Archive for the 'Regulators' Category

SEC Nigeria leads FSD Africa programme to boost capital markets regulators

Left to right: Reginald Karawusa (Director, Legal and Enforcement, SEC), Laure Beufils (Deputy High Commissioner), Mary Uduk (ag Director General, SEC), Evans Osano (Director Financial Markets, FSD Africa), Richard Sandall (Senior Advisor, DFID Nigeria).

Funding organization FSD Africa is launching a 3-year programme to improve skills of Africa’s capital market regulators. The Securities and Exchange Commission SEC Nigeria is the first capital-market regulator after signing an agreement worth £450,000 ($585,200) on 28 September.
The programme will also be rolled out in Ghana, Kenya, Mozambique, Rwanda, Tanzania, Uganda, Zambia and Zimbabwe. FSD Africa is a non-profit funded by UK Aid, which is Department for International Development (DFID) and the British Government.
FSD Africa will provide funding over 3 years to build the capacity of regulators, providing technical assistance, encouraging closer collaboration among regulators and conducting research to support the development of new policies and regulations.
Evans Osano, Director Financial Markets at FSD Africa, says (emailed press release): “This partnership will unlock capital by improving investor and issuer confidence, reducing transaction costs and reducing the complexity and approval times for capital issuance. The programme will also support greater collaboration and knowledge sharing with other African capital market regulators.”
FSDA Director Mark Napier says: “Well-functioning capital markets can play a vital role in support of inclusive economic growth by channelling long term finance into infrastructure and other large-scale projects that create jobs and improve access to markets. Strengthening regulatory capacity in capital markets is an essential pre-condition for building investor confidence.”
Mary Uduk, Acting Director General of SEC Nigeria, says the collaboration will facilitate access to capital for private and public issuers and enhance the competitiveness of the Nigerian capital market as a global investment destination. SEC Nigeria is contributing £22,000.
According to a report in the local news Independent the project will promote regulation of financial technology; fund an audit of institutional capacity and implementing the recommendations; and back collaboration and knowledge sharing between regulators.
Laure Beaufils, Deputy High Commissioner, British Deputy High Commission Lagos, commenting on the programme, added that capital markets have an essential role to play to help unlock capital that can be invested in the real economy and that can contribute to job creation and inclusive growth.

Mobile phone app for trading on Zimbabwe securities exchanges

Investors can check their portfolios and send orders to their stockbrokers on their smartphones in Zimbabwe with an app called C-Trade from today (4 July). C-Trade is an online and mobile trading platform for shares on the Zimbabwe Stock Exchange (ZSE) and the second licensed exchange, the Financial Securities Exchange (FINSEC).

According to an article in the Herald newspaper, C-Trade is for financial inclusion in Africa: “The platform will enable investors, both local and foreign to purchase securities from anywhere in the world anytime, using mobile devices. The initiative is being led by capital markets regulator, Securities Exchange Commission of Zimbabwe (SECZ), and seeks to promote financial inclusion by encouraging participation by the smallest retail investor.”

The Herald newspaper reported SECZ chief executive Tafadzwa Chinamo saying that President Emmerson Mnangagwa had agreed to launch the programme. “After that what you will be seeing more of is our campaign as SECZ to educate the public on what investing on the capital markets is about.”

“We have taken the issue of deepening and broadening the capital markets very seriously, to the extent that we added a new committee to our board of investor education.” In July 2017 Chinamo said SECZ had committed $300,000 to a campaign to get more people engaged in the capital market.

Escrow Systems headquartered in Zimbabwe has created the C-Trade programme to trade bonds and shares, using the same technology as Kenya’s world-first M-Akiba mobile Government bond sold on mobile phones to small investors in Kenya, from minimum denomination of $30. Here is our post on M-Akiba from October 2015 and a Reuters story on the eventual M-Akiba launch in March 2017.

According to a report in Newsday, Escrow Group chief executive officer Collen Tapfumaneyi said: “C-Trade is a mobile trading platform and is combination of a number of systems that enable investors to access the securities market or capital markets popularly known as the stock to enable people buy shares and all that. It comes in three forms, USSD application which can be utilised by mobile network subscribers. We have Econet and Telecel, but we are about to finalise with NetOne as well so within a few days all three will be on board,” It is not restricted to local mobile operators to enable foreign investors, including those in Diaspora.

Trading is still through a stockbroker, as before, says Chinamo of SECZ: ”This application is essentially sold to a stock broker to give the brokers clients access to the market. Rules of the exchange are still valid. For your trade to go through, it needs the authenticity of your broker so the broker is still liable for your trade, settlement, clearing and feed.”

The platform allows easier access for smart-phone users to manage their portfolios when they are away from a desktop/laptop.

