​Cheeky upstart challenges the JSE

It’s lunchtime on a gloomy Monday at the offices of ZAR X and there has not yet been a trade on the fledgling exchange.

“On the 20th of February, capital markets in South Africa changed forever,” says Etienne Nel, cofounder and chief executive officer of ZAR X. “Well, it was the first time in 60 years that a company listed on an exchange other than the JSE,” he says.

“Radical economic transformation — we are actually doing it. If you are a person with R1 000 you can invest. It will cost R15 in brokerage fees instead of R150.”

It’s not easy to see the revolution is afoot when looking around the quiet office.

An eclectic collection of paintings line the office space, leaning against the stark white walls and waiting to be mounted. TVs are still in their boxes and the handful of the office’s occupants work in relative silence.

ZAR X became operational when, in the first few minutes of officially opening the exchange, the very first trade was registered and a hefty brass bell was rung to mark the occasion.

A week into trading, Nel estimates the number of trades to be no more than 100 — “but definitely more than one”.

Only two company shares can be traded on the exchange: Agri-business and Senwes, as well as its investment holding company, Senwes Beleggings. Senwes’s market cap is valued on the exchange at almost R1.9-billion, and the holding company’s market cap is nearly R700-million.

Authorised users, or brokers, registered to trade on the exchange also number two, although Nel says applications to register have been coming thick and fast since the exchange began trading.

Nel, with 20 years’ stockbroking experience, cofounded ZAR X after a directive from the Financial Services Board reformed the trade of over-the-counter shares and required many of these to be bought and sold through a licensed exchange.

ZAR X was subsequently born out of the need for a new product with a lower cost, Nel says.

Unlike other exchanges that take a few days to settle a trade (the JSE is trade plus three days), ZAR X settles them in 10 seconds. This is possible because all the administration is done before the transaction.

“You put your money in upfront, you put your Fica [Financial Intelligence Centre Act] in upfront; if you want to sell shares, you have to have sufficient securities in your account … and make sure your admin with your broker is done and dusted. So, when you get to the point of transaction, everything is done,” says Nel.

“Truth be told, we couldn’t have done this 10 years ago with the processing power we had back then. Because we are a fintech [financial technology] disrupter, we rely very heavily on technology.”

But key to the offering is that ZAR X charges less.

“Did you know a broker on the JSE is the one who is standing good for the trade?” asks Nel.

The Financial Markets Act requires that a trade can only be conducted through an authorised broker, who must be registered with the exchange. JSE rules require several things from a registered broker, which cost money.

At ZAR X, brokers are not charged for services such as live data feeds, or Zaps — a publishing service akin to the JSE’s Sens (stock exchange news service) announcement — and they don’t have to have collateral until the trade settles. Fees are also all percentile-based and there are no flat charges.

“So all of a sudden it becomes immensely profitable for a broker to trade in a ZAR X environment,” says Nel. “Ultimately the benefit is for the investing public — the brokers don’t have extra costs to pass through.”

ZAR X offers a primary board on which industrial companies can list and structured investment products, which are made up of exchange traded funds (ETFs), ETF notes and preference shares. It also offers restricted securities, on which there are constraints — such as race, gender, occupation or religion — on who can own the share

To buy shares in Senwes Beleggings, for example, you must be a farmer.

“If you are not a bona fide farmer, you can have all the money in the world, the Senwes board won’t approve you,” Nel says.

Another restricted share could be sharia-compliant sukuks (Islamic bonds). “There is big money there. We are talking about significant pools of capital tied up in Islamic funding structures.”

The biggest number of restricted shares, the low-hanging fruit, are the black economic empowerment (BEE) structures, he says.

It has been a long process for ZAR X to get to this point. The Financial Services Board (FSB)licensing process was one problem, particularly because the granting of the ZAR X licence was subject to four appeals by the JSE.

On February 9, the FSB appeal board dismissed the consolidated appeals of the JSE and 4AX against the FSB granting an exchange licence to ZAR X, and awarded full costs to ZAR X.

“The appeals were variations on a theme. In a nutshell, they wanted to see our entire application, the IP [intellectual property], the financials, the business processes — it’s like Liberty Life requesting all of Discovery Life’s info. Basically, it was a stalling tactic to keep us out of the market,” he says, adding that ZAR X had laid a complaint with the Competition Commission for abuse of dominance.

“If you think about it, we are a very real threat because we are a full multicounter exchange. We are not a one-trick pony.”

For companies, too, ZAR X offers a listing process that is fast and unambiguous. Its approach to listing is based on principles rather than rules.

“It doesn’t mean there is less regulation, but our approach to enforcing it is different.”

For example, ZAR X does not have a list of accredited auditors but requires company auditors to be regulated by the Independent Regulatory Board for Auditors and be compliant with international financial reporting standards.

That alone will bring down the cost of listing for companies. But the licensing conditions do not allow ZAR X to trade shares that trade on the JSE.

The smallest company ZAR X would work with would need a market cap of about R200-million but, since launching, ZAR X has been approached by a few multibillion-rand companies, Nel says.

The advantage of a real-time settlement is that it reduces systemic risk because investors get their money immediately.

“Because everything goes into a central nominee settlement account upfront, there is no risk to the broker and there is no risk to you, the investing public. We are derisking it for the working public — you can have your money in your bank account the next day. That’s the benefit,” he says.

Another new entrant also bristles

Although the JSE has given up on its objection to the Financial Services Board (FSB) licence awarded to ZAR X, another new market entrant, 4AX, announced its intention to challenge the awarding of the licence. 4AX made its intentions known on the same day ZAR X made its first trade.

Fay Mukaddam, chief executive of 4AX, says the ZAR X model and rules are not compliant or in line with the Financial Markets Act, the Companies Act and common law.

Mukaddam says: “This is new territory for everybody, everyone is trying to map the way forward … [But] we don’t believe the [FSB) appeal board dealt with our concerns.”

In its judgment, the appeal board said it did not have the power to decide on some of the procedural challenges raised by 4AX in the exchange’s appeal and found that only a review court could do so.

“I have always believed the market is deep and elastic enough to accommodate a few exchanges … [but] we do believe as an exchange we have a duty to ensure against systemic risk.”

4AX, a fully fledged stock exchange, is ready and open for business, Mukaddam says. But it has yet to conduct its first trade as it prepares its first two listings, with six others in the pipeline.

“We are offering an alternative platform, with simplified listing requirements, simplified structures and simplified fees, with pre-cleared trading.

“Historically, the incumbent has prioritised the institutional investor — that’s just their model. I don’t believe there is a space for retail investors to be wholly involved.”

Mukaddam says the exchange will also be open to mid-sized businesses with a market cap of between R100-million and R8-billion.

4AX has also partnered with the Gauteng provincial government to bring in retail investors and medium-sized companies in the township economy.

Mukaddam says 4AX has in no way relaxed the regulations and all the required checks and balances are in place.

“Compliance is a cost. Because of current legislative framework, you can’t just do away with compliance,” she says.

“In choosing to list and operate in a public space, it means a company’s commitment to compliance becomes paramount.”

It’s the technology that allows for cost reductions. “We are not burdened by legacy systems. It is far more seamless.”

Although Mukaddam says 4AX technology has the capability to clear a trade immediately, they have entered the market at trade plus three days as part of its commitment to mitigate against any risks of instability.

In that time, “everything is verified to ensure nothing goes wrong. Things can always go wrong. One must put things in place to ensure risks are minimised,” she says.

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