The exchange innovates with regulation and offerings

The Johannesburg Stock Exchange (JSE) retained its ranking as the best-governed bourse globally, a position it has held for four years running, according to the World Economic Forum’s “Global Competitiveness Report” for 2013-14. Balancing effective regulation with an enabling environment for new products has been key to the JSE’s success.

Sound, Strong & Supportive

The JSE is South Africa’s only licensed securities exchange. It is also a self-regulatory body, meaning that it regulates its own exchange and its components, including listings, trading, clearing and settlement. The Financial Services Board (FSB) has final oversight and supervises the JSE in its regulatory duties. With the anticipated implementation of the new “twin peaks” model of regulation for all financial services in 2015, the prudential regulatory role will shift to the South African Reserve Bank, while market conduct responsibility will remain with the FSB (see Banking chapter).

Implementation is currently being tested and phased-in, and Nicola Comninos, head of equity market development at the exchange, does not foresee much changing under twin peaks. “The capital adequacy requirement set by JSE market regulation team for members of the JSE equity market is already very prudent.” she told OBG. Twin peaks will continue the self-regulatory organisation model for the JSE.

Mark Brits, general manager of strategic projects at the Banking Association of South Africa, thinks there are still some issues to iron out. “There is a perception among banks that greater certainty needs to be achieved between the regulatory and commercial functions of the JSE,” he told OBG.

Recent Changes

To address such concerns, in 2011 the JSE created the Self-Regulatory Organisation Oversight Committee, an independent body tasked with overseeing the JSE’s self-regulatory activities and managing any perceived conflicts. The committee reported satisfactory performance in the JSE’s 2013 annual report. Regulatory changes such as the 2011 decision to amend South Africa’s inward listing rules have made the JSE a more attractive destination for foreign listings. The change allowed foreign companies to be treated as domestic listings. Limitations on the amount of foreign equities that local investors could hold were subsequently lifted.

Another regulatory issue relates to corporate governance. Companies listed on the JSE must follow the King Code of Governance, a post-financial-crisis regulation that prescribes best practice principles of accountability, integrity, fairness and transparency. King III is the latest iteration of the code, and took effect in 2010. King III allows shareholders more visibility to make better decisions in corporate affairs.

The UK’s Markets in Financial Instruments Directive II (MiFID II) is also being watched closely, since South Africa tends to follow the UK’s lead on financial services regulation. MiFID II is a wide-ranging legislation that covers a number of corporate functions, from IT to human resources systems.

New Offerings

Several new derivatives developments have also increased the JSE’s appeal. On-screen options and contracts for difference (CFDs) were introduced in early 2013. On-screen options have allowed more access against the previously modest telephone-based market, and investors are excited about CFDs as demand is growing, Magnus de Wet, equity derivatives market manager in the bonds and financial derivatives division at the JSE, told OBG.

In the last two years, JSE derivatives products have also linked to a suite of BRICS and MSCI indices. As a result, the ALSI, which is an index of the top 40 equity derivatives, is now listed outside South Africa and the BRICS exchanges’ flagship indices are available on the JSE. The first MSCI contracts were listed on the equity derivatives market in January 2013.

Dividend-neutral index futures were introduced in mid-2013 to remove the dividend risk when writing index futures. Finally, fee holidays will be introduced in 2014 in an effort to attract new traders and clients.