Chapter 2: The Financial Markets Act, 2013

Question 1

What are the objects of the Financial Markets Act?

Answer 1

The objects are to
 increase confidence in the South African financial markets by
o requiring that services be provided in a fair, efficient and transparent manner;
o contributing to the maintenance of a stable securities market environment;
 promote the protection of regulated persons and clients;
 reduce systemic risk;
 promote the international competitiveness of securities services.

Question 2

Jan Ndlovu has an electronic system for bringing together buyers and sellers of securities. The orders are matched and then settled. Should he apply for an exchange license?

Answer 2

Yes, because his system complies with the definition of “exchange” in the Financial Markets Act

Question 3

What is the function of a central securities depository?

Answer 3

A licensed CSD provides custody and administration services.

Question 4

Does giving of advice regarding the buying and selling of securities fall within the definition of “securities services”?

Answer 4

Yes.

Question 5

Which financial instruments are expressly excluded from the definition of “securities”?

Answer 5

Money market instruments and the share capital if the SA Reserve Bank.

Question 6

What are the limitations regarding ownership of an exchange?

Answer 6

The control of and shareholding of an exchange is limited. No person may hold shares in an exchange that exceeds 15% of the nominal value of issued shares or 15% of the voting rights without the approval of the Registrar. In addition, no person may have the power to determine the appointment of 15% or more of the directors of the exchange without the approval of the Registrar. No person may without the Registrar’s approval acquire shares or other interest in an exchange if the acquisition will enable such a person directly or indirectly and with or without an associate to exercise control over an exchange.

Question 7

How is a guarantee fund funded?

Answer 7

Fees on transactions

Question 8

Who supervises the self-regulatory functions of the exchange?

Answer 8

The Financial Services Board.

Question 9

May an exchange list its own shares?

Answer 9

Yes, subject to the approval of the Registrar and if complying with such conditions as the Registrar may determine.

Question 10

What steps must an exchange take before removing a security from a list?

Answer 10

An exchange must before removing a security from the list inform the issuer of its decision and give reasons for the refusal. The issuer must be given the opportunity within a stated time period to provide reasons why the security should not be removed from the list.

Question 11

What conditions must be complied with before removing a security from a list at the request of the issuer?

Answer 11

The following conditions must be complied with:
 The holders of its securities must have approved the removal; and
 The exchange must be satisfied that the interests of minority shareholders have been considered.

Question 12

What disclosure requirements may be imposed by an exchange on an issuer?

Answer 12

An exchange may require an issuer to disclose any information about the securities or the affairs of the issuer that may be necessary to achieve the objects of the Act. The exchange may also require disclosure of the information to the holders of the securities within a specified period. If such disclosure may affect the price of the securities, disclosure must be made at the same time to the public. If the issuer refuses to make the necessary disclosure, trade in that security may be suspended unless a court order has been obtained to allow non-disclosure.

Question 13

What criteria for the authorisation of authorised users must be included in the rules of an exchange?

Answer 13

These criteria must include the following:
 Requirements that authorised users must be of good character and high business integrity or in the case of a corporate entity be managed by such persons;
 Requirements that authorised users comply with certain standards of training, experience or qualifications or in the case of a corporate entity be managed by such persons or employs such persons;
 Requirements in respect of capital adequacy, guarantee or risk management. These requirements must be prudent but may differ among different categories of authorised users or different activities of an authorised user’s business.

Question 14

Define an authorised user.

Answer 14

An authorised user is a person (including a company and any other juristic entity) that has been authorised by the exchange to render securities services and includes an external authorised user.

Question 15

When may an authorised user alienate (sell) listed securities deposited with the authorised user?

Answer 15

If the depositor has authorised it in writing.

Question 16

What are the general principles underlying the code of conduct that an authorised user and its employees must comply with?

Answer 16

The following are the general principles underlying the code of conduct:
A code for authorised users, participants, clearing members of independent clearing houses must be based on the principle that it must
 act honestly and fairly and with due skill, care and diligence and in the interests of the client;
 uphold the integrity of the financial markets;
 have and effectively employ the resources, procedures and technological systems for the conduct of its business.

In the case of authorised users, the code must also provide that it must
 seek information from a client about his or her financial position, investment experience and objectives where appropriate to the category of securities services provided and to the business of the client; and
 act fairly in a situation of conflicting interests.

Question 17

What must an authorised user do that ceases business?