Escrow is offering it on revenue-sharing basis to users with “minimal or no costs to market participants” according to an older news story in Financial Gazette.

According to an article today in Newsday, there are 13 licensed stock-broking firms in Zimbabwe, of which 3 signed up to use C-Trade. Escrow’s Tapfumaneyi said they were still talking about sharing fees: “C-Trade acts as an agent for the broker. The broker will still earn his full revenue according to the fee charged. However, the brokers pay a fee to use the platform which is negotiable.

“What we are basically doing is get business for them and they keep their traditional business. But, if we get people registering online and placing orders online, all that traffic is being channelled through to the brokers which then gets channelled to the exchange. So we are basically an extension of the brokers,” he said.

“These orders, when they come to the brokers, is also the issue of evaluation and trading is not just picking an order from a client and sending it through. You have got to analyse the market and advise the client what the pricing should be and all that. So we still have that interface.”

The target for C_Trade is about 20,000 individual participants by year-end and an ultimate goal of 2 million people.

Barclays Bank call for standards for derivative trades on blockchain

Blockchain can revolutionize trading in derivatives, fix inefficiencies and cut cost of trading, but only if there is much more standardization across the industry. Barclays Bank is one of the key champions and yesterday (26 April) spoke out at the annual meeting of the International Swaps and Derivatives Association (ISDA) in Miami, USA.

According to this preview article on Coindesk: “Before banks and traders can rely on a distributed ledger technology as the vaunted ‘single record of truth,’ there first needs to be better standardization. Yet as it stands, they use a hodgepodge of data structures and formats to track the life cycle of trades, reflecting in part the variety of regulatory requirements imposed after the 2008 financial crisis.”

ISDA had proposed a common domain model (CDM) in May 2017, with the support of blockchain firms including R3, a consortium of the world’s biggest banks including JPMorgan and Citigroup among 200 enterprises, dedicated to researching and delivering new financial technology, and Axoni, a capital markets technology firm specializing in distributed ledger infrastructure.

ISDA is to release the first iteration of the blockchain-compatible version of CDM in early summer 2018 and Barclays has an internal CDM adoption working group. Coindesk quotes Sunil Challa from the business architect team at Barclays: “There is a shiny new technology promising to be a panacea for fixing many post-trade processing issues. So, now is an opportune moment to re-engineer our processes.”

“Simply replicating the existing fragmented state would be a colossal missed opportunity.”

How blockchain works for derivatives
Derivatives are traded using a contract between two or more parties, as highlighted in April 2016 on CNBC. Derivatives “contracts are made up of three main parts with ISDA creating the standards for derivative trading across the financial world. But the process is arduous with current paper contracts in the form of computer documents still being issued.”

Barclays showcased a prototype of using smart contracts through the lifecycle of a derivatives trade, including negotiating an ISDA master agreement, entering individual trades and performing the trades on a distributed ledger. The bank replaced traditional derivatives contracts with an electronic smart contract, whose fields could be pre-populated with certain values agreed by ISDA. This way, all the banks have the same document which will not vary slightly from bank to bank, something that can cause delays and unnecessary human intervention. The UK bank used a blockchain called Corda, developed by R3.

The banks involved could then populate the fields with the terms of the derivatives agreement such as the price with any changes being recorded. Those can then be seen online. Previously, a bank would have to search through its inbox or pile of documents to find an earlier version of the draft.

Even if banks use CDM on transactions between them, often they use their own ways to communicate data internally. CDM and distributed ledger could standardize data within institutions. It also provides a way for derivatives trading to be “blockchain agnostic” as many different providers are providing blockchain platforms and it is seen as risky to be on one.

Coindesk quotes Lee Braine of Barclays CTO Office, describing a future scenario in which banks are trading with each other on different distributed ledgers. If there are some counterparties on one network and other counterparties on other networks, would each need to host a node on every network or could they be genuinely interoperable? “A simplistic solution would be to revert to the traditional model of silos with messaging between them, but that risks replicating the fragmentation of the past. If you instead transition to the CDM, then at least there is opportunity to standardize on data structures, lifecycle events etc.”

Better for costs, better for regulators
Barclays working group estimated around 25% gains in efficiency form using CDM only in clearing, and about $2.5 billion in annual running costs.

Goldman Sachs, another keen supporter of CDM and shared ledgers as a way to deal with some of the extra pressures from implementing the European Union MiFID2 Markets in Financial Instruments Directive, which started being rolled out across financial institutions in the EU in January 2018.

One appeal for blockchain is that regulators can streamline reporting, by pulling data from a node on the blockchain. The Financial Conduct Authority of UK participated in a proof-of-concept for regulatory reporting of data mortgage transactions, using R3’s Corda platform.

