The Competition Commission has approved the small merger between Strate, the Universal Exchange Corporation (Unexcor) and the Central Depository, paving the way for one electronic settlement house for the country.
Strate is the authorised central securities depository for the electronic settlement of equities and warrants listed on the JSE Securities Exchange, as well as all transactions concluded "off-exchange" in securities listed on the JSE. Unexcor is the recognised clearing-house of the Bond Exchange of South Africa and Central Depository performs settlement services for bonds.
Nkonzo Hlashwayo, manager of the commission's Mergers and Acquisitions Division, says the commission's analysis revealed that there was no overlap in the activities of the merging firms.
"We are of the view that the unification of the South African financial markets' settlement and clearance services will lead to efficiencies in those markets. It will have a positive effect on the industry as a whole and will position SA to compete effectively on an international basis. Furthermore, there is a worldwide tendency to merge clearing and settlement systems into ever-larger entities, both as a result of economies of scale and the desire for more effective public regulatory oversight."
Concerned parties have, however, raised the issue of the vertical integration between the JSE and Strate, he says.
"The JSE is, pre-merger, a 50% shareholder in Strate. The commission found that these issues will not be exacerbated by the merger. On the contrary, the vertical issues are diluted by the proposed transactions.
"Due to the structure of the transaction and purchase consideration, the JSE's shareholding in Strate will decrease from 50% to 40.8%, thereby further diluting the influence of the JSE as a shareholder."
The shareholding the JSE has in Strate does not currently raise competition concerns since the owners of the JSE are its and Strate's users (customers). They therefore have no incentive to increase costs to users. However, says Hlashwayo, should the JSE demutualise and become a for-profit institution, this incentive will change.
The new JSE may increase costs to users without other competition. In addition, a for-profit institution may deter entry by increasing the cost to Strate users, thereby making it economically unviable for new players to enter the exchange market should the regulatory environment allow it. This situation is, however, not as a result of the merger and may prevail even without the merger.
In addition, the commission is of the view that in the face of technological advances, competitors for Strate's services are an electronic connection away, should the regulatory environment allow it.
The commission therefore has not imposed conditions on the transaction, but would take a strong advocacy position on the preferred market structure should the JSE demutualise and become a for-profit institution.
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