Answer 17

An authorise user must do the following:
 notify the exchange of the intended or actual date of cessation of business;
 notify the clients for whom it holds assets or funds, in writing, of the intended or actual date of cessation of business, provide those clients with statements reflecting the assets and funds held on their behalf and indicate to which authorised user or other person authorised to deal in securities their assets and funds will be delivered to in the absence of an instruction from the client to the contrary; and
 deliver the client’s assets and funds.

Question 18

What are the requirements for appointment as an auditor of an authorised user or exchange?

Answer 18

The auditor must be independent i.e. may not have a direct or indirect financial interest in the business in respect of which the auditor is appointed. No auditor or member of an auditor firm in which a regulated person or director, officer or employee of a regulated person has any financial interest, may be appointed as auditor.

Question 19

What must the accounting records of a regulated person show?

Answer 19

Its transactions and financial commitments and transactions and payments relating to clients, disclosing with substantial accuracy the financial position, performance and cash flows of the regulated person, and separately the position of clients of the regulated person, at the close of business on any day.

Question 20

Is it legal for a financial institution to transact with another financial institution on a principal basis without routing the transaction through the exchange?

Answer 20

Yes, but such transactions must be reported to the Financial Services Board.

Question 21

Zandile sets up a business to buy and sell securities on a principal basis. Zandile is not an authorised user. Is this legal?

Answer 21

Yes, if transactions will have to be routed through an authorised user.

Question 22

Susan’s husband is a director of ABC Ltd. She owns 10 000 shares and wishes to sell them since she has heard her husband discussing the bad results of the company over dinner.
When will she be able to sell her shares legally?

Answer 22

When the trading results of ABC Ltd have been published

Question 23

Peter is the financial director of XYZ Ltd and owns 10 000 shares. The company has been doing badly and he sold his shares prior to the financial results of the company having been published. The share price did not move as a result of Peter’s sale. Is he guilty of insider trading?

Answer 23

Yes, it does not matter whether the trade has an impact on the share price.

Question 24

How does the deposit of a security into a participant change the rights of ownership?

Answer 24

The owner of the securities becomes entitled to an interest as co-owner of all the securities of the same kind comprised in the securities account.

Question 25

John initiates a buy order during the pre-opening of the market but cancels it ahead of the opening of the market. John was hoping to stimulate a demand for the share as he wants a good price for his shares. Is this legal?

Answer 25

No, it amounts to market abuse and is prohibited.

Question 26

If a security is sold, how does transfer of ownership take place?

Answer 26

Transfer of ownership takes place upon the debiting and crediting, respectively, both of the account in the sub register from which the transfer is made and the sub register to which transfer is made by the participant.

Question 27

How is the interest of co-owner calculated?

Answer 27

The interest of a co-owner is calculated by reference to the proportion that the number or nominal value of the securities deposited bears to the total number or nominal value of the securities of that kind held in the securities account or central securities account.

Question 28

Who is responsible to maintain a list of approved nominees?

Answer 28

The Registrar

Question 29

Who administers the register of a company that records the details with regard to the uncertificated securities?

Answer 29

A participant, usually a bank.

Question 30

How many CSDs are there currently in South Africa and what are they called?

Answer 30

One only. It is called STRATE Ltd.

Question 31

Exchange

Answer 31

A juristic person that provides the infrastructure for bringing together buyers and sellers of securities and matching those orders whereby they become transactions.

Question 32

Clearing House

Answer 32

A person providing infrastructure to clear transactions in securities. Aclearing house may be associated with the exchange or independent.

Question 33

Authorised User

Answer 33

A person authorised in terms of the exchange rules to perform one or more securities services and includes an external authorised user.

Question 34

Central Securities Depository (CSD)

Answer 34

A licensed CSD providing an infrastructure for holding uncertificated securities which enables the making of entries in respect thereof and includes a securities settlement system.

Question 35

Participant

Answer 35

A person authorised by a CSD to perform custody and administration services or settlement services or both in terms of the CSD rules and includes an external participant where appropriate.

Question 36

Issuer

Answer 36

An issuer of securities such as a company issuing shares or a utility (such as Eskom) issuing debt instruments.

Question 37

Regulated Person

Answer 37

An exchange, authorised user, CSD, participant, clearing house, clearing member, nominee and trade repository. An issuer is also a regulated person but only under certain circumstances.

Question 38

Market Infrastructure

Answer 38

An exchange, a CSD, a clearing house and trade repository.

Question 39

Trade Repository

Answer 39

A person who maintains a centralised electronic database of records of transaction data.

