Archive for the 'OTC' Category

New South African stock exchange ZAR X to start 3 October

Trading is to start on South Africa’s new ZAR X securities exchange on 3 October. It gained a licence on 2 September and the first listings will be Senwes and  Senwes Beleggings, with up to 5 listings planned for first week October.

Another exchange is also being readied, 4AX also called 4 Africa Exchange (see story below).

South Africa’s regulator, the Financial Services Board, announced on 2 September that it had granted licences to ZAR X and 4 Africa Exchange Licences. It said: “The Registrar of Securities Services.. received and considered applications for exchange licences from ZARX (Pty) Ltd (“ZAR X”) and 4 Africa Exchange (Pty) Ltd (“4AX”) and has, in terms of section 9(1) of the Act, granted ZAR X and 4AX exchange licences with conditions after careful consideration of objections received as a result of a notice referred to in section 7(4).”

Initially FSB gave ZARX a conditional licence but in August a court ruled in favour of an application by the JSE, which had argued there was no provision for conditional licensing. JSE CEO Nicky Newton-King said at the time there were concerns about the complexity and the potential for systemic risk that multiple exchanges could bring.

ZAR X has a different level of risk as it requires to be pre-funded, which means that participants must lodge scrip and cash before they trade and settlement is then the same day (T+0). In July the JSE and other market participants moved their market from T+5 settlement to T+3 without any problems. Most institutional investors prefer transferring stocks or money after they have traded, when they know the exact amounts to transfer.

Etienne Nel, CEO of ZAR X, said: “We need to create a level of co-operation within the market space to make it as simple as possible for all participants to coexist”.

Speaking to Business Day TV, he said: “..we are very happy, obviously, delighted since it’s been a long time coming. To give you some context around the conditions, it’s obviously what we applied for. We initially said we were not going to be offering derivatives to the market and obviously as a result one of the conditions is we may not offer derivative trades on our market. Similarly, we cannot offer shares already listed on another exchange, but that was never in our application so we are obviously delighted with the licence that we finally got.”

Nel said in September they were busy getting brokers on board and putting investors through necessary screening and checks of the Financial Intelligence Centre Act (38 of 2001 “FICA”)

Nel says ZAR X has less onerous rules on admitting companies for trading (listing requirements): “In our approach to listings.. we will have a conversation with the issuer and we are taking what is called a principles-based approach to listing rather than rules-based. Now what that achieves is if we get the slightest inclination that something is awry within a company we would actually rather walk away rather than doing the listing.. A rules-based environment .. becomes a tick-box exercise and in that environment you would end up with a situation where people end up finding loopholes, which a principles-based approach does not allow for”.

It breaks over 100 years of monopoly Africa by the Johannesburg Stock Exchange, as the JSE was founded in 1887 but there were several stock exchanges around during the first South African gold rush. Speaking after the licence was issued, 4AX CEO Fay Mukaddam said in a press release: “We are delighted to have secured our licence. South Africa is a vibrant, growing market with enormous potential and we are confident that there’s a strong appetite for an additional licensed exchange to further develop and deepen the capital markets in the country.. 4AX can stand as a vehicle for diversity, which in turn, will drive real economic inclusion”. It will be an “empowered exchange” and will aim at retail investors but also attract institutional trading.

Both ZARX and 4AX will use Strate as their central securities depository (CSD).

 

Etienne Nel, CEO of ZAR X (credit timeslive.co.za)

Etienne Nel, CEO of ZAR X (credit timeslive.co.za)

About 4AX – new South African securities exchange

South Africa’s second new exchange, which also got a licence according to the 2 September announcement by the Financial Services Board (FSB), is 4AX, also known as 4 Africa Exchange. It plans to trade securities that are currently traded over-the-counter (OTC) and to go live early in 2017.

Speaking after the licence was issued, 4AX CEO Fay Mukaddam said in a press release: “We are delighted to have secured our licence. South Africa is a vibrant, growing market with enormous potential and we are confident that there’s a strong appetite for an additional licensed exchange to further develop and deepen the capital markets in the country.. 4AX can stand as a vehicle for diversity, which in turn, will drive real economic inclusion”. It will be an “empowered exchange” and will aim at retail investors but also attract institutional trading.

According to the background on its website: “A unique situation in South Africa has however created the need for 4AX. Previously, a number of South African companies issued shares and facilitated trading in the over-the-counter (OTC) market using unregulated OTC platforms. The current OTC market boasts a combined market capitalisation in excess of R30 billion ($2.2bn).

“As the OTC market expanded, the FSB recognised a need for greater regulation to protect shareholders and ensure a fair, orderly and transparent marketplace for issuers. The FSB determined that all operators of unregulated OTC platforms must cease operating or apply to become licensed exchanges under the Financial Market Act of 2012 (FMA). Board Notice 68 of 2014 reaffirmed the view of the Registrar that operators of exchange infrastructure should be licensed and that a proliferation of exchanges should not be allowed. This has caused significant upheaval in the market, for both issuers as well as shareholders.

“As a result of the regulatory amendments a substantial number of OTC companies are now in breach of the FMA. Faced with significant potential penalties under the FMA these companies have either stopped operating their OTC platforms or applied for extensions from the FSB, whilst searching for an alternative to unregulated OTC platforms. 4AX provide the solution.

Maponya Group has a 15% shareholding, other shareholders listed on its website include Global Environmental Markets Ltd, Capital Market Brokers which is a leading member of the Stock Exchange of Mauritius, independent fiduciary Intercontinental Trust Ltd,  agricultural firm NWK, and investment banking firm Pallidus.

Exchange trends from World Exchange Congress 2016

A couple of interesting statements from speakers at the excellent World Exchange Congress 2016, happening 22-23 March at Bishopsgate in London.

