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 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 being³:

• Capital markets, which consist of:
  • stock markets, which generate financing by a company selling its shares, and which can then be traded;
  • 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 2012 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. Prior to a fairly extensive restructuring in 2017, and an amendment of this Act, it had a close symbiosis with the Financial Services Board Act, and big brother for the purposes of the Financial Markets Act was the FSB. The FSB Act has been replaced by the Financial Sector Regulation Act 2017, and there is a working relationship now between that Act and this, the Financial Markets Act. Many of its provisions are quite esoteric, far too lofty for this work, and what follows has more likely some everyday relevance.

A. Exchanges, and trading listed securities

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.

There are various kinds of functionaries involved in the business of an exchange; here are some of the more relevant, for present purposes:

• ‘authorised user’ – this is somebody authorized by the exchange to perform so-called securities services, much like the well-known stockbroker;
• ‘clearing member’ – this is somebody who facilitates the clearing and settlement of transactions in securities;
• ‘participant’ – this is somebody who is authorized to perform custody and administration services relating to securities which are not certificated (as a company share is, for example).

1. 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.^4 5

2. The Financial Sector Conduct Authority (‘the Authority’) can prohibit a person from providing any securities services. If this happens, it is an offence to contravene such a prohibition.⁶

3. To perform the services of participant, authorized user, or clearing member one must be licensed by the exchange in question, conduct business in accordance with the exchange’s rules, and so on. It is an offence to do otherwise.⁷

4. It is also a criminal offence to misrepresent oneself as being some type of functionary, or exchange, depository, clearing house (and so on).⁸

5. An exchange must be licensed by the Authority, and commits an offence if it is not licensed.⁹

6. Listed securities may be traded outside of an exchange, in cases where two financial institutions are transacting directly as principals, or where there is a restructuring of a company or group of companies or a control in management. However, the transaction must be reported to the Authority by the financial institution involved, or by the person who has effected the restructuring, and commit a crime if they fail to do so.¹⁰

7. A central securities depository must be licensed by the Authority. If not, it commits a criminal offence.¹¹

8. So must a clearing house, including when it acts as a so-called central (or external) counter-party. Otherwise there is a crime committed.¹²

9. The same applies to a trade repository, whether local or external. This is a person (generally, a corporate) who maintains a centralised electronic database of records of transaction data. If not licensed by the Authority, it commits an offence.¹³

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:

• the person to whom the confidential information relates has given consent; or
• disclosure is required or permitted in terms of a law or a court order, or is necessary to carry out official functions, or is required for the purposes of legal proceedings.¹⁴

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 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.¹⁵

2. An insider also commits an offence if he does likewise for any other person.¹⁶

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.¹⁷

4. An insider who knows that he has inside information and who discloses it to another person, commits an offence.¹⁸

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.¹⁹

D. Falsehood trading practices²⁰

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.²¹

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.²²

3. It is a crime to make or publish any statement, promise or forecast in respect of securities traded on a regulated market, or about companies whose securities are listed, which is false or misleading or deceptive in any material respect.²³

4. If the person who makes or publishes such a statement, promise or forecast, unwittingly, but thereafter learns that the information was false, misleading or deceptive, he must without delay publish a full and frank correction. If he does not do so, it is a criminal offence.²⁴

E. Power of authority to request audit

1. The Financial Sector Conduct Authority 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 Authority 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.²⁵

F. General

1. It is an offence to accept an appointment as a member of the controlling body of any market infrastructure (e.g. exchange, central securities depository, clearing house, exchange or trade repository) if you do not meet certain criteria.²⁶