JSE Limited abridged Annual report 2006

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2 JSE Limited abridged Annual report

3 SCOPE OF THE REPORT The annual report for presents the first set of operating and financial accounts as a listed company, for the period 1 January to 31 December. The financial statements have been prepared in terms of International Financial Reporting Standards. In addition, they have been prepared in line with the Companies Act, No. 61 of 1973 and the JSE Listings Requirements. The guidelines set out in the King Code on Corporate Governance were also considered. This annual report was submitted to the Financial Services Board. This is an abridged version of the annual report. The full length annual report is included with this booklet. It is also available on the JSE s website at JSE Limited (Registration number /022939/06) Incorporated in the Republic of South Africa SCOPE OF BUSINESS The JSE is licensed as an exchange under the Securities Services Act, No. 36 of It is a full service, modern securities exchange providing fully electronic trading, clearing and settlement in equities, derivatives (equities and agricultural), interest rate products and other associated instruments with extensive surveillance capabilities. The JSE is also a major provider of financial information products. The JSE s main lines of business are: listings, trading, clearing and settlement services, technology and related services and information product sales. One Exchange Square, 2 Gwen Lane, Sandown, South Africa Private Bag X991174, Sandton, 2146, South Africa Telephone Facsimile Contents: 1: 2: 3: 4: 5: 6: 8: 9: 10: 11: 12: 16: 18: 19: Chairman s letter What we do Sources of revenue The numbers: highlights What happened in CEO statement and business review: highlights Shareholders Corporate Governance: highlights Sustainability Report: highlights Focus for 2007 Financials Truncated notes Dividend statement & Audit opinion Directors remuneration A full list of authorised users of the JSE is available on the website

4 CHAIRMAN S LETTER It is with great pleasure that we present the first set of results for the JSE as a listed entity. was probably the most exciting and rewarding year in the JSE s history, with the listing of the JSE on the exchange in June. The JSE/FTSE All Share Index again ended the year on a record high, for the third year in a row. Volumes through the Exchange were likewise at record levels, reflecting the general mood of optimism that pervades the South African economy. Economic successes which we now enjoy were a decade in the making. The government s prudent fiscal and macro-economic management has injected a level of stability and confidence not seen in this country for many years resulting in, amongst other things, substantial foreign investment in the domestic economy. Listing the JSE has unlocked enormous value for shareholders and the consequent implementation of our truly Broad-Based Black Economic Empowerment initiative, are just two of the noteworthy events which warrant a special mention. These initiatives, and others, will be dealt with in more detail in the CEO s review. None of the successes of would have been possible without a robust economy, an invigorated investment climate, and the dedicated efforts of our executive team, led by Russell Loubser. My sincerest appreciation goes to Russell, his team and all other JSE staff members, for guiding the JSE through the momentous changes of the last year. I salute them. I would also like to express my extreme gratitude to the directors for their guidance, commitment and encouragement over the last year. We enter the new financial year with great confidence and optimism, and I thank all JSE stakeholders staff, brokers, investors, regulators, customers, suppliers and the general public for contributing to what was a memorable year for the Exchange. With the JSE no longer being exclusively owned by brokers, it is imperative that we achieve an appropriate balance between the need of brokers for a competitive and efficient exchange with the requirements of investors for returns which we will continue to achieve through close cooperation with our stakeholders. Humphrey Borkum Chairman jse page 1

5 WHAT WE DO Liquidity Number of listed companies and securities Number Companies Securities The Jse is a full service, modern securities exchange It operates a regulated, central order-book for primary and secondary markets It provides fully electronic trading, clearing and settlement in equities, derivatives (equities and agricultural), interest rate products and other associated instruments It has extensive surveillance capabilities The JSE, which has a strategic alliance with the London Stock Exchange (LSE), uses the LSE s equities trading system, operated from London Since introducing world-class trading, clearing and settlement facilities in 2002, the JSE has a record of zero failed trades It is the 16th largest stock exchange worldwide in terms of market capitalisation Its liquidity has risen from 5% of total market capitalisation in 1996, to 40% by 31 December (the financial year-end) It is the second largest single stock futures market in the world The JSE demutualised in and listed on the Main Board in June It has 221 employees, 54% of whom are black and 60% female page 2

