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Increased market liquidity is Loubser's goalDeregulation and the introduction of the JET system on the Johannesburg Stock Exchange has transformed stockbroking and the local market irrevocably. CIARAN RYAN reportsBEFORE Russell Loubser completes his term as JSE president in four an a half years, he intends to push through an ambitious programme of reforms designed to transform the JSE into one of the world's most competitive exchanges. The process of deregulation initiated in November 1995 by his predecessor, Roy Andersen, is more a beginning than an end point, says Loubser. Although South Africa has just one stock exchange, it faces a huge challenge from overseas markets. Of the 617 companies quoted on the JSE, about 160 have dual listings on foreign bourses. In 1995, the foreign trade in these 160 shares amounted to 142% of JSE trade in the same shares. Since deregulation, the JSE has won back market share. In 1996, foreign bourses accounted for just 82% of the trade in shares with dual listings, falling to about 70% in mid-1997. But competition from abroad is arriving in other, more threatening forms. Earlier this year the Chicago Mercantile Exchange introduced listed futures and options on the rand after a proposal by the SA Futures Exchange (Safex) to launch a similar product in SA was turned down by the authorities. The relaxation of exchange controls allows institutions to invest 10% of their assets and 3% of new cash flows abroad. The flow of South African assets into foreign markets has been mitigated by net foreign inflows to the JSE of R12-billion in the first six months of 1997 - exceeding the combined inflows of the three previous years. But once exchange controls are completely abolished, South Africans will be free to trade SA-listed shares in London, New York or Frankfurt. "Exchanges controls will eventually have to go, and only then will we experience the full force of global competition," says Loubser. "Deregulation introduced greater competition and this has been to everyone's benefit, in the form of better price discovery, faster transaction times, lower dealing costs and greater market liquidity." A key benefit of deregulation is increased liquidity. Total trade as a percentage of JSE market capitalisation is now 15%, more than double its level two years ago. This is a measure of market efficiency and Loubser would like to see this double again over the next few years. Deregulation ushered in three key reforms:
The introduction of negotiable commissions slashed institutional dealing costs by half - some brokers charge nothing for institutional deals - removing a major barrier to increased market liquidity. The Johannesburg equities trading (JET) screen-based system replaced the JSE trading floor and institutional buying orders which previously took a day to fill can now be done in minutes. For many institutions timing is more important than dealing costs as they have positions in the equities, bond and futures markets, and a movement in the all-share futures index may require a rapid readjustment in the institution's equity portfolio. Loubser wants to see greater co-operation between the JSE, Safex and Bond Exchange of South Africa. This is in keeping with the worldwide trend towards integrated or merged markets, such as the merger of the European Options Exchange and Amsterdam Stock Exchange, and is vital to attracting large-scale investment flows. "We cannot have a strong JSE and a weak futures market, or a strong futures market and a weak bond market," he says. "The strength of the chain depends on the weakest link. Any really large deal often involves an equity element, a futures element, a bond element and, increasingly, a foreign exchange element. So these markets are inter-linked and we need to push for far greater co-operation, yet retain the separate identities and independence of the different exchanges." Cross-surveillance of all three markets would reduce the possibility of irregular trading and improve market efficiencies. Each exchange imposes its own capital requirements on investors and no allowance is made for off-set positions on other exchanges. For example, an investor may be invested in a spread of shares making up the JSE all-share index (ALSI), but may also be invested in ALSI futures contracts in such a way that should the JSE share prices decline, the loss is made up in the futures market. The investor is required to satisfy the capital requirements of both the JSE and Safex, with neither exchange making allowances for cross-market risk. A number of steps have already been taken to improve cooperation between Safex and the JSE. Computer links between the two have been strengthened and Safex is developing a traded options market on individual equities at a cost of about R1-million, as opposed to the R12-million it would have cost the JSE to develop the system from scratch. Eventually, says Loubser, all three exchanges will be governed by a single Act, which should facilitate co-operation. The next major issue on the JSE agenda is the introduction of an electronic scrip depository and clearing and settlement procedures which conform to international standards. JET has automated the front end of the trading environment, but thereafter the system gets bogged down in paper. The JSE now handles 10 000 trades a day, three times more than predicted in 1995. While JET can comfortably cope with this volume, the back offices cannot. The first step is to immobilise the scrip by removing paper from the equation and then centralise it in an electronic depository. Shareholders will, in future, receive statements rather than share certificates, thereby eliminating the possibility of tainted scrip entering the market. Dividends and other cash benefits will flow electronically through the banking system into shareholders' accounts and there will no longer be an obligation on brokers to wait for the arrival of share certificates from a seller before the deal can be settled. One snag in the introduction of the electronic scrip depository is the need to effect changes to 22 pieces of legislation, which is likely to delay implementation until 1998. Once introduced, however, it will enable the JSE to shorten the settlement period, which currently starts on the Tuesday of the week following execution of the trade, extending to subsequent days if not settled on the Tuesday. Deals which are not settled within the week because, for example, the broker has not received the share certificates in time, may get carried over for another week. The JSE intends introducing rolling daily settlement, so that all trades are settled five days after execution of the deal. The plan is to reduce this period to three days, then eventually to real time. This reduces the risk of deals failing and is increasingly demanded by foreign investors. Another oddity of the JSE is that settlement is not contractual. If settlement is not made by due date this does not constitute a breach of contract - a feature regarded with some dismay by foreign investors.
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