Question 40

Securities

Answer 40

 Listed and unlisted:
o shares, depository receipts and other equivalent equities in public companies (excluding shares in a share block company);
o debentures, and bonds issued by public companies, public state-owned
enterprises, the South African Reserve Bank and the Government;
o derivative instruments (defined as any financial instrument or contract that creates rights and obligations and whose value depends on or is derived from the value of one or more underlying asset, rate or index, on a measure of economic value or on adefault event);
o notes;
o participatory interests in a collective investment scheme as defined in the Collective Investment Schemes Control Act, 2002 (Act No.45 of 2002), and units or any other form of participation in a foreign collective investment scheme approved by the Registrar;
o instruments based on an index;
 units or any other form of participation in a collective investment scheme licensed or registered in a foreign country;
 the securities referred to above but listed on an external exchange;
 an instrument similar to one or more of the securities listed above declared by the Registrar by notice in the Gazette to be a security for purposes of this Act;
 rights in the securities referred to in the above list.

Question 41

Clearing or Clear

Answer 41

Before settlement, to determine and calculate the exact number and nominal value of the securities of each kind to be transferred and the amount of money to be paid to ensure settlement of a transaction or group of transactions. This includes in some cases the process by which the due performance of a transaction by the buyer and seller of a transaction or group of transactions is underwritten from the time of trade to the time of settlement.

Question 42

Securities Services

Answer 42

 buying and selling of securities for own account or on behalf of another person as a business, part of a business or incidental to conducting a business;
 furnishing of advice to any person;
 custody and administration of securities;
 management of securities and funds by an authorised user;
 clearing services;
 settlement services.

Question 43

The requirements for an exchange licence include the following:

Answer 43

 have adequate financial, management and human resources in South Africa with the necessary experience to perform its functions;
 have clear and transparent governance arrangements that promote the safety and efficiency of the exchange and support the stability of the broader financial system, other relevant public interest considerations and the objectives of the relevant stakeholders;
 demonstrate that the applicant or the exchange, its directors and senior management meet the fit and proper requirements prescribed by the Registrar;
 have made arrangements for the efficient and effective surveillance of all transactions effected through the exchange and for the supervision of all authorised users to identify possible market abuse and ensure compliance with the exchange rules and directives and the FMA;
 have made arrangements for the efficient and effective monitoring of compliance by issuers of securities listed on the exchange with the exchange’s listing requirements;
 implement arrangements to manage the material risks associated with operating an exchange efficiently and effectively;
 have made arrangements for the efficient and effective security and back-up procedures to ensure the integrity of the records of transactions effected through the exchange;
 have insurance, a guarantee or compensation fund or other warranty in place to provide compensation, subject to exchange rules, to clients;
 make arrangements for the efficient and effective clearing and settlement of transactions effected through the exchange and settlement risk;
 have made arrangements for the efficient and effective supervision of authorised users to ensure compliance with the Financial Intelligence Centre Act;
 implement an effective and reliable infrastructure to facilitate the trading of securities listed on the exchange.

Question 44

What is the listing requirements of an exchange?

Answer 44

 the manner in which securities will be listed or removed from the list;
 the manner in which the trading in listed securities may be suspended;
 the requirements that issuers, proposed issuers and their agents must comply with;
 The standards of conduct that issuers, their agents, directors and officers must meet;
 The standards of disclosure and corporate governance that issuers must meet;
 Such other details relating to the listed securities that may be necessary;
 The disciplinary procedure in respect of the contravention of listing requirements, including the penalties that may be imposed.

Question 45

An authorised user does not have to make a deposit in the following circumstances:

Answer 45

 If payment is made by the buyer against delivery of the securities.
 If payment is made by the buyer against such securities being marked or recorded as the property of the buyer.
 If the payment is preceded by a payment made by the authorised user to a seller against delivery of the securities to the authorised user.
 If the payment is made to pay a debt due to the authorised user (please note that a debt arising from the purchase of listed securities which has not been marked as the property of a buyer will not be regarded as a debt).
 If the payment is made in terms of any other law or exchange rule which specifically provides for the payment to be made into some other account.

Question 46

Which accounts constitute as trust property?

Answer 46

 funds held in a trust account; and
 funds not deposited in a trust account but identifiable as belonging to a specific person.

Question 47

Withdrawal from a trust account may only take place in order to?

Answer 47

 pay the person entitled to the payment; and
 pay in terms of any other law or the rules.

Question 48

A code for authorised users, participants, clearing members of independent clearing houses must be based on the principle that it must?

Answer 48

 act honestly and fairly and with due skill, care and diligence and in the interests of the client
 uphold the integrity of the financial markets;
 have and effectively employ the resources, procedures and technological systems for the conduct of its business.

