“The critical questions are: what did Gigaba do after receiving the S&P news on Friday? Did he tell anyone else? What stopped the people he could have told to act on that information?”
The controversy implicating the new finance minister, Malusi Gigaba, around the reception and delivery of news that S&P was to downgrade South Africa’s sovereign credit rating exposes a gaping hole in the disclosure protocols of financial markets.
It is a gap that perhaps amounts to gross negligence around the regulation of disclosure of market moving information and insider trading. A situation whereby, a person can be informed of a pending sovereign rating downgrade into junk status three days prior to the action and have no clear disclosure obligations is highly problematic. That’s because such a person is in a position to effect a trade that takes advantage of privileged information in what will amount to insider trading.
Indeed there has been talk that some people may be shorting the rand around the barrage of political actions that has undermined the value of the local currency. Shorting the rand is to take a short position that will gain from the depreciation of the rand (See comprehensive definition).
The Gigaba matter unfolded a day after he was appointed minister of finance on Thursday night the 30th of March 2017. The minister was then informed of the pending S&P downgrade on the morning of Friday the 31st of March. He held a press conference on Saturday the 1st of April where he was assuring stakeholders that all will be well.
He mentioned the word rating thrice in his statement and gave no hint of a pending downgrade. If anything he is generally seen to have expressed confidence that South Africa will maintain its investment grade credit rating.
When news broke that Gigaba was informed of the downgrade on Friday and people cried foul, he defended himself by saying that the S&P briefing was confidential. As such it was not for him to release the news of the pending downgrade.
That’s fair. But the situation raises a number of concerns when seen in light of the battle against insider trading. The critical questions are: what did Gigaba do after receiving the S&P news on Friday? Did he tell anyone else? What stopped the people he could have told to act on that information?
A view of how the JSE deals with such a matter might help this point. A document titled Insider trading and other market abuses contends that “Insider trading has always been the stuff of controversy and scandal, making headlines and destroying reputations. It is at the very root of discrimination, as it gives a small, usually already relatively privileged minority, an unfair advantage over the broad majority who do not enjoy the same quality of information or opportunity.”
It adds “The use of privileged information for the purposes of gain (or to avoid a loss) at the expense of others is morally and legally reprehensible. The eradication of this practice is essential to the efficient working and reputation of any market, and the society in which it operates.”
In South Africa insider trading is regulated via the Insider Trading Act (1998). It covers trading of securities listed on the JSE and the Bond Exchange of South Africa (BESA). The concerned securities include equities, bonds, futures, agricultural and equity derivatives.
The universe of persons targeted by the regulations is wide but it’s not clear if it covers flow of information from credit rating agencies to politicians.
The Act defines inside information as:
- specific or precise information, which has not been made public and which
- is obtained or learned as an insider; and
- if it were made public would be likely to have a material effect on the price or value of any security listed on a regulated market.
The Act defines an insider as “a person who has inside information” through the following status: a director, employee or shareholder of an issuer of securities.
The JSE acknowledges that the latter definition is limited. It notes that “The potential pool of persons who could become insiders is large, and relates not only to directors, employees and advisers, but could also include advertising and production companies employed to compile and produce confidential information, such as newspaper advertisements announcing company results, cautionary announcements and other price-sensitive notices. Those people involved in defining interest rate policy are also insiders in relation to government debt instruments.”
Journalists and government employees can also be included. What about the minister of finance and the credit rating agency? Surely, the disclosure protocol that demands that market sensitive information must be released promptly should be considered.
This piece was lifted from our sister publication ProBonoMatters