According to Coindesk, Clive Ansell, head of market infrastructure and technology at ISDA, says: “There is a fantastic opportunity … but the level of success will depend on the industry operating to a common data and processing model.”

This article also appears at my new company website, www.innovation-wire.com.

African capital markets and innovation key to achieving African agenda

“The time is now to stop aspiring to building and focus on ensuring the African financial markets are actually built.”

    Paul Muthaura CMA Kenya (photo The East African)

  • African capital markets are key to African development visions but governments must prioritize market finance structures over donor and government-to-government finance.
  • How to mobilize over $1trn of assets in pension, insurance and collective investment vehicles across sub-Saharan Africa
  • Innovation at the core of Kenya’s 10-year capital markets masterplan, including M-Akiba bonds, regulatory sandbox, mobile platforms for securities trading
  • Governments to provide conducive environments
  • Capital markets connectivity to allow free flow of capital across borders to fund critical infrastructure for Continental Free Trade Area

Here are extracts from the speech by Paul Muthaura, CEO of the Capital Markets Authority of Kenya, this morning at the 7th annual “Building Africa Financial Markets Seminar” in Nairobi.

Also present was HE William Samoei Ruto (Deputy President of Kenya), Oscar Onyema (President of African Securities Exchanges Association (ASEA) and Chief Executive Officer of the Nigerian Stock Exchange), Sam Kimani (Chairman of the Nairobi Securities Exchange) and Geoffrey Odundo (CEO of NSE).

“This conference also comes closely on the heels of the admission of the NSE to the World Federation of Exchanges which acknowledges the trajectory of our markets’ growth in recent years and reinvigorates us for the journey ahead as we seek to position the NSE as a globally competitive platform for wealth creation, a global cross roads for investment and risk management and a critical catalyst for economic transformation.

“The central role of deepening capital markets to finance infrastructure, business enterprise and overall economic development is increasingly a key pillar of policy makers’ agendas in Africa. For instance, the African Union (AU) Agenda 2063 prioritizes the development of capital markets on the continent to strengthen domestic resource mobilization and to double market-based financings’ contribution to development financing.

“Similar prioritization is found in several national visions including Nigeria’s FSS2020, Zambia’s Vision 2030, Rwanda’s Vision 2020, Uganda’s Vision 2040 and of course the Kenya Vision 2030. Over US$1 trillion in assets are currently held by pension, insurance and collective investment vehicles across sub-Saharan Africa so the challenge to us in this room remains how are we going to leverage these pools to crowd-in the significantly larger pools of global capital necessary to fund the meteoric rise of this continent.

Innovation

“Institutions or sectors that do not prioritize innovation are ultimately relegated to stunted growth, poor competitiveness and ultimately, redundancy. The very fact that we are all gathered here today affirms that as a continent we are committed to actively deliberating on proactively adapting to emerging innovations. To institutionalize this commitment to constructive innovation at a national level, the Authority was honoured to convene our sector and international partners to put in place the Capital Markets Masterplan (CMMP) – a 10-year strategic policy document that targets to stimulate innovation to broaden product and service offerings, deepen market participation and liquidity, and drive transformative economic development for Kenya and the wider region.

“Any conversation on innovation appears inseparable from a deliberation on the global efforts to continuously update business models in line with technological changes cutting across product/services design, infrastructure, access and supervision. To this last point, regulators are increasingly challenged to rethink their supervisory models to align regulatory requirements with market needs is a fast-changing environment.

“For some time now, Kenya has been sitting in a unique position as a bustling hub for impactful innovation, ranging from MPESA – a fast and convenient mobile money platform to M-Shwari – a mobile-based savings product. Not to be left behind, Kenya’s capital markets have through various initiatives have been angling to put the country on the global innovation map. These initiatives include;

  • The recent launch of M-Akiba – a mobile-phone-based retail government bond primary and secondary market investment platform,
  • The on-going efforts to establish a Regulatory Sandbox for Kenya’s capital markets to provide an ideal platform for testing of ideas/innovations/products/services etc. before they are rolled-out to the wider market; and
  • The development of a wide spectrum of mobile based platforms for securities trading.

“As a regulator cognisant of our dual mandate of regulation as well as development, the Authority has also operationalized principle-based approval powers to allow for the accelerated introduction of new products including exchange-traded Funds, GDR/Ns (global depository receipts) and asset-backed securities.

