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A recent industry agreement that allows for greater interoperability between SA exchanges is good for competition in the sector, but it also points to a heartening level of co-operation in the interests of more efficient, robust and coherent capital markets.
The introduction of the matched-principal (MP) trade on June 2 creates, for the first time, a framework for interoperability between SA capital market exchanges, allowing brokers — and, by extension, asset managers and other investors — to reap the benefits of better pricing and increased liquidity.
In essence, the MP trade mechanism for the first time allows brokers to easily transfer trades executed on one exchange to the other exchange and then use a single process to book a consolidated brokers note, representing executions from both markets at the average price, to their client.
Why is this such a milestone? In most international environments, exchanges have access to either a utility clearer or a choice of clearers who will settle trades across all exchanges operating in that country or region. This allows trades to take place across several platforms, with risk managed centrally and a single contract note issued.
SA, by comparison, has a unique market structure. The Financial Markets Act of 2012 allowed for competition in principle, but never contemplated an environment facilitating interoperability and trade across exchanges. This joint initiative represents the first effective market collaboration in SA.
The 50-odd brokers who are members of the JSE are required to use the Broker Dealer Accounting (BDA) platform. Because A2X uses a separate platform, individual contract notes for the same client needed to be issued for each exchange, which was time consuming and inefficient.
The broking community can now easily access the best price available for their clients, and asset managers can fully avail themselves of these benefits. In the interests of expanding the benefits of these trades for the sector, neither exchange will levy a fee for MP trades.
The agreement to introduce the MP trade agreement is the result of an extensive engagement process between the Financial Sector Conduct Authority (FSCA), the JSE and A2X, culminating in an industry workshop which also included brokers, central-securities depository Strate and several buyside institutions.
Impressively, the solution was implemented in just two months after the workshop took place and paves the way for current exchanges, and any future exchanges that may be launched, to operate more coherently.
There are still many infrastructural and regulatory hurdles to overcome, but with FSCA having approached this issue from an industry perspective rather than an exchange-specific one, it has hopefully laid the foundation for future co-operation and the prospect of greater market interoperability, with the goal of a more efficient, competitive and progressive South African capital market.
It’s a gratifying all-around win and a step forward for South African capital markets and their stakeholders, and hopefully a sign of further development and growth of the sector.
• Brady is A2X CEO.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.