On 3 June 2013, the Financial Markets Act (Act) replaced the Securities Services Act. The explanatory memoranda that accompanied the FMA acknowledged the need to ensure the regulatory framework of the FMA is aligned with, inter alia:
  • The relevant local and international developments and standards;
  • The developments of financial markets in comparable jurisdictions;
  • The proportionality and efficiency of the regulatory framework, its flexibility and the timelines and responsiveness of South Africa’s regulatory framework.
Section 2 of the Act sets out its objects as follows:
  • Ensure fair, efficient and transparent SA financial markets;
  • Increase confidence in SA financial markets through the:
    • provision of securities services in a fair, efficient and transparent manner;
    • Contribute to maintaining a stable financial market environment;
  • Promote the protection of regulated persons, clients and investors;
  • Reduce systemic risk; and
  • Promote international competitiveness of international and domestic financial markets and of securities services in SA.
The Act is enabling legislation that makes provision for competition in the exchange space. It is not prescriptive on the form that an exchange model must take provided that it complies with the requirements of the Act and the objects of the Act are furthered by the exchange application. Competition and the consequential benefits to the financial markets has been in the international spotlight for some time. The proposed A2X business model brings competition to the South African financial markets in an area that has been the sole domain of one dominant player for many years. 2015 saw the JSE record yet another record year with a post-tax profit of R899m, up 42% on 2014. This followed a 25% increase in FY2014 and 68% increase in FY2013. These numbers have been generated notwithstanding changes to its billing model and select rebates to users. The equity product line, which is where A2X intends to compete, makes up about 70% of the JSE’s total revenue The value proposition of the proposed A2X model is a substantial reduction in trading costs to investors without compromising on the efficiency and integrity of the financial markets. A2X have targeted a 30% to 50% reduction in the end to end cost of transacting (this excludes Strate Fees and Taxes). Competition in financial markets has become a firmly established principle internationally with Australia having 2 trading revenues, the US 50 (13 exchanges and 37 ATS), Canada 13 and the UK 5 with the generally accepted consequences being a reduction in direct and indirect costs, product innovation as well as improved levels of service. For details on the Australian experience and the benefits of competition in that jurisdiction, which is similarly structured to the South African financial market environment see “A2X – the Australian Experience, May 2015”. 
A2X has applied for an exchange licence with an infrastructure to clear in terms of Section 7 of the Act. In its application for an exchange licence submitted to the FSB, A2X adhered to the requirements and principles of the conventional self-regulatory organisation (“SRO”) model and the provision of securities services that has come to be expected from an exchange within the context of the South African financial markets. That is, the listing of securities by and supervision of issuers in terms of listing requirements, the provision of an electronic trading facility for trading equity securities by authorised users as well as clearing and settlement facilities. The A2X rules provide for the supervision of authorised users in a manner consistent with international best practice as well as the enforcement of the provisions of the rules to ensure a fair, efficient and transparent market promoting the protection of clients and investors. An investor protection fund and exchange fidelity insurance will also be put in place to assist in achieving these regulatory objects. A2X proposes a listings model which is consistent with international trends, and is not a departure from current practice in South Africa in respect of the regulation of issuers with a secondary listing. Initially A2X will list only qualifying equity securities. That is, equity securities which have a primary listing on, and are regulated by another licensed exchange that operates within a regulatory framework which is the equivalent to that established in terms of the Act, is supervised by a supervisory authority, is a member of the World Federation of Exchanges and complies with the principles of securities regulation adopted by the International Organisation of Securities Commissions (IOSCO) (“regulated market”). A2X will initially target the top 50 to 65 largest companies on the JSE. A2X will therefore rely partly on the “host” market to provide the regulation of the issuers of qualifying equity securities and the A2X listing requirements are structured to reflect this. No initial public offerings or capital raisings will be offered by A2X at this stage and once the business is up and running, additional products and geographical areas will be considered.
A2X has licensed the systems for its core exchange platform from Aquis Exchange. The core systems include the matching engine, the surveillance system as well as a bespoke clearing system. Aquis is authorised and regulated by the UK Financial Conduct Authority (FCA) to operate a Multilateral Trading Facility (MTF). Further details about Aquis can be found on their web-site at www.aquis.eu Aquis Exchange have developed a high performance, highly scalable and resilient matching engine. It allows for high numbers of fast simultaneous trading connections and high transaction capacity and is designed to process a significant volume of messages per day. The internal latency of the matching engine is also significantly lower than most of the existing exchanges in Europe. The Aquis matching engine is proven technology and is currently operational across thirteen European markets. The matching engine offers full system redundancy which will include a secondary matching engine located in a second data centre. Aquis Exchange has developed a bespoke clearing system for A2X which will replicate many of the key clearing elements of the South African post trade environment. The clearing system will have a fully redundant platform and will be tightly integrated to the matching engine using the industry standard Fix protocol. Strate will be the appointed central securities depository. All of A2X’s key systems and infrastructure will be located and supported in Johannesburg.
