Can East African Community capital markets learn from SADC model?

The Southern African Development Community integrated stock markets offer good lessons for the East African Community as it seeks to integrate its stock exchanges via a suitable interconnectivity window.

This was laid bare at a meeting of capital markets experts held in Kampala recently.

The SADC operates a shared model that makes it possible to procure affordable digital operating platforms and reasonable sharing of commissions between stockbrokers.

Under this model, a stockbroker who refers an equity trade to a colleague based in a participating stock exchange receives 33.3 per cent of the commission earned from the stock trade. The balance is allocated to the stockbroker that actually executes the trade.

In comparison, disagreements over technological issues have significantly slowed down integration of East Africa’s stock markets trading platforms, compounded by funding gaps.

According to Paul Bwiso, the chief executive officer of the Uganda Securities Exchange; “Our stock markets are in different stages of development and this makes system integration more difficult than expected.

“While Uganda and Tanzania’s stock exchanges appear more compatible with each other based on results of trades done in the past, Rwanda’s stock exchange shares a CDS platform with the central bank in a very entrenched arrangement,” he said.

“Kenya’s securities exchange operates an internal CDS platform separate from that of the central bank while Burundi is yet to establish an exchange. Due to divergent technological factors, the integration of the local stock market trading platforms across East Africa has been pushed to first quarter of 2020. But finding consensus on a trading revenue sharing ratio remains one of the biggest obstacles facing the stock market integration agenda,” he added.
In the SADC model, stock exchanges hosted by member states enjoy access to discounted prices for advanced but expensive technological platforms by leveraging on the Johannesburg Securities Exchange’s economic muscle.

Johannesburg is Africa’s largest stock exchange, with a market capitalisation of more than $150 billion—bigger than East Africa’s individual economies—and has more than 300 listed companies on its trading board.

MoUs between stockbrokerage firms in EAC countries may help drive future consensus on a viable trading revenue sharing ratio.

“Equity Stockbrokers Ltd of Uganda signed an MOU with Dyer and Blair Investment Bank of Nairobi for cross border equity trading and sharing of commissions in 2008. Most of the clients serviced under that MoU were signed up during the Safaricom IPO,” said Edward Ruyonga, an equity dealer at the USE.

Discounted prices

“Under that MoU, Dyer and Blair was entitled to 55 per cent of the commission earned from the cross-border trades while Equity Stockbrokers received 45 per cent. This MoU benefited Equity Stockbrokers well but was terminated in 2013 due to unforeseen circumstances,” he added.

Whereas hi-tech trading platforms such as the Automated Trading System and Central Depository System cost more than $1 million in foreign markets and are an investment burden to small stock exchanges, a joint procurement order by the JSE to a major technology supplier is likely to yield bargain equipment prices and cost savings for member exchanges.

“This shared business model helps smaller stock exchanges offset huge capital expenditure costs by leveraging on significant financial resources offered by a large securities exchange in the co-operation network.

“When a stockbroker in Johannesburg calls another in Namibia for MTN Group shares, revenue from that transaction is shared between the two and the exchange that originated the trade would also earn a fee from this transaction,” Tiaan Bazuin, CEO of the Namibia Stock Exchange said.

“Under the co-operation framework, the JSE shares Initial Public Offering information with all SADC stock exchanges to enable market participants prepare for upcoming equity offers,” Bazuin added.

Similar strategies pursued by large African banks during acquisition of core banking platforms such as Finnacle have helped their subsidiaries buy upgraded software systems at discounted prices coupled with favourable maintenance packages when compared with ordinary, individual purchase orders that hardly attract discounts.