COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 68/LM/Oct10
In the matter between:
JSE Limited Acquiring Firm
And
Momentum Managed Account Platform Holdings (Pty) Ltd Target Firm
And
FirstRand Alternative Investment Management (Pty) Ltd Target Firm
Panel : Norman Manoim (Presiding Member),
Yasmin Carrim (Tribunal Member)
Andreas Wessels (Tribunal Member)
Heard on : 4 May 2011
Order issued on : 05 May 2011
Reasons issued on : 03 June 2011
Reasons for Decision
Approval
1] On 4 May 2011 the Competition Tribunal (“Tribunal”) conditionally
approved the large merger between JSE Limited and Momentum
Managed Account Platform Holdings (Pty) Ltd and part of the business of
FirstRand Alternative Investment Management (Pty) Ltd. The Tribunal’s
reasons for conditionally approving the transaction are set out below.
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The Parties to the transaction
2] The acquiring firm is JSE Limited (“JSE”), 1 a company listed on the
Johannesburg Stock Exchange. JSE is not directly or indirectly controlled
by any of its shareholders, some of which are Public Investment
Corporation (12.25%), STANLIB Asset Management Ltd (8.04%), Skagen
AS (6.69%) and Kagiso Asset Management (6.26%). It is also important to
note that no one shareholder may own more than 15% of JSE Ltd.
3] The primary target firm is Momentum Managed Account Platform
Holdings (Pty) Ltd (“MAP Holdings”). MAP Holdings is directly controlled
by Momentum Group Ltd (“Momentum”). Momentum is in turn directly
controlled by FirstRand Limited (“FirstRand”). FirstRand is a public listed
company and is not directly or indirectly controlled by its shareholders who
include RMB Holdings Ltd (30.06%), FirstRand Empowerment Trust
(9.49%) and Public Investment Corporation (8.92%).
4] MAP Holdings then controls Momentum Managed Account Platform (Pty)
Ltd (“MOMMAP”), which is a managed account platform. MOMMAP is
essentially a legal structure and vehicle for making safe investments in
hedge funds which makes it possible for multiple investors to invest in one
or more of a chosen set of underlying hedge funds which mirror certain
desirable hedge funds in the market but are entirely separate and have
different assets.
5] MOMMAP is the main asset being acquired by JSE in terms in this
transaction.
6] The secondary target firm is part of the business of FirstRand Alternative
Investment Management (Pty) Ltd (“FRAIM”) which currently provides
operational services to MOMMAP.
7] In terms of the proposed transaction JSE will acquire all of the issued
share capital of MAP Holdings and also part of the business of FRAIM.
The activities of the parties
8] The Acquiring Firm, JSE 2 is currently the only exchange in South Africa
licensed by the Financial Services Board (“FSB”) in terms of the Securities
licensed by the Financial Services Board (“FSB”) in terms of the Securities
Services Act 36 of 2004 and provides the platform (Trading Venue) for the
public sale of shares to investors and also caters for the subsequent
trading thereof.
9] JSE further provides financial data on shares trading which is utilized in
making decisions on investments. JSE also provides for the listing of
1 http://www.jse.co.za/Home.aspx
2 JSE has operated as a market place for the trading of financial products for nearly 120
years. In this time, the JSE has evolved from a traditional floor based equities trading market
to a modern securities exchange providing fully electronic trading, clearing and settlement in
equities, financial and agricultural derivatives and other associated instruments and has
extensive surveillance capabilities. JSE is also a major provider of financial information.
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securities, surveillance and risk management.
10]The Target Firm, MAP Holdings, is the holding company of MOMMAP.
11]MOMMAP, through daily monitoring, valuation and risk management of
underlying hedge funds, effectively regulates and provides safer means of
investing into hedge funds through constant, sound and operational risk
management.
12]MOMMAP provides the above services through the essential operational
services currently provided by FRAIM, which is the secondary target firm.
The Rationale
13]The effective regulation of the hedge fund industry, which is somewhat
addressed by MOMMAP, has been an international dilemma which
numerous jurisdictions have grappled with for over a decade.
14]Hedge funds were thrust into the international spotlight by the global
financial crisis and more recently by the scandals and fraud which plague
this industry3 such as Bernard Madoff's $50 billion hedge fund fraud
conviction4 and the more recent conviction of hedge fund billionaire Raj
Rajaratnam.5
15]There is therefore not only a dire need for the regulation of the hedge fund
investment sphere locally, but also internationally and in addressing the
above concerns, MOMMAP is an innovation which enables investors to
monitor the operation of hedge funds without the complication of
introducing a separate legislative framework for such regulation. It can
thus be thought of as a private substitute for a gap in public regulation.
