The X factor: South Africa’s financial markets watchdog cracks down on ZAR X

SA’s financial markets regulator has suspended the licence of ZAR X, a move that has temporarily barred share trading by investors and company listings at the alternative stock exchange that was the first to launch in the country in 2017.

The Financial Sector Conduct Authority (FSCA) is concerned that ZAR X doesn’t have enough capital on its balance sheet that would help the young stock exchange to withstand unexpected future events and economic shocks. 

Licensed stock exchanges like ZAR X are required by regulators and the Financial Markets Act to have capital on their balance sheet that is equivalent to at least six months of their operating expenses. According to the FSCA, ZAR X has not been able to meet this capital adequacy requirement, necessitating the suspension of its licence.

Regulators require financial services companies to have adequate capital buffers because they could put a country’s wider financial system at risk if they were to collapse. In SA, past failures of Saambou Bank, African Bank and many others have pushed regulators to be tough on financial services companies – including banks, insurers, stock exchanges and others – to safeguard savings and investments belonging to the public.

ZAR X is a small stock exchange and its collapse won’t have a large impact on the country, but it would be a blow to companies that are listed on its trading platform and investors that buy and sell shares. ZAR X has seven companies listed on its platform – including Senwes (an agribusiness), Orion Real Estate (property company), and Transformational Investment Portfolio (an investor of BEE share schemes) – that have a combined market capitalisation of R5-billion. 

ZAR X was one of four stock exchanges to be launched in 2017. The launch of alternative stock exchanges was meant to challenge the dominance of the JSE, promote competition and financial inclusion. ZAR X’s debut was followed by the take-offs of 4 Africa Exchange, A2X Markets, and Equity Express Securities Exchange. 

Drawn-out talks between FSCA and ZAR X

The suspension of ZAR X’s licence is one of the major cases that Unathi Kamlana has been involved in since he was appointed in April as the FSCA’s commissioner by former finance minister Tito Mboweni. Kamlana, a former National Treasury and SA Reserve Bank official, said the FSCA’s decision to suspend ZAR X’s licence didn’t happen overnight as the regulator had been in talks with the alternative exchange as early as 2018 to fix its capital and liquidity profile.

Amendments were made in 2018 to the Financial Markets Act, which heightened capital adequacy requirements for the broader financial services industry. The industry was given a year (until February 2019) to comply with amendments to the act.

“We then agreed with ZAR X to give it an extension to early 2020 to comply with changes to the act,” said Kamlana in a Business Maverick interview. ZAR X required an extension because it was still concluding talks with potential investors that would inject money into its balance sheet and shore up its liquidity position. 

“These transactions [with potential investors] have not materialised and this is what concerns the FSCA about ZAR X. There were explanations [from ZAR X about potential investors] that sounded credible two years ago. But we have to act now [against ZAR X].”

The FSCA’s decision to suspend the licence of ZAR X has been supported by the SA Reserve Bank and its Prudential Authority, which also regulates the financial services industry.

Kamlana said he’s not worried about the financial position of other alternative exchanges that compete with ZAR X. 

“We are close to all of the exchanges. From a regulatory compliance perspective, we are comfortable with where other exchanges are.”

The suspension of ZAR X’s licence has been effective since Friday, August 20 at 4pm. This means that ZAR X will only be able to finalise trading transactions that were concluded before the suspension. But ZAR X cannot accept new trades or facilitate the listing of companies on its platform. This will hurt ZAR X financially as it generates fees from listings and trading activity. 

The FSCA has given ZAR X three months to improve its liquidity profile. If it doesn’t, the FSCA will move to permanently cancel ZAR X’s licence, portending the permanent closure of the exchange. ZAR X can ask its shareholders for financial help, including the Public Investment Corporation, which bought a 25% shareholding in the stock exchange in 2018. ZAR X was not available to comment about how it plans to raise capital in three months. DM/BM