6 SOURCES OF REVENUE Revenue contribution across main business lines % 100 % Review of cost components Other Agricultural derivatives Info sales Listing fees Equity derivatives Equities RM C&S BDA Services Equities trading 0 05 Black shareholders retention scheme JEF shares Strate ad valorem fees Long-term incentive scheme Other Operating lease Personnel expenses IT expenses Equities Trading, Risk Management, Clearing & Settlement Average daily trades climbed 58% on s performance, to approximately a day Average daily value traded rose 68% to R8.4 billion Issuer services 37 new listings (up from 19 in ) 18 on the Main Board 19 on AltX Total listed companies up to 401 (compared with 388 in ) 364 Main Board 37 AltX 30 Foreign 371 Local Capital raising up 5% Information sales 28% increase in number of equity live data terminals (on December ) 16% increase in number of indices live data terminals (on December ) 59% of equity live data terminals and 50% of indices live data terminals are international Equity derivatives Strong growth recorded Average monthly number of equity derivative contracts traded rose 108% Average number of Single Stock Futures contracts traded climbed 185% Index futures contracts traded rose 45% Can-do Options launched with over 20 listed products by end- Agricultural derivatives Average monthly contracts traded up 10% Futures contracts going through to physical delivery remain under 2% Increased trade in wheat contracts, which now constitute 20% of trade on this market Technology Strong BDA revenue growth tied to equity market performance New Technology and Business Agreement concluded with London Stock Exchange jse page 3

7 THE NUMBERS: HIGHLIGHTS GROUP Income Expenditure Income over expenditure Staff numbers Cost to income ratio %* 93,26 97,45 90,77 87,72 89,99 *Cost to income ratio including financing revenue and cash Index value Annual index values for the All Share Index revenue from operations up 57% to R640 million (including R57 million revenue offset by equal cost item) other income up 158% to R40 million after tax profits up 32% to R141 million NAV up 20% to cents headline earnings per share up 31% to 168 cents ordinary dividend number 2 of 15.6 cents per share page 4

8 WHAT HAPPENED IN JANUARY Noteworthy Events Consulted with JSE shareholders regarding the proposed broad-based black economic empowerment (Broad-Based BEE) transaction, the possible listing of the JSE, the JSE s proposed dividend policy and capital structure and the introduction of a staff retention scheme MAY JUNE JULY SEPTEMBER NOVEMBER DECEMBER General meeting of shareholders of JSE to consider JSE listing and other related matters Annual General Meeting of shareholders Approval of Broad-Based BEE initiative by shareholders Listing of JSE on the Main Board. Trading commenced at R26 per share Distribution of maiden dividend of 13,6 cents Launch of the first Can-do Option contract on the equity derivatives market Listing of first structured transaction on Yield-X Equity members able to participate in Yield-X without creating a separate legal entity JSE signs Technology and Business Agreement with London Stock Exchange Payment of special dividend of 68,2 cents per share Largest futures close-out in the history of the JSE The JSE Ltd share price closed the year at R52,50 per share, an increase of 102% over its initial trading price Cents Share price performance since listing BB-BEE Scheme announcement Demutualisation JSE lists 0 04/07 04/08 04/09 04/10 04/11 04/12 04/01 04/02 04/03 04/04 04/05 04/06 04/07 04/08 04/09 04/10 04/11 04/12 jse page 5

9 CEO STATEMENT AND BUSINESS REVIEW HIGHLIGHTS The JSE Ltd recorded a strong performance, driven by strong global markets and controlled costs The jse/ftse all share index achieved a new high for the third year running Revenue increased by 57% (: R640 million; : R408 million) The JSE Ltd successfully concluded its Broad-Based Black Economic Empowerment (Broad-based BEE) transaction which will, when implemented, fully raise black shareholding in the exchange to about 12%. By end- black shareholders owned about 9% of the equity The Long-Term Incentive Scheme for staff was implemented in a bid to retain key personnel Average daily equity trades INCREASED BY 58% and average monthly trade of equity derivative contracts up BY 108% Second grade white maize contract exceeded expectations ito contracts traded Information sales rose due to a 28% increase in the number of equity live data terminals and a 16% rise in indices terminals in SA and internationally page 6

10 HIGHLIGHTS A change to the service level agreement with Strate boosted revenue and cost lines by R57 million, leading to a nil effect on the bottom line A new technology and business agreement was concluded with the London Stock Exchange Other income was boosted by a R26 million nonrecurring performance bonus received on an insurance product by the Guarantee Fund Trust Net financing income has improved considerably on the back of increased values invested and the increase in the interest rates operating costs contained to 11% growth over Costs boosted by unusual items: R32 million of costs related to the JSE s Long-Term Incentive Scheme to retain key staff and R49,8 million to THE major portion of costs of the JSE s Broad-based Black Economic Empowerment initiative Earnings increased by 32% (: R141 million; : R107 million) jse page 7