Right foundations

“It is critical, particularly given the nascent state of markets on most of the continent, that we do not lose sight of the critical importance to build our markets on the right foundations. In a world where we are eternally competing for highly mobile capital, we must prioritize the development and more critically the transparent enforcement of world class legal and regulatory frameworks; in pursuing innovation, we must not forsake robust market infrastructure that provides pre and post trade transparency and engenders confidence in settlement finality; we must ensure that the products and services being developed are actually relevant and responsive to the economic needs of our environment, resonate with the political priorities of our governments and strengthen the savings and investment habits of our citizenry.

“We must challenge our governments to provide conducive macro-economic, political and fiscal environments for markets to grow. Difficult as it may be, we must be willing to prioritize market-based funding models over traditional government-to-government and donor funding models. What appears concessionary today will likely be unsustainable tomorrow where the necessary market dynamics have not been built to support private sector growth and SME business as the engines for long-term sustainable economic growth and as a critical source of tax revenue to ensure debt service and sustainability.

“We must challenge our market intermediaries to raise their operational and technical standards to be able to support responsive product design and ethical practices, all parties need to come together to drive both issuer and investor education on the full spectrum of financing options available to them to ensure the supply side is as dynamic as the demand side’s need.

“We must challenge our domestic institutional investors to make the difficult decisions to diversify into appropriate market-based risk products that allow for effective asset-liability matching in place of traditional government debt and, needless to say, proactively work with government to consistently lower government borrowing rates in order to tackle the crowding-out effect all too common with the easy availability of double-digit risk-free assets.

“If we are to deliver robust African capital markets we must deepen the capacity of the complementary professionals, support independent auditor oversight, robust corporate governance and globally benchmarked certification standards.

“Introduction of REITS (real estate investment trusts), operationalizing collateral management and liquidity management tools like REPOs and securities lending and borrowing, Impending green finance, roll-out of Islamic finance, delivery of commodities exchange and warehouse infrastructure, derivatives markets to support hedging, online forex trading (FX CFDs), and leveraging fintech to support access and market growth, are all critical components in deepening and diversifying the capital markets that have received and continue to receive strong support from the government in partnership with market stakeholders.

Pan-African challenge

“With the introduction of the Continental Free Trade Area, it is for the capital markets to address pan-continental connectivity to allow for the free flow of capital across borders to fund the critical infrastructure necessary to support the free movement of goods and services under the free trade area. The time is now to stop aspiring to building and focus ensuring the African financial markets are actually built.

“As the capital markets regulator, we are keen on actively playing our role in positioning Kenya as an investment hub for East and middle Africa. By 2023, we envision Kenya as the choice market for domestic, regional and international issuers and investors looking for a safe and secure investment destination.”

For the full speech, see the CMA Kenya website.

UK regulator accused of dropping standards to woo $2 trillion listing

Investment institutions are protesting moves by the UK capital markets regulator, the Financial Conduct Authority, to alter listing standards to accommodate a potential $2 trillion listing on the London Stock Exchange. Meanwhile rumours are growing that Saudi Aramco may be dropping its plans for a £1.5bn initial public offer on the New York, London or Tokyo Stock Exchange in addition to the Tadawul (Saudi Stock Exchange).

According to this article in the Financial Times, a trend towards “uber compliance” for listed securities means Aramco is thinking of selling shares to sovereign wealth funds, possibly led by China, as an alternative to a public listing which would have been the world’s largest float.

On 15 October, Aramco said the giant listing is still on: ““All listing venues under review for optimal decision, IPO process is on track for 2018”.

Plans for a giant £1.5bn ($2bn) initial public offering of only 5% of Aramco’s capital are a key part of Saudi Arabia’s Vision 2030, which plans to wean the economy off reliance on oil, where it made up 90% of public revenues until 2014. However, in the short term it may signal Saudi intentions to use price-fixing cartel the Organization of Petroleum Exporting Countries (OPEC) to push up oil prices and boost the valuation.

Outgoing LSE CEO Xavier Rolet accompanied British Prime Minister Theresa May for a visit to Aramco in April, while Andrew Bailey, chief executive of the FCA, agreed the regulator had met the potential listing candidate before a consultation on revising the listing standards. Many observers think there is political pressure on FCA and LSE to win the listing from New York and prove that London is still competitive as Brexit uncertainty and economic damage impacts UK.

Consultation on the FCA’s new listing rules closed on Friday 13 October. It would be the world’s largest float.

According to writer Nils Pratley in The Guardian: “Furious fund managers sense a bad case of a regulator planning to lower standards to suit ministers’ short-term desire to persuade Aramco to float in London rather than New York.

“The investors’ objection is straightforward: why on earth would we want to create a ‘premium’ listing category for state-owned companies while not enforcing normal investor protections?

“Under the FCA’s proposal, the likes of Aramco would be allowed to ignore some basic principles. They would not have to get approval from outside shareholders for transactions with the state. They would not have to give independent shareholders a vote on who should serve as independent directors.