Question 49

A code of conduct may provide for:

Answer 49

 disclosure to a client of relevant material information, including the disclosure of actual or potential own interests;
 proper record-keeping;
 avoidance of fraudulent and misleading advertising, canvassing and marketing;
 proper safekeeping of clients’ transaction documents;
 proper separation and protection of clients’ funds and securities;
 any other matter necessary or expedient to be regulated in a code of conduct for the achievement of the objects of the FMA.

Question 50

An authorised user, participant or clearing member of an independent clearing house that ceases business must?

Answer 50

 notify the respective exchange, central securities depository or independent clearing house of the intended or actual date of cessation of business;
 notify the clients for whom they hold assets or funds, in writing, of the intended or actual date of cessation of business, provide those clients with statements reflecting the assets and funds held on their behalf and indicate to which authorised user, participant, clearing member or independent clearing house or other person authorised to deal in or hold custody of securities their assets and funds will be delivered in the absence of an instruction from the client to the contrary; and
 deliver the client assets and funds.

Question 51

An authorised user, participant or clearing member of an independent clearing house must keep the following accounting records with regard to securities services rendered:

Answer 51

 a daily record of all sums of money received and expended;
 a record of funds held in trust;
 a record of all income and expenditure;
 a record of all assets and liabilities, including any provisions for financial commitments and contingent liabilities;
 a record of all purchases and sales of securities which reflects the following:
o date and time of each transaction;
o person from whom securities were bought or to whom they were sold, unless it was processed through an automated trading system recognised by the relevant exchange;
o name of the person on whose behalf the securities were bought or sold;
o quantity and description of the securities which were bought or sold;
o name of the issuer of the securities;
o price per security and the total consideration;
o fees and charges;
o taxes that are payable in respect of each transaction;
o terms of the contract;
o capacity (principal or agent) in which the transaction was entered into and;
o the following additional information in respect of transactions in options:
 the reference number of the transaction and option number, where applicable;
 whether the option is a put or call option;
 the terms and conditions under which the option may be exercised, including the type of option, the strike price or yield, the strike date and time and the settlement date;
 the identity of the writer of the option;
 the quantity and description of the listed security to which the option relates;
 the option premium and settlement date; and
 whether the option was exercised or lapsed and the exercise date, if applicable;
 a record of all securities and documents of title which are in the possession, safe custody or under its control in which the following is reflected:
o name of the issuer of the securities;
o quantity and description of the securities;
o identification numbers of the securities and documents of title, where applicable;
o name of the registered holder and if the registered holder is a nominee controlled
by the regulated person, the name of the person on whose behalf the nominee is
holding the securities;
o person from whom the securities were received and to whom the securities were
delivered;
o date of receipt and delivery;
o location where the securities or documents of title are kept;
o details of any pledge to which the securities may be subject;
o person on whose behalf securities or documents of title have been received or
delivered; and
o purpose for which the securities or documents of title are held;
 a record of securities held by the authorised user on behalf of its clients which must be made available to its clients as frequently as required in terms of the applicable rules or directives and which must contain as a minimum
o the name of the client;
o the quantity and a description of securities held; and
o a description of transaction movements within the securities accounts during the
period since the previous report;
 A record of the reconciliation of the securities accounts maintained by a participant and the central securities account maintained by the central securities depository.

Question 52

How long should accounting records be preserved in a safe place?

Answer 52

At least 5 years from the date of the last entry.

Question 53

The auditor must audit the annual financial statements of a regulated person in accordance with the International Financial Reporting Standards to ascertain

Answer 53

 whether the financial statements are in accordance with the underlying records;
 whether the financial statements have been prepared in accordance with the above said Standards, the Companies Act and the FMA; and
 whether the financial statements fairly present the financial position, cash-flows and the results of the operations of the regulated person.

Question 54

The auditor’s report must contain the following:

Answer 54

 That the auditor has completed the audit of the annual financial statements of a regulated person in accordance with the International Financial Reporting Standards and in the auditor’s considered opinion the financial statements fairly present the financial position, cash-flows and the results of the operations of the regulated person.
 whether or not securities that have been entrusted to the regulated person or for which the regulated person is accountable, are in the possession of the regulated person or a custodian, and whether confirmations or statements of holdings have been obtained from the persons who maintain the record of ownership of such securities;
 whether the authorised user complied with the FMA with regard to the operation and maintenance of its trust account;
 whether the authorised user complied with the FMA with regard to the operation and maintenance of a separate securities account.

