Where to start when licencing your own stock exchange?

December 1st, 2019
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The stock exchange or exchange is a place where people buy and sell securities. Securities, for example, include –

  • bonds;
  • shares;
  • derivative instruments;
  • notes;
  • debentures; and
  • instruments based on an index.

Exchanges play a role of intermediary or facilitator between buyers and sellers of securities. Hence exchanges must develop their own listing requirements and rules that must be approved by the regulator or the Financial Sector Conduct Authority (FSCA) (which on 1 April 2018 replaced the Financial Services Board) in terms of ss 11 and 71 of the Financial Markets Act 19 of 2012 (the Act). In South Africa there are currently five licensed exchanges –

  • Johannesburg Stock Exchange Limited (JSE) (the oldest and largest exchange on the African continent);
  • A2X (Pty) Ltd (A2X) (granted an exchange licence on 6 April 2017);
  • 4 Africa Exchange (Pty) Ltd (4AX) (granted an exchange licence on 31 August 2016);
  • ZAR X (Pty) Ltd (ZARX) (granted an exchange licence on 31 August 2016); and
  • Equity Express Securities Exchange (Pty) Ltd (EESE) (granted an exchange licence on 11 September 2017).

The Act defines an ‘exchange’ as ‘a person who constitutes, maintains and provides an infrastructure –

(a)      for bringing together buyers and sellers of securities;

(b)      for matching bids and offers for securities of multiple buyers and sellers; and

(c)      whereby a matched bid and offer for securities constitutes a transaction.’

Accordingly, any person who maintains or provides an infrastructure, which meets the three requirements set out in the definition, operates an exchange, notwithstanding whether the infrastructure is provided for transactions in only one security.

Requirements for licensing an exchange

A person who wishes to operate an exchange must apply for an exchange licence in terms of s 7 of the Act. Section 7(1) of the Act provides that all exchanges must be licensed. In terms of s 109 of the Act:

‘A person who –

(a) commits an offence referred to in section 78, 80 or 81, is liable on conviction to a fine not exceeding

R 50 million or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment;

(b) commits an offence referred to in section 93(2), is liable on conviction to a fine not exceeding R 10 million or to imprisonment for a period not exceeding five years, or to both such fine and such imprisonment;

(c) contravenes or fails to comply with the provisions of sections 4, 7(1), 24, 25(1), 27(1), 47(1), 49A(1), 54(1), 56A(1) or a prohibition by the Authority referred to in terms of section 6(7) commits to both such fine and such imprisonment;

(d) contravenes or fails to comply with the provisions of section 73(1) commits an offence and is liable on conviction to a fine not exceeding R 1 million or to imprisonment for a period not exceeding five years or to both the fine and such imprisonment.’

Chapter III, particularly ss 7 to 17 of the Act set out the requirements that an applicant for an exchange licence must meet. The requirements include, among other the following –

  • a person applying for an exchange must be a juristic person (providing a proof that the company is registered);
  • governance arrangements by the applicant must be clear and transparent, promote the safety and efficiency of an exchange, and support the stability of a broader financial system, other relevant interest considerations, and the objectives of relevant stakeholders (for example that the applicant has a board and subcommittees such as a risk committee, audit committee and/or regulatory and supervisory committee);
  • an applicant and its directors and senior management must demonstrate that they meet the proper requirements prescribed by the regulator (also comply with Board Notice 97 of 2013, which sets out fit and proper requirements for market infrastructures);
  • an applicant must have made arrangements for efficient and effective surveillance of all transactions effected through the exchange and for supervision of authorised users (or stock brokers or traders) so as to identify possible market abuse and ensure compliance with the exchange rules and exchange directives and the Act;
  • an applicant must have made arrangements for the efficient and effective monitoring of compliance by issuers of securities (companies offering sale of their securities) listed on the exchange with exchange’s listing requirements; and
  • an applicant must have insurance, a guarantee, compensation fund or other warranty in place to enable it to provide compensation – subject to the exchange rules – to clients.

Furthermore, the applicant must also comply with the requirements as contained in Board Notice 104 of 2013. These requirements include providing the following –

  • the founding documents of the applicant;
  • information to demonstrate that the applicant has adequate financial resources;
  • a demonstration that the applicant has adequate management and human resources;
  • the business plan of the applicant; and
  • the details of a compensation funds (as required by s 8(1)(h) of the Act).

Concurrence of regulators on licensing matters

Since the advent of the Financial Sector Regulation Act 9 of 2017 (the FSR Act) (came into effect on 1 April 2018), the FSCA – as a regulator – may not in terms of s 126 of the FSR Act issue an exchange licence without the Prudential Authority’s concurrence. The Prudential Authority was created in terms of the FSR Act and its objectives include the promotion and enhancement of safety and soundness of financial institutions that provide financial products and securities services and assistance in maintaining financial stability. The Prudential Authority currently operates within the administration of the South African Reserve Bank.

As a consequence, in September 2018 the FSCA and the Prudential Authority concluded a Memorandum of Understanding to address, among other things, concurrence and areas where there are regulatory and supervisory overlap and to enable the resolution of conflicts. The copy of the Memorandum of Understanding between the Prudential Authority and the FSCA is obtainable from www.fsca.co.za.

Annexure 3 of the Memorandum of Understanding between the authorities deals specifically with licensing, para 2 thereof deals particularly with the process where concurrence is required. The process includes the timelines on which the FSCA must share the application with the Prudential Authority on receipt of such an application. For example, within ten business days of receipt of an application the FSCA must share the application with the Prudential Authority.

The Prudential Authority must within 30 business days of receiving the application from the FSCA, do the following –

  • must consider the prudential issues of the application and inform the FSCA in writing of its decision and where necessary with reasons;
  • may request a meeting with the FSCA to discuss the application; or
  • may request additional information relating to the application from the FSCA.

Thus in the event that the Prudential Authority is requesting additional information relating to the exchange application, the FSCA shall within five business days of receiving such a request from the Prudential Authority, request such additional information from the applicant.

The FSCA is required within five business days of receipt of such additional information from the applicant to submit it to the Prudential Authority. The Prudential Authority shall then within seven business days of receipt of such additional information revert to the FSCA. The Prudential Authority is thus required to make a decision within 30 days from the date of receipt of the additional information.

How long does it take to determine a licence for an exchange?

Section 116 of the FSR Act specifically deals with the determination of applications. Section 116(3)(a) stipulates that the responsible authority must determine an application and notify the applicant within three months after the application is made. The FSCA is the responsible authority for licensing of exchanges and must adhere to this period.

However, s 116(b) of the FSR Act provides the FSCA with a possibility to extend the period of three months by giving a notice to the applicant. The extension by the FSCA, however, may not be more than nine months.

Conclusion

The requirements for licensing an exchange as contained in Chapter III of the Act must also be read with the provisions of s 115 of the FSR Act, which also deals with matters to be taken into account in relation to an application.

The FSCA may, after consideration of any objection received, after the publication of an application for an exchange, grant an exchange licence in terms of s 9 of the FMA (subject to any conditions the regulator may deem appropriate).

Michael Kabai LLB (University of Limpopo) LLM (Unisa) LLM (NWU) is a legal practitioner, adviser and senior manager of the Market Infrastructure and SROs at the Financial Sector Conduct Authority in Pretoria. The views expressed in Mr Kabai’s article are his own and do not reflect the views of the Financial Sector Conduct Authority.

This article was first published in De Rebus in 2019 (Dec) DR 18.