“There clearly could be a place for such companies in London, but you would hardly award ‘premium’ status, a label that is meant to indicate the highest governance protections. The regulatory regime would look like a pushover, which may succeed in drumming up some short-term business but could seriously damage London’s status as a good place to invest.”

On 18 October, the world’s biggest wealth fund warned the FCA that the listing changes would be a “step back”, according to an article in City AM. Norges Bank Investmnet Management, part of the Norwegian Central bank which manages assets on behalf of Norway’s $1trn fund, which has $44bn invested in LSE companies, wrote on 13 October to FCA:

“Ultimately, investors expect today’s high standards of shareholder protection to apply to the premium listing category, whether controlled by a sovereign state or private investors. We fear that relaxing these rules would reduce the voice of minority investors and undermine the independence of the board.”

NBIM said the changes would be a “step back” in terms of investor protection, especially for minority shareholders, and would threaten the London Stock Exchange’s standing as a best in class corporate governance framework: “We believe the FCA should consider a more balanced approach that takes into consideration the interests of all stakeholders in the listing environment.” Other protests about relaxing the listing rules have come from a wide range of institutions, including the Institute of Directors and investor group the International Corporate Governance Network which said the plans were “fundamentally flawed” and increased risk. The Investment Association boss Chris Cummings said the change: “could impact on London’s reputation and future as one of the world’s leading financial centres”.

FCA’s Bailey had told Parliament that people would not need to invest in the new listing if they did not like the governance. According to this article , he wrote: “We do not think protections for investors will be weakened. Plainly, absent the new category, sovereign-controlled companies would be unable to choose a premium listing; they would therefore not be bound by any of the premium listing requirements that might otherwise offer additional protection for investors.”

Bailey said some criticism of the proposal left the “incorrect impression that the premium listing is monolithic in form, and therefore, that any issuer included in that category must also be included in the main FTSE UK index”. Financial services advocacy group The CityUK supported the FCA’s “open-minded approach to regulatory change”.

Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, said it will be “bad news” for London if the proposals are put in place: “It looks like the FCA is consulting on amending the existing listing rules to accommodate the peculiarities of one company, which is not a very effective strategy for regulating the market as a whole. If the proposals in this consultation document are implemented, it will be bad news for London and will reverse the progress we have made in recent years to uphold strong governance and protect minority shareholders.”

According to the Financial Times: “A market regulator that makes transparent and fair rules, respecting both property rights and investor choice, will attract business in the long run. If, on the other hand, attracting business becomes a short-term goal, and rules are tailored to land big deals, regulation becomes marketing, and the long-term outlook becomes much less attractive.”

Saudi Aramco says its 2018 listing is on track (photo Reuters/Ali Jarekji)

Nigerian Stock Exchange’s new Nasdaq market surveillance

The Nigerian Stock Exchange has gone live with a new market-surveillance platform powered by SMARTS, a solution supplied by Nasdaq.

Tinuade Awe, General Counsel and Head of Regulation, NSE, said in an NSE press release: “As we enter the growth phase of the development of our market, including the introduction of new asset classes such as derivatives, there will be the imperative of processing significant volumes of market information in real-time to detect anomalies. The SMARTS technology, which we have successfully deployed, allows our team to proactively analyze patterns and trends to make sense of the vast amounts of data for investigative purposes and protection of investors, while strengthening the integrity of our market.”

The technology lets the Nigerian bourse proactively monitor market manipulation (including spoofing and layering), detect and deter manipulative tendencies, gather intelligence, carry out monitoring and analysis of traders, conduct multi-asset and cross-market surveillance, and execute risk-based supervision of flagged participants. The new system went live in July.

According to Nasdaq, the SMARTS Surveillance solutions are used at 47 marketplaces, 17 regulators and 140+ market participants across 65 countries and are used by over 3,500 compliance professionals. They have been used for real-time, cross-market, cross-asset surveillance for over 22 years.

Tony Sio, Head of Exchange & Regulator Surveillance, Market Technology at Nasdaq, said: “SMARTS performs universal surveillance of all asset classes and provides a strong platform for NSE to develop new products such as derivatives. We look forward to a long partnership with the NSE as the Nigerian markets evolve.”

CEO Oscar Onyema shows top managers of Nasdaq the NSE trading floor a few years ago. (Credit: businessdayonline)

South Africa’s securities exchange war goes to court

Court is the next battleground in a contest to transform the securities exchange landscape in South Africa. Newly licensed exchange 4AX, which is not yet operational, has launched a High Court application to set aside both the decisions of the FSB regulator and its Appeals Board to give a licence to new exchange ZAR X, according to Moneyweb .