11 SHAREHOLDERS End July End December 2% 9% 4% 4% 62% Member Retail Pension Institution 2% 10% 19% 47% 19% Unclaimed 3% Foreign 19% Ownership at end- Shares held % Axiam Holdings Ltd ,6 Magnolia Ridge Properties 354 (Pty) Ltd ,2 SSB & Trust Co ,0 Capital Research & Management Co ,9 Horizon Asset Management Inc ,3 Coronation Fund Managers (Pty) Ltd ,1 JSE Empowerment Fund Trust ,5 Van Eck Associates Corporation ,2 Taquanta Asset Managers ,2 Fidelity Management & Research (US) ,1 Ownership data based on most recent publicly available data according to Thomson Financial page 8

12 CORPORATE GOVERNANCE HIGHLIGHTS When the JSE listed on 5 June, its board intensified its commitment to the values of good corporate governance The JSE has a unitary board The JSE has FIVE executive and eight independent non-executive board members, including an elected non-executive chairman The JSE has made and continues to make every effort to conform to the King Code in all material respects A dealing policy is in place providing rules regarding JSE employees and directors dealing in JSE shares In the interests of transparency, a representative from the JSE s regulator (the Financial Services Board) attends board meetings as an observer The JSE s risk management committee is comfortable that the company s overall level of risk management is good and continues to improve The JSE s internal audit process gives the company independent assurance on all key risk areas and related internal controls jse page 9

13 SUSTAINABILITY REPORT HIGHLIGHTS The JSE was the first exchange to launch an index measuring the triple bottom line performance of participating companies, called the Socially Responsible Investment (SRI) Index the JSE, which uses the criteria of the JSE s SRI Index as a means to focus its sustainability practices, successfully met the criteria for The /6 review saw the highest success rate so far of companies applying to join the SRI Index with 58 out of 62 applicants making it onto the index The JSE actively invests into the community through its involvement in initiatives such as Nurturing Orphans of Aids for Humanity and the JSE/Liberty life Investment challenge The JSE actively engages stakeholders such as government & ministerial authorities, regulators, customers, the local community, staff and investors Projects the JSE is working on include developing a formal environmental management system, standardising recycling across the company and setting clear objectives related to employee occupational health and safety page 10

14 FOCUS FOR 2007 attracting inbound foreign listings including African listings; shortening the time between trade and settlement to three days; working on tightening relations with the Bond Exchange of South Africa through the creation of a product with a single contract with one pool of liquidity and a central risk mitigation & clearing process; and introducing innovative products to Yield-X (including currency futures), the equity derivatives market (including single stock options and, possibly, the SAVI index) and the agricultural derivatives market (including a soft commodities index) Note: Stakeholders are reminded that the JSE s earnings are impacted, amongst other things, by the volumes of transactions executed on the JSE. The JSE does not control these volumes and has a largely fixed cost base. At the same time, the JSE will start to depreciate the expenses of its technology integration project, Project Orion and will need to expense the costs of both aspects of the Broad-Based BEE initiative as well as the Employee Long Term Incentive Scheme during All these expenses will impact the profit the JSE is able to show for JSE BUSINESS MODEL DIVERSIFICATION AND GROWTH OF REVENUE INCREASED NUMBER OF LISTINGS CONTROLLING OF COSTS ACCESSIBILITY TRANSPARENT AND SECURE TRADING COMPETITIVE PRICES RESPONSIBLE AND SUSTAINED BUSINESS PRACTICES UNDERPINNED BY GOOD GOVERNANCE jse page 11

15 INCOME STATEMENTS for the year ended 31 December Group Exchange Investor Protection Funds* Revenue Other income Personnel expenses ( ) ( ) ( ) ( ) Other expenses ( ) ( ) ( ) ( ) (10 412) (11 253) Profit/(loss) before net financing income (1 347) Interest received Interest paid ( ) ( ) (5 875) (3 544) Net financing income Share of profit of equity accounted investees Profit before tax Income tax (70 254) (70 200) Profit for the year Basic earnings per share (cents) 168,0 128,3 94,1 92,0 41,2 7,6 Diluted earnings per share (cents) 167,5 127,9 93,8 91,7 41,1 7,6 * The JSE maintains the JSE Guarantee Fund Trust and the JSE Derivatives Fidelity Fund Trust for investor protection purposes as required under the Securities Services Act, No. 36 of In view of the control that the JSE exercises over these Trusts, the JSE is required to consolidate them into the results of the Group in terms of International Financial Reporting Standards ( IFRS ). However, as these Trusts are legally separate from the JSE, neither the JSE nor its shareholders have any right to the net assets of such Trusts. For enhanced understanding, the investor protection funds have been shown separately, although, for compliance with IFRS, these results form part of the Group financial statements. page 12