Exchanges – back to the information coffee house
Stu Taylor, CEO of Algomi: Fixed-income trading was dominated by banks who use voice trading and support it with their balance sheets. Most banks and their clients prefer this way and are not naturally going to switch to putting limit orders through the exchanges. We try to see how we can help with parts of the transactions, we worked first with the regulated Swiss exchange to put technology components at banks and that can help them sometimes with their trades, the exchange can help them find different counterparts, or with missed trades or, when they are struggling to complete a deal, the exchange can make suggestions. We suggest actions into the existing workflow, rather than trying to change the workflow. Exchanges can connect information sources so the exchange is the place to see what’s going, it can offer “bond dating”, trying to match buyers and sellers into a transaction.

Historically the technology focus for exchanges has been on execution, but now the innovation is that the exchange is about the information itself. Technology is shrinking the world, we used to talk about 6 degrees of separation in the world. Technology such as Facebook has made that number closer to 3 degrees of separation. Exchanges are back to the origins of exchanges as the coffee shops, finding a place to know someone who knows someone. Information and pre-trade are where the next waves of innovation for exchanges are going to come from.

Exchanges role in banks' bilateral bond trading, source www.algomi.com

Exchanges role in banks’ bilateral bond trading, source www.algomi.com

Can technology create liquidity?
Ganesh Iyer, Director of Global Product Marketing at IPC Systems: “Technology has become a facilitator of liquidity. Uber has no taxis but it provides taxi “liquidity”, Airbnb has no rooms but provides accommodation “liquidity”. Technology does not create liquidity on its own but it brings together market participants and that leads to liquidity. In the capital markets it can bring very diverse market participants together, for instance a mutual fund seller with a diverse “buy-side” community including hedge funds, retail, etc.

Move over-the-counter (OTC) trading onto exchanges
April Day, Director, Equities, Association for Financial Markets in Europe: “There is always a need for keep some balance, some trades are not suitable for exchange trading, there is still a time when investors choose to trade off exchange for reasons such as not wanting to share market information, reduce costs, less disclosure, etc.

Sergio Ricardo Liporace Gullo, Chief Representative EMEA BM&FBOVESPA; The Brazil market has reached a big harmony, we have survived many crises and we have a sophisticated system offered by the exchange which offers central clearing and makes all parties’ lives more efficient and offers better use of capital.

Keisuke Arai, Chief Representative in Europe of Japan Exchange Group: The Japaese experience is that it’s important for the exchange to strike the right balance between market efficiency and investor protection.

Soaring trading on Nigeria’s FMDQ market for fixed income and fx

Nigeria’s booming fixed interest and currency securities exchange FMDQ OTC Plc (“over-the-counter” market) recorded market turnover of NGN93.9 trillion ($471.7 billion) for the 8 months to 31 August. This includes all products traded on the FMDQ secondary market as well as trade executed between dealing members, dealing members & clients, and dealing members & the Central Bank of Nigeria (CBN).

According to a recent report in Vanguard newspaper, treasury bills transactions accounted for NGN31.7trn (34%) of the total trading; repurchase agreement/buy backs were NGN21.354trn (23%) turnover; and foreign exchange (forex) NGN19.84trn (21%). The top 10 dealing members accounted for NGN67trn, 71% of the turnover; 3 dealing members accounted for NGN27.9trn (42%) of the broker trading.

Photo: FMDQ OTC

Photo: FMDQ OTC


Major listings in July included NGN26bn ($130m) FCMB Financing SPV PLC series 1, 7-year 14.25% fixed-rate unsecured bond under a ₦100trn debt issuance programme. This came after the listings of NGN4.8trn of bonds issued by the Federal Government of Nigeria (FGN) and quotation of NGN2.8trn of treasury bills. Other key listings have included a NGN30.5bn bond by UBA and a NGN15.54bn bond by Stanbic IBTC.

Other instruments traded in the 8 months to August:

  • Unsecured placements – NGN9.2trn
  • FGN Bonds – NGN6.1trn
  • FX Derivatives – NGN5.5trn
  • Money-market derivatives – NGN101bn
  • Eurobonds – NGN33bn
  • Other bonds – NGN18bn.

The figures exclude primary-market auctions in T-Bills, Bonds and FX.

According to CEO Bola Onadele Koko, revenue in 2014 was NGN1.75bn, compared to NGN155.65m in 2013, based on transaction income only for one month, December 2013. The bourse aims “to be No. 1 in Africa in the fixed income and currency markets by 2019”.

The FMDQ concept was promoted by the Financial Markets Dealers Association (FMDA) in 2009 and sponsored in 2010 by the Bankers’ Committee, chaired by the CBN with the Nigeria Deposit Insurance Corporation (NDIC) and all the banks and discount houses operating in Nigeria as its members. The committee resolved to set up a self-regulated organization licensed by the Securities and Exchange Commission (SEC) to operate all the over-the-counter inter-bank market activities in fixed income and currencies.

FMDQ was incorporated on January 6, 2011 with a NGN100m contribution by the CBN and equal contribution of NGN15m by each of the 25 banks and 5 discount houses to the company’s initial capital. On 6 Nov 2012, SEC registered FMDQ as an OTC securities exchange and self-regulatory organisation. It started operations a year later, 7 November, 2013.

By 31 Dec 2014 there were 26 FMDQ-licensed dealing members made up of banks and discount houses licensed to make markets in debt securities, money-market instruments and currencies on FMDQ. It was due to add specialist dealing members to deal in treasury bills and FGN Bonds. There were 13 licensed associate members, including SEC-registered inter-dealer brokers and brokers, as well as clients including institutional investors/asset managers, pension fund administrators and corporate treasurers.

From 2014 annual report

From 2014 annual report

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