Investors in broad-based black economic empowerment (BBBEE) share schemes may be able to continue trading their shares, after the announcement this week that a consortium of international companies is awaiting approval from the Financial Services Board (FSB) to register as an exchange.

The application by 4 Africa Exchange (4AX) follows the turmoil in the over-the-counter (OTC) share market in 2014 that resulted from the FSB’s issuing directives that all trading platforms must regularise their affairs in terms of the Financial Markets Act (FMA) and either apply for licences to operate as exchanges or stop trading.

Most trading platforms applied for and were granted a temporary exemption from the requirement to register as an exchange.

However, the FSB has refused to extend the exemption of one large share issuer beyond the initial six months, raising the possibility that the temporary exemptions granted to other platforms will not be renewed when they expire.

MTN Zakhele, the BBBEE share scheme set up by MTN, recently announced that the FSB will not extend its temporary exemption beyond the end of March. Only trades where buyers and sellers enter into bilateral negotiations will be allowed after March 31.

MTN Zakhele had hoped that its temporary exemption would be extended to 2016, when trades in the shares will no longer be restricted to black people and BBBEE-certified companies.

Until now, the scheme has been allowed to operate as a platform that brings together potential sellers and buyers and matches their bids and offers for its BBBEE shares.

The FSB says a trading platform that brings together buyers and sellers anonymously is an exchange and not a decentralised OTC market where buyers and sellers enter bilateral agreements to trade unlisted shares and other securities. In addition to MTN Zakhele, about 15 issuers, with shares in issue of about R30 billion, have platforms that fall within the FSB’s definition of an exchange and will therefore no longer be allowed to operate without a licence.

Other BBBEE schemes that will be affected by the FSB’s clampdown on OTC trading are Phuthuma Nathi (issued by Multichoice), Sasol Inzalo (Sasol), Yebo Yethu (Vodacom), Umkhamba Holdings (Imperial) and Welkom Yizani (Media24). The other shares traded in the OTC market that will be affected are mostly those of agriculture-related schemes, such as Senwes, KaapAgri, NWK and KWV, as well as the shares of life assurer Assupol.

Stephan van der Walt, the spokesperson for 4AX, says the FSB’s directives caught many companies off-guard and raised the concern that the closure of the trading platforms would result in BBBEE shares losing liquidity.

He says the FSB’s announcement has already negatively affected the liquidity of BBBEE shares and this impedes price discovery (finding out the price at which you should buy or sell shares), because the prices of OTC shares that are not traded on a platform are not made public. Uncertainty about the prices of unlisted shares makes it difficult to match the prices offered by buyers and sellers.

Johan Holtzhauzen, the managing director of PSG Capital, says if the platforms where BBBEE shares trade are closed, the liquidity of these shares will dry up, prices will not be transparent, and it will be more difficult to trade the shares of BBBEE schemes and other unlisted entities. This could result in these schemes being wound up.

PSG Capital announced in September 2014 that it would close its Thembeka BBBEE scheme.

The consortium that is applying for the licence is led by Bravura (an investment banking and advisory firm) and includes Trifecta Capital (which provides services to financial companies), Intercontinental Trust (which provides financial and fiduciary services to international businesses), Capital Markets Brokers (a stockbroking firm based in Mauritius), NWK (which provides services to the agricultural sector) and Global Environmental Markets (a developer of electronic trading platforms).

Van der Walt says the exchange hopes to have a licence by August and to begin trading in October. If 4AX is granted a licence, it will be the only registered exchange in South Africa, apart from the JSE and its AltX exchange.

4AX plans to provide services and infrastructure for entities that issue shares to shareholders who meet certain requirements, such shares issued in BBBEE structures.

