31 January 2014 Mr Norman Muller Head, Capital Markets Department The Financial Services Board P O Box 35655 Menlo Park 0102 Doc Ref: Your ref: Direct : +27 11 645 6708 E- : garyh@banking.org.za Dear Sir Comments on: Regulation of Exchanges under the Financial Markets Act 19 of 2012 We thank you for the opportunity to provide comments on the consultation paper ( the paper ) and have endeavoured to capture all the comments from our members to correctly reflect our concerns and understanding of the impact of the FSB s proposed approach to regularise the affairs of unlicensed exchanges. We have noted press reports 1 that already indicate the FSB has provided formal approval to an operator of an unlicensed exchange which will go live in the near future; we are concerned that precedence has been created before receiving comments or further engagement with the proposed regulations. In reviewing the paper, we have specifically focussed on how the proposed approach will be considered in the context of the objects of the Financial Markets Act ( FMA ), namely: Ensure that the South African financial markets are fair, efficient and transparent; Increase confidence in the South African financial markets by o requiring that securities services be provided in a fair, efficient and transparent manner; and o contributing to the maintenance of a stable financial market environment; Promote the protection of regulated persons, clients and investors; Reduce systemic risk; and Promote the international and domestic competitiveness of the South African financial markets and of securities services in the Republic. Whilst BASA is supportive of a pragmatic approach, it is concerned that in pursuit of this proposed approach, the unintended negative consequences of such a precedent will greatly outweigh the benefits gained from regularising unlisted exchanges. 1 http://www.biznews.com/vodacom-yeboyethu-thousands-shareholders-get-ready-trade-february/ Registration Number: 1992/001350/08 An Association incorporated under Section 21 of the Companies Act 1973 Directors: SK Tshabalala (Chairman), C Coovadia (Managing), M Brown, S Koseff, T Sokutu, E Essoka**, S Nxasana, Ms D Oosthuyse*, Ms M Ramos, L Vutula Company Secretary: N Lala-Mohan (*American)(**Cameroonian)
Page 2 We detail our principle concerns below: 1. General Comments 1.1 Definition of shares Ambiguity is created in the use of the terms shares and securities. The term shares is used in the paper; however, share is not defined in the paper or in the FMA. The term share is defined in the Companies Act as means one of the units into which the proprietary interest in a profit company is divided. It is not clear whether the FSB intends to use the term share in a narrow context meaning equity securities, (i.e. ordinary shares) or whether the term shares includes preference shares, depository receipts or debentures and corporate actions on those securities(e.g. dividend in specie, right issue etc.). 1.2 1.2 Listed status of the Company The paper does not clarify whether the public companies facilitating, or wishing to facilitate, a secondary market for their shares are, or must be listed, on a licensed exchange (JSE, foreign or other exchange). The definition of an exchange cannot be divorced from the primary function of an exchange as provided for in S10 (2) of the FMA: A licenced exchange - must provide an infrastructure for the trading of securities listed on that exchange. The concept of an unlisted public company licenced as an exchange to facilitate a secondary market for its shares, which are not listed on that exchange, is incongruent with and not contemplated by the FMA. In addition, listing on an exchange where strenuous listing requirements apply provides investors with a level of protection. 1.3 1.3 Definition of an exchange The paper clarifies its interpretation of the legal definition of what constitutes an exchange, however the interpretation does not clearly articulate whether an exchange merely provides the infrastructure as an agent or may be a buyer or seller of securities in a principal capacity. It is not implicit in the definition of an exchange in the FMA that an exchange must be independent of buyers and sellers. Does this mean that the FSB envisages that an exchange could be a buyer or seller of its own securities or market maker in its own securities? This is relevant as the implication of this interpretation could include securities as defined in the FMA, specifically non-equity securities (e.g. CFDs, debentures and corporate bonds). 2. Specific Comments 2.1 Section 4.5 The statement that the Market Abuse Provisions of the FMA apply to securities listed on licensed and unlicensed exchanges is technically incorrect. The Market Abuse provisions of the FMA only apply to securities listed on a regulated market. The term regulated market is defined as, means any market, domestic or foreign, which is regulated in terms of the laws of the country in which the market conducts business as a market for dealing in securities listed on that market. [BASA emphasis]. Simply, if the shares are not listed on the exchange or facility, the market is not a regulated market and the Market Abuse Provisions of the FMA would not apply.
