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South Africa

Name change

The Johannesburg Stock Exchange has changed its name to the JSE Securities Exchange South Africa (JSE).

Warrant market

Warrants (being listed equity options) were first listed on the JSE during the course of 1997. During this initial phase, warrants capitalized on the downward trend of smaller stocks on the JSE, and the subsequent boom in specific sectors, notably resources, as investors discovered the leverage warrants provided. At this time the JSE published specific listing requirements pertaining to warrants. Criteria were laid down for issuers (among other things that issuers should hold assets of at least R2 billion ($253 million) in the event of uncovered warrants), the underlying company (a market capitalization of at least R2 billion) and certain basic parameters for warrants generally.

Derivatives became less relevant for private investors during the late 1990s as listings, in particular listings of smaller stock, increased substantially, with most investors preferring to invest on the venture capital and development capital boards of the JSE. The last two years has, however, seen substantial growth in the derivative markets with retail investors embracing derivatives enthusiastically. In line with this revolution, many new issuers have entered the market, offering a wide variety of vanilla and exotic products. The JSE has listed in excess of 300 warrants of various types, including American- and European-style call and put warrants over underlying securities, debt instruments and the like. Exotic products, including barrier, basket and discount warrants are also available. The JSE has recently published revised and refined warrant listing rules, to further streamline the warrant sector which is already the fastest growing sector on the JSE.

Special investment product sector

The substantial growth in the South African warrant market over the last two years has led to a variety of exotic products being listed under the warrants category. Most of these products are designed to provide investors with protection against the potential risk of warrants expiring worthless. To protect against this, warrantholders are guaranteed a minimum return on their investment in exchange for limiting their potential upside. As these products continued to develop, it became apparent that they had little in common with traditional options, and specific rules were required to regulate their trading and listing on the JSE.

To accommodate these products, the JSE released a draft set of listing requirements dealing with these special investment products. The draft defines "special investment products" as, among other things: "unsecured debt securities consisting of notes and/or other evidence of indebtedness, or any other structured product as deemed by the committee." A specific category, namely equity performance-linked notes, was created for the types of warrants mentioned above. The listing requirements for special investment products are very similar to those applicable to warrants, and also make provision for minimum capital requirements on the part of the issuer and on the part of the underlying company.

The introduction of the special investment product section confirms the JSE's desire to expand its operations and to offer trading in a wider variety of securities. These aspirations have recently culminated in the JSE making an offer for the purchase of the South African Futures Exchange (SAFEX).

Purchase by the JSE of SAFEX

The JSE recently confirmed that it is planning to buy SAFEX in a deal bringing to an end more than two years of negotiations. SAFEX members will receive a cash amount and one JSE right for each SAFEX seat held. The talks began more than two years ago as part of a planned three-way merger between the JSE, SAFEX and the Bond Exchange of South Africa (BESA). It is believed that major firms who are members of both exchanges, are pushing for the takeover. The deal originally planned provided for a merger of the two exchanges, but due to practical considerations and the need for one of the cultures to prevail, a takeover structure has been preferred.

The takeover should, when completed, lower costs and improve efficiency for investors. Further, the deal is an attempt to build a single market place for all South African financial products, and should enhance the ability of the exchanges to manage risk across the market through a centralized clearing house. Recent announcements by the JSE and the London Stock Exchange (LSE) unveiling a new business venture between the two exchanges is further evidence of the JSE's desire to improve its efficiency and the scope of its market.

Business venture between the JSE and the LSE

In April 2001, the JSE announced that it has entered into an agreement with the LSE in terms of which key technologies from the LSE will be sourced to the JSE, and further allow both parties easier access to each other's markets. In terms of the deal, the JSE will exchange its trading system, JET, by year-end. Local trading will then take place on the LSE's more advanced SETS system, which would be run from London.

The JSE's affiliation with the LSE will, among other things, allow major locally-listed companies access to global markets and capital, which was one of the main concerns cited by companies that wanted to move their primary listings offshore. In terms of the deal, local brokers will also be able to deal in selected LSE listed shares. The deal will make the JSE an attractive gateway to international capital for local companies through the planned creation of an international board with listing requirements acceptable to the LSE and to UK regulators. Companies on the board would have dual primary listings in London and Johannesburg, preventing a further exodus of large companies from the JSE. Apart from enabling both organizations to benefit from each other's expertise in the local markets through the identification and development of new business opportunities, the deal represents a diversification of the portfolio of products and services offered by the JSE and LSE. The deal also provides an opportunity for the parties to share any additional revenue generated as a result of growth in the respective markets. South African exchange control regulations may however stand as a significant hurdle to the success of the proposed business venture.

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