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Financial Markets

South Africa has an interesting connection to the world’s first stock exchange. On 16 March 1603, Jan Alletsz sold subscriptions to a value of 2 400 guilders to Maria Van Egmont. A Hollander, Jan had not even paid for his shares in the then newly established Dutch East India Company,1 founded just the year before. He, along with the other 1 142 investors had simply undertaken to produce the subscribed sum – all 3 674 945 guilders – in the future. And, thus, the world’s first stock exchange was born.2

There are various types of financial markets today, the most common being:3

  • Capital markets, which consist of:
    • stock markets, which generate financing by a company selling its shares, and which can then be traded; and
    • bond markets, which provide financing through ‘bonds’, and which can be subsequently traded.
  • Commodity markets, which facilitate the trading of commodities – metals, coal, oranges, maize, etc.
  • Money markets, which provide short term debt financing and investment. Derivatives markets, which provide a means (“instruments”) for the management of financial risk.
  • Futures markets for trading in products at some future date.
  • Insurance markets, which facilitate the redistribution of various risks.
  • Foreign exchange markets, for trading of foreign currencies.

Naturally, human nature being what it is, there is a need for strict controls to be in place and this, in part, is where the Financial Markets Act 20124 comes in. It aims to ensure that the Republic’s financial markets are fair, efficient and transparent; and that they increase investor confidence by reducing systemic risk, promoting competitiveness, and protecting clients and investors alike.

The Act falls under the authority of the Minister of Finance, although big brother is really the Financial Services Board.5 Many of its provisions are quite esoteric, far too lofty for this work, and what follows has more likely some everyday relevance.

A. Buying and selling listed securities

  1. Securities are things like shares. If a company’s shares are ‘listed’, they are included in a list of the securities which an exchange maintains. (Basically, an exchange is an infrastructure for bringing together buyers and sellers.) A person may only carry on the business of buying or selling listed securities if that person:
    • is authorised by a licence exchange; and
    • acts in compliance with the relevant exchange rules; or
    • effects such buying or selling through an authorised person in compliance with the relevant exchange rules.

    He commits an offence if he carries on business in conflict with these provisions.6 7

  2. If a transaction in listed securities (which changes their beneficial ownership) is effected, outside of an exchange, by a financial institution acting as a principal or by a person effecting a reconstruction, takeover, or change in control over management, it must be reported to the Registrar. An offence is committed by the failure to do so.8

B. Disclosure of information

No exchange (or other market infrastructure) or any officer, employee, representative or member may disclose to any person any confidential information obtained in the performance of functions under this Act. It is an offence to do so, unless:

C. Insider trading

Inside information is specific or precise information which has not been made public, but which (if it were made public) would be likely to have a material effect on the price or value of any listed security.

An ‘insider’ is a director, employee or shareholder of a listed company; or someone who has access to the information by virtue of his position or profession.

  1. An insider commits a criminal offence if:
    • he knows that he has inside information; and
    • he deals (directly, or indirectly, or through an agent) for his own account in the listed securities to which the information relates, or which are likely to be affected by it.10
  2. An insider also commits an offence if he does likewise for any other person.11

  3. If you deal in listed securities for an insider, to which inside information he possesses relates (or which are likely to be affected by it) and you knew that such person is an insider, you commit an offence.12

  4. An insider who knows that he has inside information and who discloses it to another person commits an offence.13

  5. If an insider (who knows that he has inside information) encourages, or causes another person to deal (or discourages, or stops another person from dealing) in listed securities to which the inside information relates, or which are likely to be affected by it, he commits an offence.14

D. Falsehood trading practices

  1. It is a criminal offence to use, or participate in any practice which:
    • has created or;
    • is likely to have the effect of creating, a false or deceptive appearance of the demand for, supply of, or trading activity in connection with any listed security.15
  2. It is an offence to use, or participate in any practice which:
    • has created or;
    • is likely to have the effect of creating, an artificial price for any listed security.16

F. Financial Services Board

The FSB is responsible for the supervision of compliance with the Act, particularly insofar as all these provisions relating to market abuse17 are concerned. The Board has wide powers of investigation and inquiry, search and seizure.

  1. Any person who has been summoned to an inquiry and who:
    • fails to appear at the time and place specified in the summons;
    • fails to remain in attendance until excused from further attendance;
    • refuses to take the oath or to make an affirmation;
    • fails to answer fully and satisfactorily any question lawfully put to him; or
    • fails to furnish information or to produce a document referred to in the summons, commits an offence.18

G. Power of Registrar to request audit

  1. The Registrar of the FSB may, at any time, direct a person (to whom the Act applies) to have his accounts, records and financial statements audited; and to submit the results of such an audit to the Registrar within the time specified in the notice. Any person who gives information, an explanation or access to records knowing that the information, explanation or records are false or misleading, commits an offence.19

H. General

  1. It is an offence to accept an appointment as a member of the controlling body of any licensed central securities depository, clearing house, exchange or trade repository if you do not meet certain criteria.20
  1. Yes, that Dutch East India Company – the one which established a profitable sea route around the Cape, indeed founding the first European settlement in 1652, and which went on to become Cape Town. Most settlers were immigrants from Western Europe who had enlisted as soldiers or sailors in the Company’s service and became farming free burghers at the Cape. - The Afrikaners, by Herman Giliomee (Tafelberg, 2003) page 1. Thus began Afrikaner history. 

  2. See The World’s First Stock Exchange by Lodewijk Petram published by Columbia Business School, and based on his PhD research thesis on the development of the 17th Century stock exchange in Amsterdam. See www.lodewijkpetram.nl/index.eng. It could be argued that money lenders such as William Shakespeare’s Shylock, famous in The Merchant of Venice, were far earlier stock exchange traders. In the 1300s, the Venetians were the first to start trading securities from other governments. See www.investopedia.com ‘The Birth of Stock Exchanges’. 

  3. Reproduced (and adapted) from Wikipedia – ‘Financial Markets’. 

  4. As amended; the latest amendment was effected by Act 45 of 2013. 

  5. The Financial Services Board has its Head Office at Riverwalk Office Park, 41 Matroosberg Road, Menlo Park, Pretoria (tel: 012 428 8000). 

  6. There are exceptions. For example, if the person is a financial institution transacting as principal with another financial institution also transacting as principal; or if the person buys or sells listed securities in order to give effect to a reconstruction of a company or group by the issue or reallocation of shares; or a takeover by one company of another, or an amalgamation of two or more companies. 

  7. Section 4(1)(b) read with section 24 and section 109 

  8. Section 25(1) read with section 109. 

  9. Section 73 read with section 109. 

  10. Section 78(1)(a). 

  11. Section 78(2)(a). 

  12. Section 78(3)(a). 

  13. Section 78(4)(a). 

  14. Section 78(5). 

  15. Section 80(1) and (2). 

  16. Section 80(1)(a)(ii) and (2). 

  17. That is, the provisions set out in this chapter. 

  18. Section 84(4)(a). 

  19. Section 93(1) and (2). 

  20. Section 66(2) read with section 66(1).