Last September the Registrar of South Africa’s Financial Services Board (FSB) awarded licences to ZARX (Pty) Ltd (ZAR X) and 4 Africa Exchange (Pty) Ltd (4AX) (see our story here). The JSE and 4AX appealed against ZAR X’s licence, but in February 2017 the FSB Appeals Board dismissed the appeal, saying that ZARX and the FSB had complied fully with the Financial Markets Act 2012 (FMA), and awarding full costs to both ZARX and the FSB (see another Moneyweb article). ZAR X settled its first trade in February 2017, delayed from an initial September launch date. Its first listing was agribusiness Senwes. 4AX is not yet trading.

In February Donna Nemer, JSE Director of Capital Markets, said the JSE will fully respect and abide by the decision: “We are still very committed to the market and the participants in this market, and will cooperate fully in the debate on how we should be evolving going forward,” she said. “We will continue the work we are doing with the regulator and all the market participants, including the new exchanges, to maintain the high quality capital markets for which South Africa is really well known.” The JSE is not joining the new court case which 4AX has launched in the South Gauteng High Court to set aside both the decisions of the FSB Registrar and the FSB Appeals Board.

Also in waiting is exchange A2X, which has a licence application with the FSB. For more background on 4AX see our story.

Why another exchange?
The new bourse ZAR X has 3 listed securities and 9 authorized market participants or brokers, according to its website. It says a number of listings are in the pipeline.
According to Geoff Cook, cofounder and director of ZAR X, writing in Business Day newspaper this month: “Nowhere is radical change more desperately needed in SA than in the capital markets. The model that has dominated for more than 60 years is stagnant, with no broadening of the capital markets. It is also hopelessly skewed against the private investor.”
Volumes had grown of trading over the counter (OTC) in shares in black economic empowerment schemes for big companies such as MTN, Vodacom, Multichoice, Sasol and Imperial. Other OTC schemes were being operated as restricted shareholder platforms such as large agricultural cooperatives Senwes, TWK and KWV, while a few other companies sought liquidity at low cost for a limited spread of shareholders.

Geoff Cook, ZAR X Head Markets and Regulations (credit ZAR X)


ZAR X co-founder and CEO Etienne Nel created a platform called Equity Express for the OTC market. In July 2014 the FSB issued Board Notice #68 which effectively compels the OTC equity trading market to alter methodology and operate through a licensed exchange in terms of the FMA.
ZAR X works with a pre-funded model, so that cash is prepaid (deposited into the system before a trade) and a seller’s shareholding is pre-cleared before concluding a transaction. This means a huge reduction in settlement risk. Securities are held in a segregated depository account at a central securities depository (CSD), as required by the FMA, with a CSD participant facilitating clearing. The trade settles on t+0 or real time.
According to Cook: “Only severe disruption will return the financial markets to any sense of reality and social relevance. That disruption has arrived. Brokers can now execute a R1,000 order profitably through a world-leading T+0 prefunded execution model that does not require settlement risk capital, in which trading and administration applications are provided at minimal cost and where live data is free to all. Safe custody fees are zero and fees are only paid on conclusion of a transaction.
“The equity market is too concentrated and the debt market remains inaccessible and opaque. Despite there being nearly 1,300 collective investment schemes as well as many broker-managed discretionary portfolios, allocations are nearly all aligned to a limited number of old economy securities. Passive investment products such as index trackers simply compound the concentration.”
Cook says that regulation and the funding imbalance towards collective investment schemes means innovative small and medium and medium-sized companies will struggle to raise capital from asset managers. They need direct access to retail investors or bespoke asset managers who can invest smaller amounts. Asset managers are restricted by the size of their portfolios to investing in securities with large market capitalization.
He says the new exchange will mean that listings of companies with market capitalization of around R200m will become more common.
Cook claims that on average less than 0.5% of daily market volume on the JSE is retail-driven with less than 300,000 active retail clients, across all brokers, loaded within the JSE’s broker deal accounting (BDA) system. He says 30% of trading volume comes from brokers who collocated or moved their trading systems physically closer to the JSE trading engine in order to profit by millisecond time advantages. According to its website: “No high frequency trading, derivatives or short selling will be allowed. ZAR X has deliberately structured fees in such a manner that we wish to encourage investing rather than trading and, in so doing, promote savings.”
“Nearly all equity listings om the JSE are now done by way of private placement, which requires a minimum investment of R100,000 per subscriber. Offers to the public are rare as brokers in the conventional system cannot facilitate smaller retail client transactions profitably. With high costs and insufficient order flow brokers focus on providing discretionary managed portfolios, which attract higher fees but have higher financial entry requirements.
“The ‘uninvested’ retail investor is therefore totally excluded from directly participating in the capital market. Their only access is indirectly via a collective investment scheme that, if they did, would further perpetuate the shrinking of our capital market.
“The concentration of order flows to fewer institutional brokers is detrimental to efficient and transparent market pricing. With thin net margins, institutional brokers use their balance sheets to secure revenue flow by engaging in principal trading, high-frequency trading (HFT), and facilitation trading, including dark pools.”