Van der Walt says traditional, regulated exchanges, such as the JSE, do not allow shares to be traded among a limited group of investors. One of the JSE’s listing requirements is that shares must be freely tradeable, which means that anyone who wants to buy and sell must be able to do so, whereas BBBEE schemes and certain agricultural schemes restrict trading. Van der Walt says BBBEE schemes, for example, allow only a black person or a BBBEE-certified company to buy and hold their shares, and certain agricultural entities allow only qualifying farmers to buy and hold their shares, or limit the number of shares that a single person may hold.

Van der Walt says all companies that list on 4AX will be subject to its listing requirements and rules. “This will give companies and share-issuers comfort that their shares are being traded by appropriate investors, but, at the same time, award such companies the ability to unlock value for their shareholders and give them a liquid market on which they can trade their shares in a cost-effective manner,” he says.

Van der Walt says 4AX will use only one clearing and settlement agent, whereas the JSE uses nine clearing and settlement agencies. Using only one settlement and clearing agent will make it easier to verify the credentials of shareholders once they are registered with the exchange, Van der Walt says.

A clearing agency matches the records of the buyer and the seller and confirms that the counterparts agree to the terms of the trade. A settlement agency receives cash from buyers and securities from sellers and gives the securities to the buyer and the cash to the seller. These agencies perform the important function of identifying traders who are not trustworthy or creditworthy.

Van der Walt says if an issuer of BBBEE shares, such as MTN, operated a fully licensed exchange, it would cost an individual almost R100 to trade shares worth R200, which would make trading prohibitively expensive.

Second, an exchange operated by an issuer would not be independent, because the issuer would draw up and police and its own listing rules.

WHAT IS A BBBEE SCHEME?

Broad-based black economic empowerment (BBBEE) share schemes usually hold a number of shares in an entity listed on the JSE or in the entity’s listed or unlisted subsidiary.

Many South African companies have launched BBBEE schemes in recent years, and qualifying investors can trade freely in these shares. Some schemes are restricted to previously disadvantaged employees, while others are open to all historically disadvantaged South Africans.

Because only qualifying investors can trade, the shares often trade at a discount to their intrinsic value. Many of the shares convert into ordinary shares within specific time periods and can then be traded by any investor.

Investors typically invest in the shares by contacting the share scheme’s website or call centre. You have to register on the trading platform, provide the Financial Intelligence Centre Act documents and prove that you meet the criteria to qualify as a buyer.

WHY THE FSB WANTS TO REGULATE OTC PLATFORMS

The Financial Services Board (FSB) has been at pains to point out that its targeting of over-the-counter (OTC) trading platforms is aimed at protecting investors in unlisted shares and not at prohibiting OTC trading.

Solly Keetse, the head of department in the regulator's directorate of market abuse, says the aim “is not to close anybody down, but to bring them into the regulatory fold”.

The Financial Markets Act defines an exchange as “a person who constitutes, maintains and provides an infrastructure for bringing together buyers and sellers of securities, for matching bids and offers for securities of multiple buyers and sellers; and whereby a matched bid and offer for securities constitutes a transaction”.

Keetse says companies that bring together buyers and sellers are service providers to the issuers of shares that trade over the counter. These service providers do not have to be licensed as exchanges, but the issuers of shares that facilitate trading in their own shares are regarded as exchanges.

In the past, the providers of OTC platforms either operated in terms of an exemption from the FSB or had to be licensed as an exchange, because they were considered merely to be providing an IT platform for participants.

Keetse says the need to bring these platforms into the “regulatory fold” arose because some of them have evolved from facilitating bilateral negotiations between the buyer and the seller to anonymous trading. By moving from bilateral negotiations to anonymous trading, the entities that facilitated the trading have ceased to be OTC markets, he says.

“As soon as trading occurs anonymously, there is a need to impose strict regulations in order to protect investors, and the entities that facilitate the trade become subject to licensing and other regulations that all exchanges are subject to in terms of the law.”

Keetse says it is important to distinguish between facilitating trades and operating an exchange. A good way to do this is to establish whether or not bilateral negotiations take place.