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Regulation and investor protection

The JSE Ltd is self regulatory organisation. It regulates broking firms and listed companies in so far as their activities on the market are concerned. The regulation is enabled by rules and directives in line with the Securities Services Act. Thus the front-line regulator of its primary and secondary markets, an independent regulatory authority, the Financial Services Board (FSB) supervises the JSE. The FSB also regulates the non banking financial services sector, i.e. capital markets,insurance industry, pension funds, asset management companies, etc. The Insider Trading Directorate of the FSB operates a stringent enforcement programme, with the support of the JSE, in respect of the secondary market. Secondary market refers to the trading of shares previously issued by listed companies and currently in the hands of investors.

The Issuer Services Division of the JSE together with two independent bodies (the GAAP Monitoring Panel and the Securities Panel Regulation) enforces compliance with GAAP and the protection of minority shareholders respectively.

There is extensive financial protection in place for losses incurred by investors and member firms as a consequence of criminal acts or default. While the JSE Guarantee Fund ultimately serves to protect investors, a fidelity insurance policy serves as front-line protection for member firms and their clients particularly as far as employee fidelity is concerned. This insurance policy also provides protection to member firms having dealt in good faith with tainted securities. The cover of the insurance policy is more than R750m.

The Guarantee Fund provides protection to investors, up to certain limits, in the event of a member's default and the investor being unable to recover securities or funds held by the member on their behalf. Following the default of a member firm, the Fund will consider a client's claim and pay out that claim, should it be deemed to qualify. The Fund would then claim against the residual assets of the member firm.

Each broking firm operating on the JSE is required to meet specific capital requirements. In part, this requirement is intended to protect broking clients. The JSE has based its capital adequacy requirements for member firms in line with international practices. The base capital requirements for member firms are the higher of:

• adequate capital to meet a member firm’s fixed operating expenditure for a period of 13 weeks; or
• either R200,000, in the case of a member firm that does not operate managed accounts for clients and does not have access to any client’s cash or scrip without referral to the clients or their agents, or R400,000 in all other cases.

A member firm’s risk requirement will be the sum of its position risk requirement, counterparty risk requirement, foreign-exchange requirement, large exposure requirement and custody and settlement risk requirement determined in accordance with JSE directives.

Surveillance at the JSE is greatly enhanced and facilitated through the Broker Deal Accounting system operated by the JSE and which all member firms must use for maintaining their accounting and client records. This enables the JSE to measure its member firms’ compliance with their capital requirements daily.

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