Stokvels – South Africa’s $3.8bn savings pool
Cook claims there is huge potential for retail investors to buy securities: “Stokvels, whose members are active savers and investors, have more than 2m members. The Zion Christian Church has about 4-million contributing members. The potential size of the ’uninvested’ retail market is unknown, but I would suggest it is in excess of R700bn. The market system has ignored it.”
ZAR X also hopes to work with other exchanges “particularly in Africa”.
Stokvels are a big part of life in South Africa, with estimated 810,000 stokvels and 11.5m members, with a stokvel economy worth R49bn ($3.8bn), according to the National Stokvel Association of South Africa. There is even a comedy show called Stokvel on DSTV’s Zambezi Magic.

Stokvel comedy, Zambezi Magic DSTV.

Top speakers for BAFM capacity-building seminar 18-19 May


Leaders and movers of African capital markets are heading to Casablanca for the 6th Building African Financial Markets (BAFM) capacity-building seminar on 18-19 May, organized by Casablanca Stock Exchange with the African Securities Exchanges Association and supported by member exchanges.
This year focuses on “Global best practices to enhance African capital markets”. The agenda features CEOs of top African exchanges and other industry leaders: Oscar Onyema CEO of Nigerian Stock Exchange and President of ASEA, Siobhan Cleary of the World Federation of Exchanges, Karim Hajji CEO of Casablanca Stock Exchange, and speakers from Bloomberg, International Finance Corporation, Ethiopian Commodity Exchange, Tanzania Capital Markets and Securities Authority, Securities and Exchange Commission (Nigeria), Safaricom, Kenya Retirement Benefits Authority, Maroclear, and many others.
Topics include: demutualization and growth, what the new US administration means for African markets, financial inclusion, pensions, liquidity, green finance, global principles on IT infrastructure, and regional integration of exchanges in East, West and Southern Africa.
It will be held at Casablanca Most Events Business Center, Anfa Place, Casablanca, Morocco. Don’t miss a great chance to meet the drivers of Africa’s capital markets development. For more, check the Casablanca Stock Exchange website page.

Uganda Capital Markets Authority joins IOSCO MMoU Appendix A

Capital Markets Authority (CMA) Uganda has taken a big step forward for international links, after changes to Ugandan law. CMA been admitted by global securities standards setter International Organization of Securities Commissions (IOSCO) as a signatory to Appendix A of the IOSCO Multilateral Memorandum of Understanding (MMoU).

The MMoU provides an international benchmark for cross-border cooperation and offers securities regulators tools for combating cross-border fraud and misconduct. Uganda’s regulator will have increased access to knowledge and research through the IOSCO network.

The admission follows the recent amendment of Uganda’s CMA Act. The capital market regulator becomes the 112th member to append its signature to the memorandum, which was instituted in 2002.

Keith Kalyegira, the CEO of CMA, said in a press release: “This is a big step for CMA and Uganda in general and I must thank all the stakeholders that have been very instrumental in enabling us to reach this milestone including the CMA Board; our parent ministry of Finance, Planning and Economic Development; Parliament of Uganda; and the Ministry of Justice and Constitutional Affairs which has tirelessly worked with us to enhance our regulatory framework so that it can fit international standards.

“Our desire going forward is to transform Uganda’s capital market into one of the most efficient, and trusted centres for attracting capital and providing capital in Africa, and this could not easily be achieved without enhancing our regulatory framework to fully suit international standards by ensuring we comply with Appendix A requirements”.

CMA Uganda became a member of the IOSCO Appendix B in 2007 and has since been compliant with most of the international best practices in regulation. However, its participation, engagement and contribution to international dialogues was limited.

The IOSCO MMoU supports mutual cooperation, assistance and consultation among members to ensure compliance with, and enforcement of securities laws and regulations. It is a response to more international activity in securities and derivatives markets.

The formal signing ceremony will be held at the 42nd IOSCO annual conference due in Jamaica in May 2017. CMA first applied to IOSCO to become a signatory to the IOSCO MMoU in September 2007, and was assigned to Appendix B. The capital market regulator proactively started steps over several years towards legislative change to bring Uganda’s legislation into compliance with the MMoU. The reapplication was submitted to the IOSCO General Secretariat in July 2016.