16 BALANCE SHEETS as at 31 December Group Exchange Investor Protection Funds Assets Non-current assets Property and equipment Investments in equity accounted investees Investments in subsidiaries Other investments Deferred taxation Current assets Trade and other receivables Government grants Due from subsidiaries Due from joint venture Derivative financial instruments Margin deposits Collateral deposits Cash and cash equivalents Total assets Equity and liabilities Share capital and reserves Non-current liabilities Provisions Deferred taxation Operating lease liability Due to SAFEX members Current liabilities Trade and other payables Income tax payable Operating lease liability Due to subsidiaries Due to holding company Derivative financial instruments Margin deposits Collateral deposits Total equity and liabilities jse page 13

17 STATEMENT OF CHANGES IN EQUITY for the year ended 31 December Rights Share Capital Share Premium Nondistributable Reserve BBBEE Reserve Retained Earnings Total Exchange and Subsiddiaries Investor Protection Funds Total Group Group Balance at 1 January Rights converted to shares on demutualisation ( ) Shares acquired for employees Income and expenses recognised directly in equity Fair value gains on available-forsale instruments Profit for the year Balance at 31 December BBBEE reserve New issue of shares The JSE Empowerment Fund Dividends paid (69 230) (69 230) (69 230) Income and expenses recognised directly in equity Fair value gains on available-forsale instruments Profit for the year Balance at 31 December Exchange Balance at 1 January Rights converted to shares on demutualisation ( ) Shares acquired for employees Profit for the year Balance at 31 December BBBEE reserve New issue of shares The JSE Empowerment Fund Dividends paid (69 230) (69 230) Profit for the year Balance at 31 December page 14

18 CASH FLOW STATEMENTS for the year ended 31 December Group Exchange Investor Protection Funds Cash generated/(utilised) by operations (5 603) Interest received Interest paid ( ) ( ) (5 573) (3 544) Dividends received Taxation paid (64 016) (63 975) Net cash inflow from operating activities Cash flows from investing activities Proceeds on redemption of preference shares Investment to maintain operations (623) (829) (623) (829) Replacement of property and equipment (623) (857) (623) (857) Proceeds on disposal of property and equipment Investment to expand operations (79 087) (70 020) (21 307) (64 390) (57 780) (5 630) Proceeds on maturity of other investments Additions to other investments ( ) (63 528) ( ) (63 528) Purchase of shares in Strate Ltd (12 413) (12 413) Proceeds on sale of Itrix Holdings (Pty) Ltd Leasehold improvements (741) (2 841) (741) (2 841) Additions to property and equipment (9 653) (61 549) (9 653) (61 549) Net cash (outflow)/inflow from investing activities (14 710) (70 849) (65 219) (57 780) (5 630) Cash flows from financing activities Proceeds from issue of share capital Dividends paid (69 230) (69 230) Net cash outflow from financing activities (69 099) (69 099) Net increase/(decrease) in cash and cash equivalents (39 247) (877) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year jse page 15

19 NOTES TO FINANCIAL STATEMENTS This is an abridged version of the notes to the financial statements. The complete notes are contained in the full-length annual report. 1. Headline earnings per share The calculation of headline earnings per share at 31 December of (: 122.0) cents per share was based on the headline earnings of R132.9 million (: R101.8 million) and a weighted average number of ordinary shares of (: ) during the period. Group Exchange Reconciliation of headline earnings: Profit for the year Adjustments are made to the following: Loss on sale of property and equipment Impairment loss on property and equipment Profit on sale of joint venture (1 283) 0 (1 283) 0 Profit on realisation of available-forsale instruments (10 707) (5 213) 0 0 Headline earnings Headline earnings per share (cents) Number of shares in issue The figures include the subdivision of shares on 5 June: 10 for 1 Shares in issue at 31 December fully paid Weighted average number of ordinary shares at 31 December Proposed Paid Dividends paid and proposed The proposed dividend for 2007 has not been provided for and Ordinary dividend No 1 of 13.6 cents per share Special dividend of 68.2 cents per share Ordinary dividend No 2 of 15.6 cents per share Secondary Tax on Companies page 16

