SA’s financial markets regulator has cancelled the exchange licence of ZAR X, an alternative trading platform that was launched in 2017 and styled as a challenger to the JSE’s dominance that had lasted for more than a century. 

The Financial Sector Conduct Authority (FSCA), a regulator of financial markets and the investment community, has stripped ZAR X of its licence “with immediate effect”, which means that it will permanently close its doors because no trading activity can be conducted on its platform. 

The FSCA has been concerned that ZAR X doesn’t have enough capital on its balance sheet that would help the young stock exchange to withstand unexpected future events and economic shocks. 

Stock exchanges like ZAR X are required by regulators and the Financial Markets Act (FMA) to have capital on their balance sheet that is equivalent to at least six months of their operating expenses. 

Regulators require financial services companies (like ZAR X) to have adequate capital buffers because they could put a country’s wider financial system at risk if they were to collapse. In SA, the failures of Saambou Bank, African Bank and many others have pushed regulators to be tough on financial services companies — including banks, insurers and stock exchanges — to safeguard savings and investments belonging to the public.

ZAR X is a small stock exchange and its collapse won’t have a large impact on the country, but it will be a blow to companies that are listed on its trading platform, and investors that buy and sell shares. At last count, ZAR X had seven companies listed on its platform — including Senwes (an agribusiness), Orion Real Estate (a property company) and Transformational Investment Portfolio (an investor of BEE share schemes) — that have a combined market capitalisation of R5-billion. 

According to the FSCA, ZAR X had not been able to meet the capital adequacy requirements, necessitating the permanent cancellation of its licence.

The FSCA temporarily suspended ZAR X’s licence in August 2021, giving the company time and space to convince the regulator that it could raise enough capital to shore up its liquidity profile. 

But judging from the FSCA’s decision to permanently cancel ZAR X’s trading licence, the company failed to come up with additional capital to allay the regulator’s concerns about the risk surrounding 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, the FSCA, with the support of the SA Reserve Bank and its Prudential Authority office, moved to strip ZAR X of its exchange licence for noncompliance with section 8 of the Financial Markets Act, which governs the liquidity and capital adequacy requirements of an exchange. ZAR X’s investors or shareholders include the Public Investment Corporation, which holds a 24.14% stake and has not been prepared to inject more money into the company. This exacerbated ZAR X’s liquidity problems. 

The FSCA told Business Maverick that ZAR X had demonstrated a willingness to address the regulator’s concerns about the latter’s liquidity profile and “embarked on various initiatives to address the noncompliance” with the FMA. “However, it was not successful,” the FSCA said. 

Business Maverick understands that there was a tussle between the regulator and ZAR X, with the latter allegedly not being forthcoming with the former about its financial books and how its shareholders plan to raise the money required to boost ZAR X’s liquidity profile. 

Etienne Nel, CEO of ZAR X. (Photo: www.zarx.co.za)

In a statement, ZAR X CEO Etienne Nel and other directors said that after ZAR X’s licence was initially suspended in August 2021, the company engaged 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 didn’t want to be associated with an alternative exchange whose licence was up in the air. Up to this point, ZAR X has not disclosed the identity of the prospective investors that would inject capital into the business. 

The FSCA’s move puts an end to ZAR X’s operations. ZAR X was one of four stock exchanges that were launched in 2017. The alternative stock exchanges were meant to challenge the dominance of the JSE and promote competition and financial inclusion. ZAR X’s debut was followed by the take-offs of 4 Africa Exchange, A2X Markets and Equity Express Securities Exchange. 

ZAR X now has just 14 days to delist all the securities or company shares listed on its trading platform, effectively meaning it will cease all business of an exchange. Within the next five days, it has to inform all affected parties of the cancellation of its licence and provide proof of that to the FSCA, while no further trading on its platform will be permitted.

ZAR X’s relationship with its existing shareholders, who have pumped money into the company to keep it afloat, is now subject to the Companies Act. ZAR X’s shareholders might ask the company to pay back the money that they have pumped into the company. But ZAR X said its board “will consider the way forward”. DM/BM