The Questionable Role of the JSE Ltd as a Regulatory Authority in the Aftermath of its Demutualisation and Listing on its Own Stock Exchange

• Jurisdiction: South Africa
• Pages: 601-630
• Date: 25 May 2019
• Published date: 25 May 2019
• Author: Tshepo H Mongalo

Articles

The Questionable Role of the JSE Ltd as a

Regulatory Authority in theAftermath of its

Demutualisation and Listing on its Own Stock

Exchange

TSHEPO H MONGALO*

University of Cape Town

NAMANGOLWA MATEELE**

Advocate, Lusaka, Zambia

1 Introduction

Stock exchanges have been known to be pioneers of modernisation and

economic efficiency. One instance of modernisation is the recent phenomenon

of demutualisation. But this change has brought to the fore a host of

regulatory problems that seem to suggest that a demutualised and listed stock

exchange is not suitable for carrying out its regulatory role. This article will

focus on conf‌licts of interest that arise when a stock exchange lists on its own

exchange and continues carrying out regulatory functions. It is widely

believed that a listed exchange cannot effectively carry out its regulatory

functions because it has to focus on activities that will generate enough

revenue to satisfy the needs of its shareholders and other investors. The

discussion will be premised on the role that the JSE Ltd plays in the regulation

of market participants and whether this role should be modif‌ied or transferred

in the light of the JSE Ltd’s listing on its own exchange.

This article is divided into f‌ive main areas. Firstly, it introduces the concept

of demutualisation of stock exchanges and outlines the benef‌its of

demutualisation. It contextualises the concept of demutualisation as it applies

to the JSE Ltd. In this regard, it offers a brief history of the JSE Ltd from the

time when it was established as a mutual stock exchange to the time when

* BProc (summa cum laude) LLB (Natal) LLM (Cantab). Associate Professor, Department of

Commercial Law, University of Cape Town. I am indebted to Adv Namangolwa Mateele, who

undertook research in this area at a very late stage of her LLM dissertation research. I am also indebted

to the academic staff of the Department of Commercial Law at the University of Cape Town for their

inputs at the departmental seminar held on 19 August 2009 at the University. Without their assistance,

this article would not have been completed.

** LLB (Zambia) LLM (UCT). Advocate of the High Court of Zambia.

601

(2009) 21 SA Merc LJ 601

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the exchange demutualised, converted into a public company and listed on its

own exchange.

Secondly, the article brief‌ly states the problem posed by demutualisation

and listing by a stock exchange. In this regard, the article outlines the

predicament of an exchange as both a regulatory entity or agency and as a

commercial concern – the latter being facilitated by the process of

demutualisation, conversion into a company and listing on its own exchange.

The article further observes that this process of demutualisation and listing by

a stock exchange gives rise to conf‌licts of interest. In addition to giving the

general explanation of the conf‌licts of interest, f‌ive specif‌ic examples of

conf‌licts of interest are discussed:

(a) the business versus the regulatory mandate;

(b) the funding regulation;

(c) administrative actions;

(d) self-listing; and

(e) the regulation of competitors.

Thirdly, the article provides a comparative analysis of the responses

adopted in other jurisdictions that faced similar challenges posed by the

demutualisation and listing of exchanges. In this regard, the article discusses

the Australian experience and the responses implemented in that country

following the demutualisation and listing of the Australian Stock Exchange

(ASX). The comparative analysis in respect of other jurisdictions is divided

into thematic areas that are indicative of the responses adopted in the

jurisdictions considered. For example, the article discusses

(a) stock exchange ownership restrictions as a response;

(b) implementation of proper corporate governance structures;

(c) outsourcing of regulatory functions;

(d) implementation of special procedures for self-listing;

(e) strengthening supervision by the stock exchange regulator; and

(f) transfer of regulatory functions to a government body.

With respect to the last response, the article considers the example of the

London Stock Exchange (LSE) as regards the transfer of listing functions.

Fourthly, the article will analyse the different responses implemented in

different jurisdictions to address this problem.

Fifthly and f‌inally, the article proposes a possible solution that may be

adopted in South Africa with respect to the JSE Ltd.

The Securities Services Act vests the JSE Ltd with the regulatory functions

as a listing authority.

1

In the aftermath of its demutualisation and listing on its

own exchange, concerns may reasonably be raised about the suitability of the

exchange to enforce the functions identif‌ied in s 11 of that Act. In particular, it

is questionable whether the JSE Ltd can objectively and fairly

1

See s 11 of the Securities ServicesAct 24 of 2006.

(2009) 21 SA Merc LJ602

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