2.2 Section 6.1, 6.2 & 6.6 Page 3 The paper refers to the self-regulatory model in the context of exchange operations. Our concern is not the self-regulatory model itself, but rather the conflicts that arise between the supervision of authorised users and issuers and the commercial motive of the exchange. These matters are particularly important when seeking to achieve a fair, efficient and transparent market. Consequently, it is our concern that this paper proposes a perpetuation of a self-regulatory model, despite the undertaking by National Treasury to review it along with the provisions in the Financial Regulation Sector Bill ( Twin Peaks ). In the context of this paper, the self-regulatory model is especially concerning in a market when more than one exchange is licenced to operate. As with other financial markets (such as in Australia), at the point where either an exchange allows for the trading of its own security (as in the JSE today) and as would be the case, with this regulation, whereby a company could operate as an exchange of its own securities, or where there is more than one exchange in the market that the Conduct Regulator internalises the surveillance function for these exchanges to avoid the resultant conflict of interest. 2.3 Section 6.7 This section refers to the conditions under which a relaxation or exception to the Financial Markets Act could be considered. It is our view, that such a relaxation is not appropriate and should not be considered. The commercial motive (for profit or not) of the provider, the providers proximity to the security in question (issuer or agent thereof), the financial instrument offered (one or multiple securities), the market type (quote or order driven), the market transparency (anonymous or disclosed) or the investor base (open or closed), should be seen rather as variations of the same construct (an exchange as defined), rather than an entirely new construct under which a different regulatory framework should apply. The requirement to prohibit these types of exchanges from raising capital is problematic: Given that certain corporate actions are capital-raising instruments (e.g. right issue), would the issuer be prohibited from employing those types of corporate actions on its own exchange in respect of its own shares? It is also our view that if deemed an exchange, the obligations in operating that exchange are not relaxed in any manner. If this were not the case, it would expose the market to regulatory arbitrage through simple business model amendments. This outcome would not be in the best interest of the South African financial markets and would be in conflict with objects of the FMA. The FSB is essentially proposing (albeit temporarily) that these new exchanges be allowed to operate in the same manner as licensed exchanges regardless of the fact that they are not able to hold themselves out as such. Additionally, by permitting this relaxation, the regulator would undermine what was put in place by the FMA. 3. Alternative Proposals The FMA specifically provides for powers of the Minister (Section 5(1)) and the Registrar (Sections 6(7) and (8)) to regulate activities in unlisted securities. We propose that the Minister prescribe a separate category of a regulated person which clearly articulates the scope of a facility or infrastructure that
Page 4 provides a secondary market in defined and limited securities, where the activities of the facility or infrastructure meets the definition of an exchange but does not provide the primary function of an exchange as provided for in S10 (2) of the FMA: A licenced exchange - must provide an infrastructure for the trading of securities listed on that exchange. In this manner, the Registrar may prescribe in Board Notices, specific requirements for the criteria authorisation of such regulated person, conditions and requirements in respect of trading, clearing and settlement of the unlisted securities and the ongoing obligations of such regulated person providing securities services, including a code of conduct. The self-regulatory model would not be applicable, as the regulated person would be regulated by the FSB directly. 4. Conclusion BASA is not supportive of the proposed operation being regulated as an exchange where certain concessions are made to the regulatory framework governing that exchange and, equally so, should the operation be deemed an exchange, then we are of the view that the self-regulatory model should be holistically reviewed in the context of a multi-exchange market with these exchanges transacting in their own securities (amongst others). We are also of the view that a notion of temporary exemption undermines the objects of the FMA and thus should be considered in the same light as a permanent application. To this extent, we would welcome the opportunity to meet with you for further discussion. Yours faithfully Gary Haylett General Manager Strategic Projects
Page 5 Appendix 1 Definition of Shares (as per the Companies Act) means one of the units into which the proprietary interest in a profit company is divided. It is not clear whether the paper intends to use the term in a narrow context meaning equity securities, i.e. ordinary shares. This raises the question does the term shares include preference shares, depository receipts or debentures and does it include corporate actions on those instruments (e.g. dividend in specie, right issue etc.)? Definition of Securities (as per the Companies Act) means any shares, debentures or other instruments, irrespective of their form or title, issued or authorized to be issued by a profit company. Definition of Securities (as per the FMA) (a) (b) (c) (d) (e) (i) (ii) (iii) listed and unlisted (i) shares, depository receipts and other equivalent equities in public companies, other than shares in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980); (ii) debentures, and bonds issued by public companies, public state-owned enterprises, the South African Reserve Bank and the Government of the Republic of South Africa; (iii) derivative instruments; (iv) notes; (v) participatory interests in a collective investment scheme as defined in the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), and units or any other form of participation in a foreign collective Investment scheme approved by the Registrar of Collective Investment Schemes in terms of section 65 of that Act; and (vi) instruments based on an index; units or any other form of participation in a collective investment scheme licensed or registered in a country other than the Republic; the securities contemplated in paragraphs (a) (i) to (vi) and (b) that are listed on an external exchange; an instrument similar to one or more of the securities contemplated in paragraphs (a) to (c) prescribed by the registrar to be a security for the purposes of this Act; rights in the securities referred to in paragraphs (a) to (d), but excludes money market securities, except for the purposes of Chapter IV; or if prescribed by the registrar as contemplated in paragraph (d); the share capital of the South African Reserve Bank referred to in section 21 of the South African Reserve Bank Act, 1989 (Act No. 90 of 1989); and any security contemplated in paragraph (a) prescribed by the registrar;