Question 55

The business of buying and selling listed securities may only be conducted by the following persons:

Answer 55

 an authorised user;
 a person effecting the transactions through an authorised user in compliance with the exchange rules. (This will be a person who is trading as a principal i.e. for own account. Agency trading i.e. trading for clients may only be conducted by authorised users authorised in terms of the rules of the exchange or financial services providers authorised thereto by the FSB under the FAIS Act. These financial services providers must also trade through an authorised user.)
 a financial institution transacting with another financial institution on a principal basis subject to the reporting requirements set out below. (This means that financial institutions may trade with each other off exchange with their own funds and assets but not clients’ funds and assets. A financial institution for these purposes includes a pension fund, pension fund administrator, friendly society, collective investment scheme, long-term and short-term insurer and a bank);
 a person who buys or sells listed securities to give effect to
o a reconstruction of a company or group of companies by the issue or reallocation
of shares; or
o a takeover of one company by another; or
o an amalgamation of two or more companies; or
o a change in the control over management or the business of a company.

Question 56

An insider for purposes of the insider trading offence includes

Answer 56

 a person, including a partnership or trust, who has inside information through
o being director, employee or shareholder of an issuer of securities listed on a regulated market to which the inside information relates; or
o having access to inside information by virtue of his or her employment, office or profession;
 a person who knows that the direct or indirect source of the inside information was a person referred to above.

Question 57

What is inside information?

Answer 57

Inside information refers to specific or precise information that has not been made public, that has been obtained or learned as an insider and that if made public is likely to have a material effect on the price or value of any security listed on a regulated market.

Question 58

What is public information?

Answer 58

 is published in accordance with the rules of a regulated market;
 is contained in records open for inspection by the public;
 can easily be acquired by those likely to trade in listed securities to which the information relates; or
 is derived from information that has been made public.

Question 59

What practices is regarded as prohibited trading?

Answer 59

 entering an order to buy or sell a listed security without a change in beneficial ownership with the intention of creating a false or deceptive appearance of the trading in a particular security or an artificial market price for that security;
 entering an order to buy or sell a listed security with the knowledge that opposite orders - at substantially the same price, have been or will be entered by or for the same or different persons with the intention of creating a false or deceptive appearance of trading in a particular security or an artificial price for that security;
 entering orders to buy a listed security at successively higher prices or orders to sell at successively lower prices for the purpose of unduly influencing the market price of such a security;
 entering an order to buy or sell a security at or near the close of the market, the primary purpose of which is to change or maintain the closing price of a listed security;
 entering an order to buy or sell a listed security during an auction call period and cancelling that order immediately prior to the auction matching, for the purpose of creating a false or deceptive appearance of demand or supply for such security;
 effecting or assisting in effecting a market corner; or
 maintaining the price of a security listed on a regulated market at an artificial level

Question 60

What is a market corner?

Answer 60

market corner is where a person or a group of persons acting together, acquires direct or indirect beneficial ownership of listed securities to exercise control over or to influence the price of listed securities and where the effect thereof is that the trading price is abnormally influenced or dictated by such a person or persons or that the trading price deviates from the trading price that would otherwise have been reflected on the regulated market.

Question 61

Investigative powers of the FSB that may be exercised by the Directorate of Market Abuse briefly include

Answer 61

 summoning a person with information or documents to appear for interrogation or to produce documents;
 interrogate such a person under oath or affirmation and examine the document or retain the document for examination;
 on the authority of a warrant, without prior notice, or subject to the consent of the person in control of the premises
o enter any premises and require the production of any document;
o enter and search any premises for any document;
o open any strong room, safe or other container;
o examine, make extracts from and copy any document or against the issue of a receipt, remove such document temporarily;
o against the issue of a receipt, seize any document;
o retain any seized document for as long as it may be required for criminal or other proceedings.

Question 62

The FSB may make market abuse rules after consultation with the Directorate of Market Abuse regarding

Answer 62

 administration matters;
 the manner in which investigations are to be conducted;
 notifications regarding amounts received as a result of administrative sanctions and the procedure for the lodging and proof of claims, the administration of trust accounts and the distribution of payments in respect of claims;
 meetings of the Directorate;
 the manner in which inside information should be disclosed; and
 the conduct of a person relating to inside information.

Question 63

If the company issued certificated securities, it must also enter the following:

Answer 63

 the names and addresses of the persons to whom the securities were issued and the number of securities issued to them;
 the number of and circumstances of securities that have been placed in trust or whose transfer has been restricted;
 the number of debt instruments issued and outstanding or the names and addresses of the registered owners and holders of beneficial interest;
 any other prescribed information.