A2X is based on a model where clients and brokers are required to open a separate account with an authorised CSDP. The safekeeping of all client assets will be the responsibility of the CSDP. Consequently no provision is made for what is currently known as “controlled clients” whose assets are under the control of the broker and whose holdings are detailed on BDA. Private individuals can approach either Link or Computershare to open an own name segregated custody account. A2X has the responsibility to ensure a fair and orderly market. It will have a suitably qualified and experienced surveillance team who will undertake the surveillance of the market and the monitoring of potential market abuse and exchange rule breaches by users through amongst other things the use of a highly sophisticated surveillance system to be provided by Aquis and approved by the UK FCA.
A2X has sophisticated market surveillance technology to ensure effective surveying of the A2X market. It will also receive a live feed from the current operator that will be fed into the surveillance system to allow for the identification of indications of possible behaviour of this nature for further investigation and action where required.
A2X is based on a model where clients and brokers are required to open a separate account with a CSDP. The holding and safekeeping of all client assets will be the responsibility of the CSDP who provides custody services as a core element of its business. Accordingly the broker does not have access to clients’ assets and therefore providing for segregation of clients’ assets is not applicable. We believe that this structure mitigates a large part of the risk to clients around the safekeeping of their assets.
A2X will operate a T+3 settlement cycle and appoint Strate, with its infrastructure of CSDPs, as its CSD.   Section 7 of A2X Trading Rules deals with Clearing and Settlement. In the settlement process, the overriding principle applied by A2X is that of settlement assurance. This means:
  • the client is responsible for the settlement of the client’s transaction in equity securities;
  • if the client does not meet it settlement obligations, the member assumes the client obligations and becomes responsible to settle the transaction; and
  • the member is responsible for the settlement of its principal transactions.
  • The A2X Clearing System manages the clearing and settlement risk process through the use of a number of mechanisms. All members and clients of members must meet the requirement of appointing an approved CSDP and have a custody account and a fund settlement account. Members are also required to have a current account for the margining process and settlement of related fund and other money movements. All member principal trades are margined at the end of day T+1. Any member client agency trades that have not been committed to by the client’s CSDP by the end of T+1 will be margined along with the member's principal trades. If the client’s CSDP has still not committed by 16h00 on T+2, the trade will moved to the broker’s principal account and will become the responsibility of the broker to settle. The margin will be calculated using advanced best practice methodology. A2X will establish a Settlement Committee. The role of the Settlement Committee will be to oversee the clearing and settlement process of all trades executed on the A2X trading platform. In the event an equity transaction looks unlikely to settle, the A2X Settlement Committee is authorised to do all things necessary to facilitate the settlement process. In the event that the Settlement Committee is not able to facilitate the settlement of a transaction and the transaction looks unlikely to settle, it will be declared a “Failed Trade”. The procedures for a failed trade are detailed in the rules but to summarise, the Settlement Committee may:
    • roll the trade for one settlement cycle; and
    • declare the transaction a failed trade and follow the procedure as set out in rules based on the principle that the non-defaulting party should not be prejudiced by the failed trade.
    A2X will monitor the financial position of all members. All members must comply with the prescribed capital adequacy requirements and remain within the credit limit of the member as prescribed by A2X.
Initially companies will not be able to raise capital on A2X as it will be a MTF styled exchange. Going forward, A2X plans to investigate expanding both geographically and from a product perspective. At that point, IPOs will be investigated and considered for implementation if appropriate.
It is the intention to levy an investor protection charge on all trades conducted on A2X to build up a fund to an appropriate size. The capital to be retained in the business to cover this issue as well as what an appropriate amount for the fund is being explored.
In conjunction with appropriately qualified service providers, we will develop relevant exams for new entrants. Officers and stockbrokers currently approved and operating on the existing operator in terms of their exams who wish to participate on A2X will be “passported” over to A2X subject to them having complied with the requirements to be determined which deal with the differences between the two markets.