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WFE Interviews Nicky Newton-King, Johannesburg Stock Exchange

Author Name: Nicky Newton-King, CEO, Johannesburg Stock Exchange

1. Could you give us a bit of background about your exchange? 

The JSE was formed in 1887 during the first South African gold rush. Following the first legislation covering financial markets in 1947, the JSE joined the World Federation of Exchanges in 1963 and upgraded to an electronic trading system in the early 1990s. The bourse demutualised in 2005 and listed on its own exchange in 2006.

Today the exchange is a diversified, full service exchange offering investors a range of markets namely equities, debt and derivatives (currency, equity, commodity and interest rate). We provide primary and secondary markets as well as post-trade services. We also sell market data and regulate primary and secondary markets. The JSE is one of the Top 20 exchanges in the world by market capitalisation, which currently stands at around US$1.12 trillion. There are currently 384 companies listed on the JSE. Though still home to a range of resource companies, these make up only 24% of our Equity Market in market capitalisation (JSE market capitalisation) terms, with Consumer goods, Financials and consumer services sectors (industries) making up 26%, 18% and 9% of market cap respectively (Stats as at 14 May 2014).

2. How active are foreign investors in your exchange? How accessible is your market?

The extent of foreign participation in our markets varies depending on the specific market in question but for equities and bonds it averages between 25-35% of daily activity. The JSE markets are fully electronic and remotely accessible from anywhere in the world. There are no restrictions on foreigners investing in South Africa and a liquid currency and liquid equity and bond market ensures that they can enter our market easily.

We believe strongly that investors should not be constrained in their investment decisions and as an emerging market exchange we therefore focus on making sure that market risk is the only risk consideration that investors have to deal with; working with our listed companies and government representatives to "sell" the SA story internationally; and not losing sight of our domestic investor base. While foreigners are a large part of our market and we will always seek to attract foreign investment, the core of our investors are local investors and we have to remain relevant to their needs.

3. What new project/product are you currently working on?

The JSE has a roadmap of large projects, many technology-focused. To focus on a selection of our current projects:

  1. We are moving our other markets onto the same trading technology as our equities market, provided by MillenniumIT. We currently have international participants in our derivatives markets but once we move onto a new platform, it should be easier for international participants to access these markets. In addition, it will also align the performance of the various markets. We will continue to invest in the best, relevant technology for our markets with the aim of increasing liquidity for all participants.
  2. The decision to migrate to a single trading platform for all our markets also necessitates implementing a new clearing solution and we have selected Cinnober for the development of a new multi-asset clearing technology platform. We believe this holds real promise for delivering enhanced trading and market data services to clients, more efficient margin through cross-product offset and unlocking product growth opportunities for the JSE.
  3. We are working to shorten the settlement window for equity market trades from the current five days after trade date to three days, with a consequent reduction in settlement risk. Phase 1 of the project went live in July 2013. Work on Phases 2 and 3 is also progressing.
  4. Lastly, we have recently launched our collocation facility which allows JSE customers to place their trading equipment closer to the JSE's trading and information systems. The colocation facility will initially provide space, power, cooling, and physical security for 35 racks for clients' trading equipment.

4. What are the challenges you see in your market today and in the future?

The challenges in our market are not unique and include the flow of global capital, as directed by the evolving response of global monetary authorities to the financial crisis, as well as changing investor sentiment toward developed and emerging markets. While these challenges will continue to affect the environment we operate in, the JSE believes that what is important is to continue to focus on running our markets properly and avoid the temptation to overreact to change. It certainly assists to offer a diversified range of products and services, as we do.

While there can be a heightened sense of risk in emerging markets, exchanges must ensure that they mitigate those risks that fall within their control. Thus, rules relating to market participation must be clear, consistently applied and understood. Technology must work faultlessly. The JSE works hard to stay ahead of industry changes and to know how to deal with its implications for our industry.

The JSE welcomes our regulator's long-standing commitment to aligning with global financial regulation standards so that these are appropriate for South Africa. The impact of such regulation has been positive in the sense that the quality of our regulatory regime has received wide acclaim and this goes a long way in influencing investor perceptions about our market.

5. How do you assess your exchange`s position at a time of increased globalization?

A more globalised investment community means that the JSE competes with exchanges around the world to attract both investors and possible listings. It is impossible for any exchange to control all the factors determining where investors choose to allocate their funds or where companies choose to list. Factors like regulation and economic policy and prospects are just some of the things they consider.

As an exchange, we ensure is that we operate in such a way that market risk is the only concern investors have when they trade here. We can ensure a safe and stable trading environment so investors know that they will always receive their shares and cash when they trade here and that our systems will always be up and running.

Globalisation has also provided us with new opportunities because more investors have become aware of the trading environment we can offer them here. A more interconnected world has not only resulted in international investors taking increasing notice of emerging markets, and of late especially of Africa, but allowed for uncertainty and unfamiliarity over trading in these markets to be reduced.

While the JSE can help investors access the African growth story, though are credentials obviously extend further than this. The World Economic Forum assigned South Africa the following rankings out of 144 countries in its 2013-2014 global competiveness survey:

  • Ranked first for the effectiveness of regulation of the South African securities exchanges for the third consecutive year
  • Ranked first for protection of legal rights
  • Ranked first in terms of auditing and reporting standards
  • Ranked first in terms of effectiveness of corporate boards
  • Ranked second for soundness of banks
  • Ranked second for availability of financial services
  • Ranked second in ability to raise finance through the local equity market

Interconnected financial market also means that aside from the well-developed institutional investment market in South Africa, the JSE also has strong links with international markets. This means that companies are able to access the capital they require through a JSE listing and receive all the benefits of an international listing with the higher associated costs.

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