In the milieu of global financial markets, securities of various types are often classified as either 'listed', 'unlisted' or 'quoted'. This classification is usually based upon whether securities are traded on an exchange or 'over the counter' ("OTC") dependant on the legal system in which they are traded. Financial market colloquialisms such as 'listed, 'unlisted' and 'quoted' in relation to securities in South Africa are, at times, incorrectly used, often because these terms have been imported into market-speak from legislatively different financial market jurisdictions. Frequently, it seems, we import terms from more developed markets - predominantly the UK. Importation of any of these terms from the UK carries a specific danger as the terms 'listed, 'unlisted' and 'quoted' carry vastly different meanings under the laws of the UK and South Africa. This article therefore attempts to provide clarity as to the definitions and uses of the terms 'listed', 'unlisted' and 'quoted' in relation to securities using both South African law and UK law as illustrative examples.
Central to the notion of 'listing' is the concept of an 'exchange' in terms of the Securities Services Act 36 of 2004 (the "Act"). Exchanges are licensed by the Registrar of the Financial Services Board ("FSB") and are defined as 'self-regulatory organisations' meaning that, to a certain degree, exchanges are responsible for regulating their own activities. The exchange must regulate its own activities and those of its authorised users and participants by making and enforcing rules that comply with the Act's requirements.
Under South African law, the definition of 'securities' is widely drafted in the Act. The Act encompasses a wide range of financial products within the definition of 'securities', including shares, stocks, depository receipts, notes, derivative instruments, bonds, debentures etc.
Licensed exchanges are obliged to keep a list of securities which may be traded on the exchange. 'Listed securities' are those included in the list of securities kept by an exchange regulated in terms of the Act. By virtue of this fact, securities which are traded on a licensed exchange and form part of the list kept by the exchange are in fact 'listed securities'.
Interestingly, the Act does not include a definition of 'unlisted securities'. The implication is that any securities which do not fall within the ambit of 'listed securities' are, by that very fact, unlisted securities. Despite not having provided a definition, the Act utilises the term 'unlisted securities' and even confers powers on the Registrar of the FSB to impose certain conditions and/or prohibitions on the trading of unlisted securities if such business defeats the objects of the Act. The Registrar may also impose conditions for the carrying on of such business or may prescribe conditions where specified types of unlisted securities may be bought or sold. Thus, unlisted securities are, it seems, those which are not listed on an exchange licensed by the FSB, which would include the following:
- shares issued by public companies that are unable to, or choose not to, meet the stringent listing requirements of a licensed exchange; and
- derivative instruments (such as interest rate or currency swaps for example) that are traded over the counter on a wholesale basis between market counterparties.
Having clarified the meanings of 'listed' and 'unlisted' securities in the context of South African law, the question still remains as to what constitutes a 'listed', 'unlisted' or 'quoted' security in the UK? The answer stems from UK law and is largely a product of the peculiarities of their regulatory system.
In the UK, the regulatory regime for securities trading is somewhat distinct from our own. UK law is impacted on two levels - at national level and at European Community ("EC") level. EC Law requires each member state to nominate or create a competent authority to maintain an official list of securities, to regulate the admission of securities to what is known as the 'Official List' and to monitor adherence by issuers to the listing rules thereafter. The UK Financial Services and Markets Act 2000, in line with EC law, establishes a single regulator for the financial services industry, namely the Financial Services Authority ("FSA"), which is also the competent authority in respect of listings.
The defining characteristic of the UK regulatory regime, which may shed light on the issue of 'quoted' securities, is that the FSA is the competent authority in respect of listings. This is different to that which occurs in other jurisdictions (such as our own) where exchanges fulfil this role. In fact, this distinction has given rise to confusion in that 'listings' are, in many jurisdictions such as ours, associated with admission to trading on a given exchange. In the UK however, admission to the Official List and admission to trading on an exchange are different (although somewhat linked) concepts. Securities which are not included in the Official List, but are admitted to trading on, say the AIM platform, are referred to as 'quoted' securities. This is solely a product of the fact that these securities do not form part of the Official List.
In the UK, a 'listed' security is a security admitted to the Official List of the United Kingdom by the competent authority (the FSA) for the United Kingdom. 'Quoted securities' are those which are admitted to trading on an exchange regulated system such as AIM or Plus Quoted Markets and either do not qualify to be, or choose not to be, admitted to the FSA's Official List. Notably, the Official List is not linked to any single trading platform or venue such as the LSE Main Board, but rather to the stringent requirements imposed on potential applicants to the Official List.
In South Africa, we do not have a single competent authority in respect of listings and therefore do not posses the gaping difference between admission to trading and listing as does the UK. These two concepts of listing and admission to trading are inextricably linked. In fact, admission to trading on a given exchange renders a security as being 'listed' in nature in our law whether it is a Main Board listing or a secondary board such as a listing on AltX. The primary requirement is that securities appear on the list of securities kept by an exchange licensed by the Financial Services Board for them to be 'listed'. If they are not, the implication is that they are 'unlisted'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.