On Friday, 29 August 2014 the FSB hosted an industry briefing session to discuss the regulatory framework and the application process for licences and exemptions in respect of Single Counter Exchanges (“SCEs”). This followed the publication of a Directive and Guideline regarding exchange infrastructures provided by companies to facilitate trading in their own securities on 11 July 2014.
The Registrar of Securities Services (“the Registrar”) emphasised that all unlicensed exchanges must urgently be brought into the regulatory fold, where investors will receive adequate protection. He highlighted three of the options available to SCEs, namely to:
(a) stop providing unlicensed exchange platforms;
(b) obtain an appropriate exemption; or
(c) obtain the requisite licence to operate an exchange.
The first option is not limited to ceasing business. It could also include changing their business model, such that they no longer fall within the definition of an exchange, as defined in the Financial Markets Act (“FMA”). This could for example be done through a platform where investors can submit bids and offers though the infrastructure, but the trading takes place on a bi-lateral basis. It would then not be an exchange and the provisions of the FMA would not be applicable to it.
With the second option the Registrar will have to be satisfied that the jurisdictional requirements of Section 6(3)m of the FMA are satisfied. Even if the jurisdictional requirements are satisfied, the Registrar will always retain a discretion to decide whether to grant or refuse an application for an exemption and to set conditions to any such exemption. The exemption can either be of a temporary duration or of a perpetual nature. The Registrar emphasised that each application would be assessed on its own merits.
Lastly, the third option would require an applicant to comply with the licensing requirements as set out in the FMA. These are mainly compliance with the requirements listed in Section 8 of the FMA, compliance with the rules and listing requirements as set out in sections 10 and 11 of the FMA respectively and payment of the fee prescribed in Board Notice 98 of 2013. When considering an application to be licensed as an exchange, the Registrar will be entitled to apply a principle of proportionality.
The Registrar understands that immediately requiring full compliance with the licensing requirements of the FMA would effectively result in most of the unlicensed SCEs having to immediately cease business. He also took cognisance of the fact that compiling an exchange licence application could take some time.
Short of requiring all unlicensed SCEs to immediately cease trading, and to remain closed until such time as they have been licensed, the only other viable option appears to be the granting of some form of a temporary exemption where the requirements of section 6(3)m have been met and the Registrar believes that he should exercise his discretion in such manner.
The general policy guideline of the FSB will thus be to look toward a temporary exemption from the exchange licensing requirements, for a maximum period of six months from 31 August 2014, where the application has merit. The aim of such a temporary exemption would be to afford the unlicensed SCE sufficient time to operate legally, whilst it winds down its operations, or to change its operating model to no longer be an exchange, or to apply for an exchange licence.
The Registrar will set stringent conditions for operation during any temporary exemption period.
The Registrar stated that each matter will be decided on its own merits, and that the general policy guideline should not be seen as creating any rights or expectations for any party as to the outcome of their application. He emphasised that any preference which he expressed as to how he saw the process unfolding was only that. It was a broad general guiding policy which is not cast in stone, and it is subject to change depending on the merits of each and every case.
On 11 July 2014 the Registrar published a standard application form wherein he set out certain basic information that he believes he will likely need in order to consider applications for exemptions from any section of the FMA. Reference to this document was also made in the Directive and Guideline that was published on 11 July 2014 and it is available on the FSB website.
The main message conveyed was that unlicensed exchanges must be brought into the regulatory fold so that they comply with the law of the country, and so that investors will receive adequate protection.
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