East Africa regulator links

CMA is also a member of the East African Securities Regulatory Authorities (EASRA), which is instrumental in the development of the capital markets industry in East Africa. This includes some joint oversight activities, particularly for financial firms operating in more than one of the East African Community EAC countries. CMA Uganda also does joint inspections with its Kenyan counterpart.

Uganda’s growing capital market

CMA recently concluded its 5-year strategy, and expects to launch a 10-year capital markets development master plan by the end of March. This will map a growth plan for Uganda’s capital market which already includes 2 Ugandan securities exchanges. It will lay a strategy for increasing access to patient capital to finance the growth of commerce and industry in Uganda.

In Uganda, CMA cooperates with other government agencies in the financial sector including Bank of Uganda, the Insurance Regulatory Authority, the Uganda Retirement Benefits Regulatory Authority (URBRA), and the Uganda Registration Services Bureau. The Uganda Registration Services Bureau acts as the Registrar of Companies and implements the Companies Act, 2012 (Companies Act).

It also works with law-enforcement agencies such as the Office of the Attorney General, Director of Public Prosecutions and the Uganda Police. CMA, Bank of Uganda and the Uganda Insurance Commission (now the Insurance Regulatory Authority) signed a Memorandum of Understanding to facilitate cooperation and exchange information in the securities, banking and insurance sectors.

Trading of listed securities is conducted through the Uganda Securities Exchange (USE), established in 1998. There are 16 listed companies on the USE, of which 7 are from privatization of government parastatals. Trading of government bonds on the USE was introduced in 2004.

In July 2015, an automated trading system was introduced on the USE. The clearing and settlement period is 3 days (T+3). A computerized Securities Central Depository System (SCD) was put in place in 2010 following the enactment of the Securities Central Depositories Act (SCD Act) in 2009. The SCD has enabled the USE to automate the clearing and settlement process.

On 4 March 2014, CMA’s Board of Directors considered and approved the application of ALT Xchange East Africa Limited to operate as a stock exchange in Uganda in accordance with the CMA Act.

Kampala view (credit www.enjoyuganda.info)

Regional integration tops 2017 agenda for Africa’s exchanges

Stock exchanges across Africa should be working towards regional integration, says Prime Minister of Rwanda Anastase Murekezi. He was guest speaker at the 20th African Securities Exchanges Association (ASEA) annual conference. The conference’s action agenda would see the regulated stock exchanges driving industrialization and economic transformation.
Panel discussions highlighted the opportunities for African exchanges, provided they adapt to meet the needs and demands of local investors and issuers. They must also find the balance between local context and environment, and alignment with global best practices.
Government support and engagement are keys to the success of exchanges and to providing the capital to grow economies. Governments should continue to create enabling environments that encourage investment, economic growth and development. Regulation should follow market needs and focus on supporting development as favourable regulatory frameworks are essential for sustainable economic growth.
Other challenges the exchanges should continue to work on include: financial inclusion or letting more people access the capital markets for investing and for raising long-term risk capital for their enterprises; financial literacy and investor education; product innovation including using technology and creating innovative platforms for new products; and finding ways to finance the missing middle of small and medium enterprises (SMEs) in Africa.
Exchanges should encourage greater emphasis on environmental, social and governance components to enhance corporate transparency and performance.
Celestin Rwabukumba, CEO of the Rwanda Stock Exchange, said innovation and technology would enable Africa’s capital markets to harness resources to fuel structural transformation: “Currently, less than 5% of the African populace participate in the capital markets; this means that there is a huge opportunity to widen the base of African capital markets by incorporating new models based on technology and other creative innovations that target provision of direct linkages with the ordinary citizens in order to bring them in the loop of resource mobilization and utilization”.
The 20th ASEA conference brought together 300 delegates, including securities exchange CEOs, regulators, ministers, investors and others. It was held in Kigali on 28-29 November 2016. The theme was “Road to 2030: Making the African capital markets relevant to the real economy”.
Speakers included Claver Gatete, Rwandan Minister of Finance, and Prime Minister Murekezi delivered a message from the President of Rwanda, His Excellency Paul Kagame, in which he commended ASEA for its role in deepening the capital markets as a way of addressing the challenges that hampered Africa
Other speakers included Prof. Kingsley Moghalu, (former Deputy Governor of the Central Bank of Nigeria), Tonye Cole (founder of Sahara Group), Staci Warden (Executive Director, Milken Institute), Sandy Frucher (Vice Chairman of Nasdaq), Paul Muthaura (CEO Capital Markets Authority Kenya), David Grayson (Co-founder and CEO of Auerbach Grayson & Company), as well as CEOs from ASEA member exchanges.