The Financial Sector Conduct Authority (FSCA) has suspended the exchange licence of ZAR X, the alternative trading platform that is partly owned by the Public Investment Corporation (PIC).
The suspension took effect from 4pm on Friday and is due to ZAR X’s non-compliance with a section of the Financial Markets Act related to liquidity and capital adequacy requirements of an exchange, the FSCA said in an e-mailed statement on Monday. The suspension was put in place with the agreement of the SA Reserve Bank and the Prudential Authority (PA), and also includes the imposition of certain conditions.
The conditions imposed on ZAR X require it to immediately inform all affected parties, including entities listed on the exchange as well as all authorised users and investors. ZAR X must also inform any appointed central securities depositories (CSDs) — organisations that facilitate the easy transfer of ownership of listed securities. In addition, ZAR X must also provide the FSCA with weekly progress reports on how it is dealing with its suspension notice.
“We don’t take this regulatory action lightly, given its impact,” said FSCA commissioner Unathi Kamlana. “Our view, however, is that this is a necessary step to safeguard market integrity and the interest of issuers and the broader investing public. This is the cornerstone of our mandate as the FSCA.”
ZAR X, which began operating in February 2017, is the longest running of the crop of alternative exchanges that have sprang up in recent years to challenge the JSE’s dominance. While other alternative exchanges, which include 4 Africa Exchange (4AX) and A2X Markets, have attracted secondary listings from a number of JSE-listed firms, as well as exchange-traded instruments, they have yet to seriously change the way publicly traded companies and other securities raise capital in SA.
ZAR X co-founder and CEO Etienne Nel said in a statement on Monday that the exchange had lodged an appeal against its suspension but would continue working with the FSCA and other regulatory authorities to resolve the issue.
“Whilst the timing of the suspension is unfortunate, we consider it to be temporary and poses no risk to issuers or investors who hold their assets in their own name directly at Strate,” said Nel, in reference to SA’s main central securities depository and collateral platform.
Nel also revealed in the statement that ZAR X had concluded “a significant equity transaction” with a foreign investor in December 2020, that had wanted to acquire a controlling interest in the exchange. However, he said the PIC, ZAR X’s biggest shareholder, had failed to approve the transaction.
“The transaction has since stalled due to an inability by our largest shareholder, the PIC, to grant formal approval of the transaction due to protracted internal issues and governance processes,” said Nel. “ZAR X is at an advanced stage of negotiation with a number of other prospective investors.”
The PIC, which invests on behalf of the Government Employees Pension Fund (GEPF), acquired a 25% stake in ZAR X in January 2018. At the time, Nel told Business Day the PIC investment would bolster the exchange’s balance sheet as well as its BEE credentials.
Nel said ZAR X has a significant pipeline of listings that have been delayed due to Covid-19, but that would come to fruition once it had concluded a transaction with a prospective investor. According to ZAR X’s website, it has attracted seven listings since it began operating in early 2017.
Despite the FSCA’s suspensive action, ZAR X will be allowed to continue operating as an exchange to give effect to transactions in progress or otherwise not finalised at the date of suspension. However, it is not permitted to allow any further trading beyond the suspension date or to accept any new listings.
ZAR X’s suspension will remain in effect until it either rectifies its non-compliance with capital adequacy requirements to the satisfaction of authorities or until such time as the FSCA makes a final decision on the cancellation of its exchange licence.
The FSCA said it intended to proceed with the cancellation of ZAR X’s exchange licence three months after the date of suspension, should it fail to rectify its non-compliance with the necessary capital adequacy requirements.
Update: August 23 2021
This story has been updated with new information.
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