16]According to the primary target firm, JSE’s unique and singular position as
described above as well as its vast experience in the financial markets will
enable it grow funds under management on MOMMAP exponentially.
17]FRAIM, the secondary target firm, recognises that the MOMMAP is not a
core business (merely an enabler) 6 and it therefore needs a strong and
capable partner to enable it to reach its full potential by making it available
to a larger pool of investors.
to a larger pool of investors.
18]MOMMAP’s independence has been compromised in the opinion of some
investors due to its links to Momentum and FirstRand, who also operate in
the hedge fund sphere, through their other business units or related
entities. Since the JSE is not a competitor in the hedge fund market, it is
perceived as more of a neutral party with the added advantage of being
able to attract investors looking for the safety and comfort of a regulated
3 JSE Business Case Document MAP, p6.
4 http://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html
5 http://www.washingtonpost.com/business/economy/hedge-fund-billionaire-raj-rajaratnam-is-
convicted-of-fraud/2011/05/11/AFN6fRuG_story.html
6 Extract from Minutes of the Meeting of the Board of Directors of FRAIM on 3 February 2009.
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investment environment.
19]The desired creation of a safe trading environment (for hedge fund
investment) will lead to increased hedge fund activity in mainstream asset
management.7 This will in turn lead to an increase in the liquidity of South
Africa’s financial instruments.
Background on the hedge fund industry
20]The hedge fund industry has and still continues to show tremendous
growth and it is attracting more and more investors.
21]Assets Under Management (“AUM”) in hedge funds as at June 2009 were
at R39.7 billion demonstrating a 93% growth since 2006.
22]The MOMMAP was launched in November 2007 and has since more than
tripled its initial number of hedge funds and its AUM.
23]Hedge funds account for only 2% of the AUM in South Africa and yet they
contribute to 25% of total trading activity.
24]Only 1.3% of SA pension fund money is invested in hedge funds as
opposed to the global average of 18%. This is due investor cautiousness
with regard to hedge funds due to fear of fraud, lack of transparency, a
lack of understanding and an unclear regulatory environment.
The relevant market and the effect on competition
25]The Competition Commission (“the Commission”) described the relevant
market as the national market for managed account platform services.
26]There is no horizontal overlap between the merging parties. There is a
vertical relationship because only the JSE is in a position to supply the
crucial financial data necessary for MAP’s operations. Secondly, the JSE
is not only a monopoly supplier; it is also a regulator of financial markets.
It is this relationship that is central to the Commission’s concerns in
respect of this merger which we go on to consider. At present MOMMAP is
the only service provider of its kind however, given that this market is
expected to grow exponentially in the future, entry by new players would
be likely. The Commission’s concerns primarily relate then to prevention of
be likely. The Commission’s concerns primarily relate then to prevention of
barriers to entry post merger.
Theories of Harm identified by the Competition Commission and the
Conditions Imposed
7 JSE Business Case Document MAP, p6.
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27]The Commission8 identified three main possible “Theories of Harm” linked
to this transaction, namely:
a. The JSE’s monopoly over information dissemination of all trading
information and the audit wide audit powers that flow from this
monopoly.9 This would give the JSE insight into any MAP
competitor’s clients and innovations as pointed out by a
competitor10 Further if the JSE refused to supply trading information
to a MAP competitor that competitor’s would be almost instantly
eradicated.
b. The possibility of the JSE listing MOMMAP in some manner and
thereafter increasing barriers to entry of future rival MAPs though its
power over listing rules and the charging of exchange and listing
fees.
c. The possibility of the JSE requiring hedge funds on MOMMAP to
switch away from the use of OTC (over the counter) derivatives to
SAFEX11 derivatives contracts in order to drive up listed derivative
trades thereby gaining an unfair advantage against prime brokers
and banks who are its competitors in the provision of derivative
contracts.
28]Merging parties do not agree with the theories of harm as identified by the
Commission and indicated their disagreement and the reasons therefore in
a letter to the Tribunal, which forms part of the record of this matter.12
29]Despite this the merging parties nevertheless have agreed to the
conditions imposed by the Commission. For this reason we do not have to
decide whether the Commission’s theories of harm are correct. We only
have to decide on the assumption that they are correct, whether the
conditions negotiated adequately remedy the harms identified.
8 Utilizing information gathered after conducting interviews with various firms such as ABSA
Capital, Nedbank Capital, Investec, Coronation Asset Managers, Novare, PSG, Peregrine
and Gen-X Equity.
