This should provide companies, which are wholly owned by non- stockbrokers, with time to become members of the JSE.
“The proposed changes are expected to be in line with developments in international exchanges, which aim to benefit investors, listed companies and stockbroking firms and should ease access to the market by prospective stockbrokers,” says Andersen.
Have the proposed changes achieved this? Only to a certain extent, in that the JSE’s agreement with Cosab means that it can now concentrate on other potentially explosive issues.
The bottom line is that signed agreements do not mean the end of potential chaos. Accepting change in theory and in practice are two extremely polar events. There are two main problems facing the JSE hierarchy:
* If banks trade for themselves, stockbrokers’ revenue could diminish. The JSE has no plans nor any policy to help stockbrokers adjust; it doesn’t even have a considered opinion on how they can offset reduced income.
Stockbrokers have a number of options. They could sell a portion of their firms to local or foreign institutions, streamline operations through a rationalisation programme, or sell research directly for cash or for a portion of institutional funds which they can invest.
They could become “managers” of deals for institutions, thus taking orders to buy and sell (broker deals) for institutions or they could trade for both themselves and for clients in a dual-capacity system.
* Banks’ ability to trade for themselves could strengthen their stranglehold over the exchange and further reduce liquidity in an already illiquid market.
In addition, banks have not shown any willingness to accept the King Report recommendations, which provide for greater disclosure and transparency by all listed companies.
The JSE’s total market capitalisation is about R830- billion, yet the four largest banks’ ownership of shares grew by 31 percent last year to R175,3-billion. This represents an astounding 21 percent control over all listed companies.
Banks’ ability to wield such powers over share prices would surely be unacceptable under Andersen’s leadership, particularly if these banks refuse to abide by greater levels of transparency.
The JSE still has some way to go before problems are ironed out and the transition to a fully automated, more transparent system has been accomplished.
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