Chapter VI of Board Notice 90 of 2012 provides that when considering if a foreign security is appropriate for inclusion in a portfolio in accordance with section 45 of the Collective Investment Schemes Control Act, a manager must conduct a due diligence investigation into the Exchange the security is listed and traded on.
What factors must be considered to establish the eligibility of the exchange?
Liquidity and repatriation of funds
In considering a foreign exchange, the following must be taken into account:
- The overall liquidity of the exchange;
- Whether securities or derivatives can be bought and sold in a reasonable time, at best execution and in adequate amounts; and
- The procedures and restrictions, if any, on the repatriation of funds to the Republic.
Regulation
The exchange must be subject to supervision by an authority, which must be a statutory body, an agency of a national Government, state department of such Government or another body designated for that purpose by one of said authorities.
In establishing the if the market is appropriately regulated, the following must be considered:
- How are members supervised?
- What are the capital adequacy requirements by members?
- Is there involvement from a central securities depository and what level of immobilisation or dematerialisation is in place?
- Is there the existence of a form of contract guarantee (e.g buying-in obligations)?
- What are the powers of the exchange to intervene in the event of misconduct?
- What are the listing standards? Is there a required to publish prospectuses and audited annual financial statements?
- The Availability of current information about the securities (e.g transactions, prices and spreads).
- Are there requirements for the issue of contract notes or their equivalents?
- Are trade reporting requirements in place?
- Are clearing and settlement arrangements prompt and secure?
- What is the risk of loss in the event of insolvency of a member of the exchange?
- How does the exchange investigate and deal with complaints?
- What type of guarantee fund is maintained to protect investors in respect of liabilities arising prior to the default of a member?
Regular Operation
The exchange must have regular trading hours during which the listed foreign equity and non-equity securities may be traded.
The following additional considerations must be taken into account:
- The availability and timing of price and volume information and the manner in which it is distributed;
- The speed at which companies must release price sensitive information, and the medium through which that information is distributed.
Recognised Exchange
The exchange must be recognised or registered as a market or exchange or self-regulatory organisation by an authority which must be a statutory body.
Open to the Public
Investments listed or admitted to dealing on the exchange must be freely available for trading by the public directly, or through members of the exchange, during normal trading hours.
The extent to which overseas investors are permitted to hold securities listed and traded on the exchange must be taken into account.
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