20 4. Contingent liabilities and commitments 4.1 Contingent liabilities: i. The JSE has a contingent liability as a result of the JSE guaranteeing the settlement of central order book equity market trades in the event that one member fails to settle. This risk is mitigated through various mechanisms, being the member firms deposits and bank guarantees (R3,7 million), the JSE Guarantee Fund Trust and the JSE s own trade monitoring system. The JSE retains reserves to meet these contingent liabilities. ii. The JSE is currently engaged in arbitration with a former supplier for alleged breach of contract by the JSE. The case was split between merits and quantum. The JSE lost on merits and the quantum has not yet been established. The JSE expects the quantum to fall in the range nil to R25.0 million. iii. The JSE is one of 25 defendants who have been served with a summons relating to losses realised by a pension fund in the amount of approximately R1.4 billion. This is in the early stages of the legal process and an exception has been filed by the JSE. Senior Counsel opinion on this matter is that the claim is unfounded. The JSE is defending the claim. 4.2 Commitments i. The JSE leases a building and accounts for the lease as an operating lease. The lease commenced on 1 September 2000 for a period of 15 years. On termination of the lease, should the landlord wish to sell the building, the JSE has an option to buy the building at a price yet to be determined. The operating lease payments escalate at 11% per annum. ii. The JSE is party to agreements for the development of software totalling approximately R215.2 million (: R206.2 million) over the next two years, of which R146.8 million (: R144.9 million) has been settled. The IT transformation project is currently running behind schedule and the JSE is in discussions with the service provider regarding payment of further amounts towards the fixed fee for resolution of scope items. If the JSE unduly delays the implementation of the project, the JSE may have to pay further amounts but a delay caused by the JSE is considered unlikely. jse page 17

21 DIVIDEND STATEMENT & AUDIT OPINION for the year ended 31 December Dividend The directors of the JSE have resolved to declare ordinary dividend number 2 of 15.6 cents per share. The salient dates for the transaction are as follows: Last date to trade JSE shares cum dividend Friday, 4 May 2007 JSE shares trade ex dividend Monday, 7 May 2007 Record date for purposes of determining the registered holders of JSE shares to participate in the dividend at close of business on Friday, 11 May 2007 Date of payment of dividend Monday, 14 May 2007 Share certificates may not be dematerialised or rematerialised between Monday, 7 May 2007 and Friday, 11 May 2007, both days inclusive. Basis of preparation The consolidated financial statements are prepared in accordance with, and comply with IFRS. The Group includes the JSE and the assets, liabilities and results of the operations of the SAFEX Clearing Company (Pty) Ltd, the JSE Derivatives Fidelity Fund Trust, the JSE Guarantee Fund Trust and JSE Trustees (Pty) Ltd. Changes in accounting policies Accounting policies of the Group are consistent with those adopted in the prior year. Audit opinion These abridged financial results have been extracted from the audited financial statements on which KPMG Inc has issued an unqualified audit report. This report is available for inspection at the JSE s registered offices. page 18

22 DIRECTORS REMUNERATION Executive directors Direct beneficial ownership in the JSE No. of shares Basic salary Bonus paid Defined contribution pension payments UIF, medical aid and travel allowance R M Loubser Chief Executive Officer N F Newton-King Total Deputy Chief Executive Officer L V Parsons Chief Operating Officer J H Burke Director: Issuer Services G Rothschild Director: Government and International Affairs R M Loubser Chief Executive Officer N F Newton-King Deputy Chief Executive Officer L V Parsons Chief Operating Officer J H Burke Director: Issuer Services G Rothschild Director: Marketing jse page 19

23 DIRECTORS REMUNERATION (continued) Non-executive directors H J Borkum A D Botha Direct beneficial ownership in the JSE No. of shares Other services Retainer fee Meetings Total Board Chairman, Chairman of Nominations Committee Chairman of Human Resources Committee M R Johnston R J Khoza (resigned 9 May ) S Koseff D Lawrence (alternate to S Koseff) W Luhabe A Mazwai N S Nematswerani Chairman of Audit Committee N Payne Chairman of Risk Management Committee G T Serobe P A Barnard (resigned 8 March ) H J Borkum Board Chairman, Chairman of Nominations Committee A D Botha Chairman of Human Resources Committee A Horowitz* (alternate to H J Borkum) M R Johnston R J Khoza S Koseff D Lawrence (alternate to S Koseff) (appointed 24 May ) W Luhabe A Mazwai N S Nematswerani Chairman of Audit Committee N Payne Chairman of Risk Management Committee G T Serobe N Smith (resigned 31 August ) * A Horowitz (alternate to H J Borkum) resigned on 31 August. No meetings were attended by him in. page 20

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