9 The JSE enjoys, in terms of its contracts with customers of this information, so called audit
powers to ensure that the information is not onsold to other parties. Although this audit power
is intended to protect the JSE’s proprietary interest in the information, once it becomes the
owner of a competing business it does give it access to information about a rival’s business
that it would not ordinarily have.
10 Competes with MOMMAP in providing Risk Analysis services.
11 SAFEX Clearing Company (Pty) Ltd, also known as the South African Futures Exchange is
controlled by the JSE.
12 The merging parties submitted that the JSE does not have the ability nor the incentive to
engage in exclusionary abuse with regards to the listing of securities, exclusionary abuse with
regards to the dissemination of JSE information and exclusionary abuse of mandates with
respect of the use of OTC versus exchange traded instruments. Further the merging parties
state that the JSE is subject to statutory functions and duties which must be fulfilled in light of
the purposes of the empowering statute, the Securities Services Act, and the JSE listing
requirements. Further the most important constraint to the JSE’s possible abuse of its powers
is the damage this abuse would cause to its reputation as an exchange. The damage to be
caused by such abuse would further far outweigh any advantages to the JSE due the value of
the MAP business relative to the size of the JSE.
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Conditions (as annexed hereto and marked “Schedule A”)
30]The conditions address the concerns relating to JSE’s monopoly over
market information, 13 by compelling JSE to supply market information to
existing and future MAP competitors on terms that are no less favourable
than those that are effectively offered to any JSE company.14
31]Further, the conditions prevent the JSE from possibly gaining insight into
and utilizing its competitors’ innovations through its wide audit powers,15 by
ensuring that strict confidentiality is undertaken by the auditors performing
such duties by creating a “Chinese Wall” 16 or barrier to impede the flow of
information between JSE and MAP.
32]The above impediment to information flow between MOMMAP and JSE is
further strengthened by the condition that the JSE and MOMMAP must
remain as separate corporate entities.17
33]In terms of the conditions 18a MAP competitor may elect to either be
audited by an independent auditor or by internal JSE auditor.
34]The conditions further restricts JSE from listing MOMMAP or any related
product or investment vehicle there by limiting JSE’s ability to increase
Barriers to Entry by amending listing requirement.19
35]The listing restriction also alleviates the Commission’s concerns over the
JSE having too much power due to it (JSE) being both the regulator of the
share exchanges and a competitor at the same time.
36]Finally, the conditions preclude JSE, for a two year period, from being able
to amend investment mandates for the mirror hedge funds.20
Public Interest
37]This transaction will have no effect on employment.
38]The FSB raised no concerns over this transaction and also stated that it is
currently in consultation with the National Treasury in considering the
appropriate regulatory framework for hedge funds.
13 This is an essential input in the Managed Account Platform market.
14 Similar to the World Trade Organization’s (“WTO”) Most Favoured Nation Rule aimed at
14 Similar to the World Trade Organization’s (“WTO”) Most Favoured Nation Rule aimed at
non-discrimination between WTO trading partners, with the effect that the same must be done
to all parties in terms of trading conditions and tariffs.
15 Conditions 1 and 2 addresses concerns with regards to information dissemination
agreements and JSE’s wide audit powers.
16 The “Chinese Wall” was a term of reference used by the parties at the hearing. It describes
the barriers created by the Conditions on the JSE’s ability to have access to their competitors’
innovations and sensitive information.
17 Condition 5.
18 Condition 3.
19 Condition 4.
20 Condition 6 addresses the third theory of harm as referred in para 26 (c) on p5.
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Conclusion
39]The conditions which are attached to our reasons are lengthy, technical
and complex. For this reason we are comforted by the fact that the
Commission in negotiating the conditions had input from those with
expertise in this area other than just the merging parties. We were
informed that a related rival business and the FSB were consulted. We
also, during the course of the hearing, debated the proposals with the
merging parties and the Commission and we are satisfied with their
responses. Indeed we commend them for efforts they have made to reach
a solution that both permits the merger to proceed, which will offer
improved service to consumers, whilst dealing with genuine concerns
about future competition in this market.
40]The Tribunal is therefore of the view that the conditions sufficiently
address the competition concerns raised by the Commission and by third
parties.
41]Accordingly, the above merger is approved with conditions.
____________________ 03 June 2011
N Manoim DATE
Y Carrim and A Wessels concurring.
Tribunal Researcher: Songezo Ralarala
For the merging parties: P McNally S.C. instructed by Webber Wentzel
Attorneys
For the Commission: Fergus Reid, Genna Robb, Andrew Sylvester and
Maarten van Hoven
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