South Africa’s first stock exchange was the Kimberley Royal Stock Exchange, which pre-dated the JSE by six years. In the mining boom of the 1880’s stock exchanges were opening in other towns such as Pietermaritzburg, Potchefstroom, Klerksdorp and Barberton, which even sprouted two stock exchanges. A stock exchange was also established in Cape Town and commenced trading on 3 May 1901. In this instance, the stock exchange was established in response to trading disruptions owing to the Anglo Boer War. When the war ended a year later the focus returned to the JSE and the Cape Town exchange was subsequently closed.
Johannesburg also saw the establishment of a stock exchange competing with the JSE, with the formation of the Union Exchange in 1933. The Union Exchange was closed by the South African government in 1958 and the listings of companies trading on that exchange were transferred to the JSE. However, not all the companies transferred met the listings requirements of the JSE. Some companies were allowed to trade only on a “secondary” exchange with less stringent listing requirements.
All these stock exchanges established with the same objectives in mind: to facilitate the attraction of investment capital and to ensure a trading platform for the holding of investments in business ventures. These objectives have not changed much over the ensuing years, although stock exchanges are much better regulated today.
The JSE is merely the oldest surviving stock exchange in South Africa today. It commenced with trading operations on 8 November 1887, one year after the discovery of gold on the Reef. But the other exchanges disappeared with the growth of the JSE, the advent of the Anglo-Boer War or the Great Depression, and so the JSE has been the only regulated stock exchange in South Africa since 1958.
Not only has South Africa had a history of more than one stock exchange, stock exchanges per se have always been regulated in terms of laws that have permitted the establishment of multiple exchanges. In 1947 the Stock Exchanges Control Act was passed to regulate the operation of stock exchanges by stating capital requirements for members and the conduct for brokers. This was also the position under the Stock Exchanges Act 1985, then the Securities Act 2005 and is still the position in terms of the existing regulatory framework in terms of the Financial Markets Act of 2012 (FMA).
On 11 July 2014 the FSB issued a Directive and Guideline which in effect compels the existing “OTC” equity trading market to alter its methodology, operate through a licensed exchange in terms of the FMA, or cease trading outright. Whilst the OTC market is currently dominated by large corporates that operate restricted BBBEE shareholder schemes (MTN, Vodacom, Multichoice, Sasol and Imperial), there are other participants that operate restricted shareholder platforms (large agricultural cooperatives such as TWK, KWV and Senwes) as well as companies that are merely seeking a limited spread of shareholders and liquidity at a low cost.
A unique situation in South Africa has however created the need for ZAR X. Previously, a number of South African companies issued shares and facilitated trading in the over-the-counter (or OTC) market using unregulated OTC platforms. The current OTC market was formalised by ZAR X Co-founder and CEO Etienne Nel when he created the OTC platform Equity Express. 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 licenced exchanges under the FMA. Board Notice 68 of 2014 reaffirmed the view of the Registrar that operators of exchange infrastructure should be licenced 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. ZAR X aims to provide the solution.