The South African financial markets regulator revokes ZAR X's licence to operate an alternative exchange

The operations of ZAR X have come to an end. ZAR X was one of four new stock exchanges founded in 2017. The purpose of the alternative stock exchanges was to challenge the JSE’s supremacy and encourage competition and financial inclusivity.

SA’s financial markets regulator has withdrawn the exchange licence of ZAR X, an alternative trading platform founded in 2017 and positioned as a competitor to the JSE’s century-long supremacy.

The Financial Sector Conduct Authority (FSCA), a regulator of financial markets and the investing community, has revoked ZAR X’s licence “with immediate effect,” thereby closing its doors indefinitely because no trading activity may take place on its platform.

The FSCA has expressed worry that ZAR X does not have adequate capital on its balance sheet to withstand unanticipated future events and economic shocks.

Regulators and the Financial Markets Act (FMA) require stock exchanges like ZAR X to have capital on their balance sheets equal to at least six months of operational expenditures.

Regulators require financial services businesses (such as ZAR X) to have enough capital buffers since their failure might jeopardise a country’s larger financial system. In South Africa, the collapses of Saambou Bank, African Bank, and others have driven regulators to be harsh on financial services organisations — including banks, insurers, and stock exchanges — in order to protect the public’s savings and investments.

ZAR X is a small stock exchange, and its demise will have little influence on the country, but it will be a setback for firms listed on its trading platform, as well as investors who buy and sell shares. However, based on the FSCA’s decision to permanently revoke ZAR X’s trading licence, the business failed to provide extra cash to alleviate the regulator’s concerns about the risk associated with its operations.

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‘Nothing came to fruition’

In an emailed response to Business Maverick’s questions, the FSCA said it was made aware by ZAR X of its potential investors that planned to inject capital into the company, but “nothing came to fruition”. “ZAR X has several other shareholders. However, no additional funding was provided by the existing shareholders,” the FSCA said. 

So, with the cooperation of the SA Reserve Bank and its Prudential Authority office, the FSCA sought to revoke ZAR X’s exchange licence for failing to comply with Section 8 of the Financial Markets Act, which oversees an exchange’s liquidity and capital adequacy standards. The Public Investment Corporation is one of ZAR X’s investors or shareholders, with a 24.14% interest and no plans to put further money in the firm. This aggravated ZAR X’s liquidity issues.

According to the FSCA, ZAR X has shown a desire to address the regulator’s concerns regarding the latter’s liquidity profile and has “engaged in various initiatives to address the noncompliance” with the FMA. “However, it was not successful,” according to the FSCA.

Business According to Maverick, there was a spat between the regulator and ZAR X, with the latter apparently not being forthright with the former regarding its financial accounts and how its shareholders intend to raise the money needed to strengthen ZAR X’s liquidity profile.

In a statement, ZAR X CEO Etienne Nel and other directors claimed that when ZAR X’s licencing was originally halted in August 2021, the firm communicated with “numerous potential investors”.

“The timing of the cancellation of the licence could not be more unfortunate. Following protracted discussion and due diligence, we were recently informed by the prospective investor that they will be submitting a formal binding offer to invest the requisite capital during the course of this week.

“Although FSCA has to date been patient in affording ZAR X time to raise the additional capital required, the continued suspension of the licence would not expose the market or investors to any additional risk.”

In other words, investors did not want to be connected with a defunct alternative exchange whose licence was in jeopardy. ZAR X has not revealed the identities of the prospective investors who would contribute funds into the firm as of yet.

The FSCA’s action effectively ends ZAR X’s activities. ZAR X was one of four new stock exchanges founded in 2017. The purpose of the alternative stock exchanges was to challenge the JSE’s supremacy and encourage competition and financial inclusivity. The launch of ZAR X was followed by the launches of 4 Africa Exchange, A2X Markets, and Equity Express Securities Exchange.

ZAR X now has 14 days to delist any securities or company shares listed on its trading platform, essentially ending all exchange activities. Within the following five days, it must notify all impacted parties of the licence termination and give confirmation to the FSCA, after which no further trading on its platform will be authorised.

The relationship between ZAR X and its current shareholders, who have put money into the firm to keep it viable, is now governed by the Companies Act. ZAR X’s shareholders may demand that the firm repay the funds that they have invested in the company. But ZAR X stated its board “will consider the way forward”.