View From the Table Top

Table Mountain

Rapid Addition was in South Africa last week when CEO Mike Powell and Chairman Kevin Houstoun caught up with RA’s Johannesburg-based head of MEA, Melvyn Plumridge, to visit customers and attend the JSE’s SA Trade Connect Event in Cape Town.

As well as being a great opportunity to catch up with clients, colleagues, and industry friends, the JSE’s event provided a forum for discussion and insight into the future of South Africa’s equity markets with senior-level executives from across the capital markets ecosystem.

Market structure is set for change over the coming years with the FSCA implementing a progressive regulatory agenda through the Financial Markets Act and Conduct of Financial Institutions Bill. With a focus on creating a level playing field and opportunity for competition, this initiative will mirror some of the areas addressed by MiFID, including key topics such as clearing, dark pools, HFT, and best execution. While the expectation is that the domestic market structure will align with EU regulations, local regulators have the chance to dissect what has and hasn’t worked since MiFID II’s implementation in 2018. Sell and buy-side participants are certainly hoping for an open dialogue with the FSCA to ensure that potential directives take into account the characteristics and needs of the South African market and ultimately enhance liquidity and its reputation as an attractive investment destination.

Some reservations were expressed at the event about the cost and complexity of implementing prescriptive best execution rules, whether the market is big enough to support fragmenting liquidity and would new regulation address issues such as the growing convergence of trading volume around the JSE’s closing auction.

It was interesting to note the larger brokers (who have typically invested heavily in trading infrastructure) make the point that they already compete on the quality of their execution in a crowded market. They are comfortable with the European best-ex model that creates an outcome-based framework where the execution strategy is determined by the client. Indeed, the brokers with EU-domiciled clients are already subject to those rules.

As for liquidity fragmentation, while perhaps wanting to replicate the emergence of multiple unsustainable MTFs and alternative venues sparked by the end of concentration rules under MiFID I, many view competition as positive for the market. A2X has emerged as a viable alternative venue and is gaining traction, helped by the introduction of matched principal trades last year. While fragmentation isn’t a panacea by itself, it can drive innovation and efficiency. If competing venues bring value to the market either by narrowing spreads and reducing trading costs or offering alternative execution strategies through electronic dark pools or new instruments, they can genuinely enhance investor attractiveness. Whether FSCA regulation will level the playing field by improving clearing fungibility will be interesting to see.

Efficient market structure and well-functioning capital markets are paramount to any economy, but ultimately investors will be attracted to the macro-outlook for the country. Despite economic and infrastructural challenges, JSE CEO Dr Leila Fourie reminded the audience of South Africa’s potential. It remains a vibrant country with many world-class companies, rich natural resources, and positive demographics, creating an attractive destination for capital over the long term. Improvements to market structure and the financial markets regulatory framework will only make it stronger.