The African Exchanges Linkage Project: A viable solution to boost liquidity levels in African stock markets?

Africa has seen an increase in the number of stock markets and the level of market capitalisation over the last two decades, with improvements to market infrastructure across the continent.

Yet, with certain exceptions, liquidity levels remain a primary concern for investors on the continent, exacerbated by factors such as inefficient trading systems, high transaction costs slowing the velocity of trade, the lack of participation of retail investors on the markets, and long-term and large holdings of pension funds.

Against this background, efforts have been made to tackle the liquidity challenge. Most noteworthy is the launch of the African Exchanges Linkage Project (AELP) on 7 December 2022, an initiative which could, over time, boost liquidity by facilitating cross-border African investment, and attract more international investors if liquidity levels increase.

The AELP, a joint initiative of the African Development Bank and the African Securities Exchanges Association, launched an e-platform (The AELP Trading Link), which allows investors in different countries to buy shares on other exchanges through a common platform. The AELP Trading Link, which is hosted on Oracle Cloud Infrastructure, has been designed to integrate with exchange and stock broker trading systems, and is available in English, French and Arabic. It aggregates live market data from the exchanges and enables stock brokers to access information and see the market depth and liquidity of the foreign market of interest. The AELP Trading Link essentially enables seamless cross-border securities trading between seven African stock exchanges, which together represents 2,000 companies with roughly US$1.5 trillion market capitalisation.

The linkage project is not the first regional linkage initiative to boost liquidity in African Stock Markets. The Bourse Régionale des Valeurs Mobilières, which links the exchanges of eight West African nations, namely Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal and Togo, is the only exchange in the world shared by several countries, and has been most successful.

In its initial phase, seven stock exchanges in fourteen African countries will be linked by the AELP. The participating exchanges include the Bourse Régionale des Valeurs Mobilières, integrating the eight West African countries: the Casablanca Stock Exchange, The Egyptian Exchange, the Johannesburg Stock Exchange, the Nairobi Securities Exchange, The Nigerian Stock Exchange and the Stock Exchange of Mauritius.

Ultimately, the AELP is expected to, among other things, promote innovations in product creation that would support the diversification needs of investors in Africa and address the lack of depth in African capital markets. It is understood that once the necessary infrastructure has been created, institutional participation is also potentially contemplated, enabling institutions to settle trades directly.

The current framework for the linkage between the exchanges is “sponsored access”. This is based on the model where a registered stockbroker or “originating broker” in one participating securities exchange takes an order from a domestic client and sends a registered stockbroker on another exchange a request to execute the trade in that market. The executing or “sponsoring broker” is responsible for ensuring compliance to the rules, settlement and practice of the market where the security is bought or sold. Therefore, the sponsoring broker will clear and settle trades in the host market, using their local currency, in compliance with the host market’s rules and practices, and the regulatory bodies in all the participating markets are apprised of the progress.

The securities are to be held in the central securities depository where the security was traded, reducing cross-border movement of securities, and streamlining settlement and clearing to comply with only one market; that being the market where the trade is executed and the security is held.

While a project to link trading on seven of Africa’s largest and most liquid stock exchanges has the capacity to boost liquidity by encouraging cross-border African investment and attract more international investors, the AELP is still in its infantile stages and still faces roadblocks on a continent with disparate regulatory regimes and trading rules, and historical capital market challenges. Nevertheless, it is a step in the right direction.

Dimitri Cavvadas is a Partner and Obakeng Phatshwane an Associate | Fasken

This article first appeared in DealMakers AFRICA.

DealMakers AFRICA is the continent’s quarterly corporate finance publication.
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