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 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.
The value proposition of the 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 CSDP and Strate fees and Taxes).
Competition in financial markets has become a firmly established principle internationally with the generally accepted consequences being a reduction in direct and indirect costs, product innovation as well as improved levels of service.
A2X was granted an exchange licence with an infrastructure to clear in terms of Section 7 of the Act on 6 April 2017.
A2X adheres 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 are in place to assist in achieving these regulatory objects.
The A2X listings model 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 all companies listed on the JSE.
A2X therefore relies 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 the clearing platform. 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 highly resilient matching engine. It allows high numbers of fast simultaneous trading connections and high transaction capacity and is designed to process a high volume of messages per day. The latency is 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 includes a secondary matching engine located in a second data centre.
Aquis Exchange has developed a bespoke clearing system for A2X which replicates many of the key clearing elements of the South African post trade environment. The clearing system is a fully redundant platform and is tightly integrated to the matching engine using the industry standard Fix protocol.
All technology is located and managed in Johannesburg with full redundancy.
The safekeeping of all client assets is 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 member 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 has a suitably qualified and experienced surveillance team who undertake the surveillance of the market and monitor 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 also receives a live feed from the current operator that will be fed into the surveillance system to allow for the identification of indications of possible behavior of this nature for further investigation and action where required.
As noted above no provision is made for what is currently known as “controlled clients” whose assets are under the control of the member and whose holdings are detailed on BDA. A2X provides that clients and members are required to hold accounts with a CSDP. The holding and safekeeping of all client assets is the responsibility of the CSDP who provides custody services as a core element of its business. Accordingly the member 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 operates a T+3 settlement cycle and has appointed 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 member is responsible for the settlement of all transaction in equity securities executed on the trading system by them;
- Where a member trades for a client, 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.
- roll the transaction up to two settlement cycles; 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.
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 Capital Exposure Requirement (CER) process and settlement of related fund and other money movements.
All transactions are subject to the CER calculation at the end of day T. Any member client agency transactions that have not been committed to by the client’s CSDP by the end of T will be included in the CER calculation along with the member's principal transactions. If the client’s CSDP has still not committed by 16h00 on T+2, the transaction will reversed to the member’s principal account and will become the responsibility of the member to settle.
The CER calculation uses an advanced best practice methodology.
A2X has established a Settlement Committee. The role of the Settlement Committee is to oversee the clearing and settlement process of all transactions 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, the Settlement Committee may roll settlement or declare a “Failed Trade”. The procedures for rolling of settlement and failed trades are detailed in the rules but to summarise, the Settlement Committee may: