Last Friday’s decision to suspend trading on the Zimbabwe Stock Exchange, on suspicion that activities going on there are contributing to the demise of the local currency, may rank as one of the policy missteps that our Government is often accused of and has often acknowledged.
The suspension, which was given without any concrete basis and also without following regulatory procedures, could surpass as one of Government’s errors of judgement. It undermines confidence in our markets and goes against the mantra “Zimbabwe is open for business”.
For avoidance of doubt, this write up is not to say there are no illegal, illicit or nefarious activities taking place on the local bourse, far from it. There could be genuine suspension and the world over, markets can be suspended if there are genuine concerns that laws of the land are being or have been broken.
But unlike Friday’s order to halt trading that came direct from Government, the regulatory body, in this case the Securities and Exchange Commission of Zimbabwe (SECZ), should have been allowed to carry out its role. In a worst case scenario, its parent ministry could have released the statement. What also made Friday’s statement confidence sapping are the reasons given. The announcement by Government was at variance with how stock markets work. The press release pointed to the “existence of fake counters on the ZSE”.
The stock exchange is also supposed to be well regulated and accusing it of housing “fake counters” sends the wrong signal to would be investors both local and foreign. A stock market is very sensitive and such a strong message coming from the ultimate authority in the country can be easily believed. With hindsight can Government repeat that there are actually fake counters trading on the ZSE?
Below we look at some of the procedures, stockbrokers are required to do with regards trading of shares on the ZSE. When dealing with clients, the first thing stockbrokers are required to do is the KYC documentation when signing on new clients, then ongoing updates to the client files.
Second is monitoring of transactions to ensure that they are in line with a stockbrokers understanding of the client. If a client goes from $200 deposits to millions, brokers will have to report that.
Stockbrokers are also required to comply with the ZSE and SECZ rules when trading. For example, ensuring no insider trading during closed periods and no front running.
They are also expected to report quarterly on financial performance and certain risk management issues such as key staff trades, client classifications among other things.
On illicit flows, brokers are expected to receive all funds through the banking systems and allocate these to segregated client accounts in their books. All trades have to go through the automated trading system (ATS) and settled by the central securities depository (CSD). Both systems are monitored by SECZ in real-time and they get daily, weekly, monthly, quarterly and annual reports.
In addition, banks are required to report brokers who deposit large amounts of cash.
So unless there is blanket non-compliance with such regulations, then there is no basis to suspend the whole market from trading.
Cases can be isolated while trading is allowed to continue. The issue then comes back to lack of understanding of how the stock market works, the more reason to let the regulators handle such issues.
Education of how capital markets work is now a must in the country if we are to prevent this from happening again. Remember this is the second time such accusations have been made, and yet every cent that comes to the stock market passes through the banking sector and should be flagged if it breaches certain expectations.
The Old Mutual Implied Rate was also pointed out as a reason for suspension, but again what the move only reflects on is a lack of understanding of how it is derived. For as long as Old Mutual is listed on more than one stock exchange, an implied rate can be easily calculated. One can even have a PPC implied rate, or a Seed Co International implied rate. The rate is a mere comparison and reflects the different values attached to the counter in different markets. The OMIR is a flawed way of measuring the value of a currency, and those using it for pricing are misled and do not have a full understanding of how it is derived and instances in which it can be applied.
Away from the OMIR, the way the ZSE was suspended erodes confidence. Capital markets are regulated by the Securities and Exchange Commission (SECZIM), so one would expect the regulator to play a key
role in decision making, but up to the time of writing, on Wednesday, July 1, the SECZIM
had not made a comment on the developments.
Government’s statement shows it might be a while before the market opens again. These measures are to subsist until such time “all the current phantom rates of exchange have converged into one genuine rate that is determined by the market forces under the Foreign Currency Auction System,” reads part of the Government statement.
Convergence of the rates is not something that will happen overnight, so the stock market might as well brace itself for a much longer time before trading resumes again.
When he fielded questions, at a post cabinet press briefing, Finance and Economic Development Minister Mthuli Ncube also failed to give clarity on when the stock market would open again. He said the ZSE will remain closed until investigations have been concluded or “if there is a feeling that it’s no longer necessary for the suspension to continue”.
He said the suspension should be treated like a very long weekend or holiday. While the Minister justified that the closure was meant to deal with illicit financial transactions allegedly taking place on the bourse, he could have tried to assure investors that the allegations are not flimsy. The market deserves to know what is really happening and how serious it is.
Minister Ncube should have been more reassuring. He could have given an indication on how long it will take to collate data followed by a possible date when the ZSE will reopen while findings are being established. But an open ended indefinite period heightens risk for investors. Even more so when they are not clear on what is happening behind the scenes.