Attracting Investment
What Stock Exchanges need to do to ensure that they are
attractive investment destinations (from an investor’s perspective)
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Agenda
Introduction
What drives investment decisions
Pre-investment considerations
Some considerations by the Stock Exchanges
Conclusion
Q&A
Introduction
“As a matter of operating necessity, Africa has been compelled to shape up or ship out of
the globalization rat-race. Management of change or change of management or both have
become a necessity in the competitive quest to woo global capital from other emerging
market suitors. Regardless of the age advantage on her side as a young and sizzling bride,
Africa still needs to adorn herself with the necessary financial infrastructure reforms to win
over the promiscuous heart of old capital as an investment destination of choice.”
By: Lehumo Capital (Pty) Ltd
Title of article: “Africa’s online securities trading revolution”
Published by SA Financial Markets Institute
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What drives investment decisions
Long-term horizons, current
income and diversification
Investment funds are allocated
where there is opportunity
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Pre-investment considerations by the investor
Political environment of the target market/country
Market entry and existing requirements
Regulatory environment
Liquidity of the market in terms of stock availability and hard currency
Market infrastructure including system connectivity between participants and the
Stock Exchange, CSD, Central Bank, etc.
Ability to disinvest when necessary
Market charges
Service providers in the market – competition leads to efficiency & price reduction
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Additional Considerations: Compliance with G30 Recommendation
Implemented
Planned
Recommendation
Yes
No
Yes
No
When
Trade comparison between direct market participants by T+0
Indirect market participants to achieve affirmation by T+1
Fully developed central securities depository
Real time gross settlement system
Delivery versus payment (DVP)
Same day funds for securities settlement
Rolling settlement system with final settlement for all trades by T+3
Securities lending and borrowing should be encouraged to expedite
settlement of securities transactions
Adoption of ISIN for securities issued as defined in ISO Standard 6166
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Attracting investors
Some considerations by the Stock Exchange
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Market regulation
Operate in a regulated
environment
Market regulation must be effective
and enforceable
Investor protection must be clearly
defined in the market rules and
regulations, e.g. Investor
compensation
There must be avenues for dispute
resolution
Market’s Central Securities
Depository must be 17f-7
compliant
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Market efficiency
• A Stock Exchange must ensure efficiencies in its operations by:
• Adhering to rules and regulations
• Automating processes in its trading (ATS), clearing and settlements;
− Having a system interface to allow for off-site trading by brokers and access to information by other market participants
• Issuing of trading and settlement reports on time to relevant participants
• Practising true DVP – where this is not the achievable, ensuring that controls are in place to protect investors
• Guarding against failed trades, or having defined buy-in processes in place to address failed trades
• Having defined timelines for corporate actions, and adhering to such timelines when published, especially payment dates
• Ensuring that investors are compensated through investor compensation fund, or participants having credit lines and/or
insurance coverage
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Market liquidity
• A Stock Exchange must work to improve liquidity:
• Encourage more listings, e.g. relax listing requirements
• Engage Government to off-load their stake in certain institutions
• Have a diversity of instruments/securities traded on the Exchange
• Work with market regulators to introduce more products such as:
• Derivatives
• Securities Lending & Borrowing
• Turnaround (back-to-back) trading, etc.
• Encourage participation on the Exchange (buyers and sellers) through educational campaigns, road-shows, etc.
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Physical security of securities traded on the exchange
• Use of CSD for immobilisation or dematerialisation of securities:
• If immobilised, the jumbo certificate must be at a secured place
• There must be a clear definition of:
− Account structure at the CSD: omnibus or segregated or a combination
− Account naming convention: nominee name, investors’ own name, etc.
− Reporting and reconciliation processes
• There must be a distinction between CSDP’s proprietary assets and those of their clients:
• If securities are in physical form, the Stock Exchange must ensure that:
• Controls are in place to detect tainted scrip
• There is a minimum delay during re-registration and/or splitting of shares
• Provision is made for shares to be sold while out for registration
• A Stock Exchange must have BCP/DR and system back-up processes
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Foreign-Investor friendliness
• To attract foreign investors, a Stock Exchange must also:
• Work with relevant Government departments/agencies to remove or ease market entry and existing requirements
− E.g. central banks need to streamline forex rules so as to ensure availability of funds to support repatriation requirements
• Lobby market regulator to remove or relax foreign investor restrictions such as:
• Ownership limits
• Investment in certain securities
• Pre-funding requirements
• Encourage local participation on the stock exchange so as to offer more avenues for disinvestment when necessary
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Make noise
• African Stock Exchanges must make themselves known through:
• Advertisement in industry-related local and international magazines
• Participation in investor-related forums
• Having a website with up-to-date information and reliable contact details
• Embarking on local and international road-shows
• Participation in depository information gathering project by the Association of Global Custodians and have it published at its website
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Conclusion
The era when it was a status symbol to have a stock exchange in an
African country, and which resulted in mushrooming of stock exchanges on
the African continent, is over – this was in the 1990’s
Stock exchanges in Africa are in competition particularly with their
counterparts in the developing world for 3rd World investment allocation,
and to a larger extent with those in the developed world
With the honeymoon period over and with increased competition, Africa
stock exchanges need to up their game to be seen as favourable
investment destinations
Efforts of the stock exchanges to attract investors would require
collaboration of their Governments and the private sector
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Thank you
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Disclaimer
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This presentation has been prepared by FirstRand Bank Limited, acting through Rand Merchant Bank (“RMB”).
The information contained in this presentation is confidential and intended solely for the use of the intended recipient. This presentation may contain information
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July 2012
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