|NSE DG, Oscar Onyema|
Today, there are three exchanges in Nigeria. They are: the Nigerian Stock Exchange (NSE), The Abuja Securities and Commodity Exchange (ASCE) and the NASD Plc. Like in other clime, these exchanges were set up for different reasons. For example, the NASDAQ was created in response to concerns from the United States Congress in the 1960s that its Securities and Exchange Commission (SEC) had been lax in supervising stock trades, and had not adequately enforced rules against large securities companies.
A 1963 SEC report had found that the American Stock Exchange, "had failed in creating an adequate structure of surveillance, control and discipline," and it questioned the effectiveness of self-regulation and the ability of exchanges to protect investors. The SEC's solution was automation.
It assigned this task of creating a computerised system to the National Association of Securities Dealers. Founded by the National Association of Securities Dealers, the NASDAQ External Link began trading on February 8, 1971, as the world's first electronic stock market, trading for over 2,500 securities. In 2000, NASDAQ membership voted to restructure and spin off External Link NASDAQ into a shareholder-owned, for-profit company. In 2007, the NASD merged with the New York Stock Exchange's regulation committee to form the Financial Industry Regulatory Authority (FINRA). In Nigeria however, the three existing exchanges were set up for ulterior reasons. While the NSE was originally established by the British to give local companies a medium to raise long term capital, its survival can be attributed to several government policies, which include: the Nigerian Enterprise promotion Decree, the indigenisation decree and most recently the banking consolidation.
On the other hand, the ASCE was established as a result of the bitter rivalry between former Director General of the NSE, Prof. Ndi Okereke-Nyuike and former Managing Director of Centre-Point Bank Plc (now defunct), Chief Dennis Odife. Odife was one of the earliest broker dealers on the floor of the NSE. His excuse for an Abuja Stock Exchange (ASE) was that the NSE was not doing enough to expand capital formation everywhere in the country.
He had also argued that the NSE was not dip enough for telecommunications companies and international oil companies to raise funds for their operation. Odife and the other promoters of the ASC would have actually succeeded but for a last minute change of mind my former president Obasanjo, all was set for an Abuja Stock Exchange and its first five listings. To assuage the promoters, Obasanjo converted the ASC to Abuja Commodities Exchange (ACE). However, the ACE never made the intended impact. Reason being that there was no enabling law backing the formation of a new Exchange or experience as to how commodities exchange work. To give the ACE a leeway, the promoters later sought permission from the government and renamed it Abuja Securities and Commodities Exchange (ASCE), so that it can trade in both shares and commodities. In the same vein, the NASD Plc was established as a result of a disagreement between its promoters and the NSE.
Following disagreements over the capacity of the trading platform of the NSE, to trade in bonds, the Nigerian Association of Securities Dealers (NASD), applied for a license for an alternative market. Transactions in bonds in the Nigeria capital market is currently being traded via over the counter (OTC), despite claims by the NSE that its present trading platform is configured and has the capacity to carry out trading in bonds. The NASD, according to findings, is to offer investors an alternative window for building wealth so as to compliment the NSE’s efforts. As the NASD commences business on July 1, this year, analysts believe the emerging scenario may change the Nigerian capital market for better or otherwise.
NASD As Alternative Market
The NASD Monday in Lagos signed an agreement with the Central Securities Clearing System (CSCS), which is its clearing house and six settlement banks preparatory to the commencement of operations in July. The banks are First Bank of Nigeria Plc, Guaranty Trust Bank Plc, Access Bank Plc, and United Bank for Africa Plc, Stanbic IBTC Plc and Sterling Bank Plc. The NASD is expected to commence trading with over 200 unlisted securities with a capitalisation of over N3 trillion. As at today, there are over 19, 000 companies in Nigeria that are doing transaction on the OTC with a daily turnover of over N3 billion.
Stakeholders believe the Nigerian capital market is set to witness a change that may shift the balance of power in the market.
The NASD is approved by the Securities and Exchange Commission (SEC) to operate an over-the-counter (OTC) trading in Nigeria.
In a chat with THISDAY at the occasion, Managing Director and Chief Executive Officer of NASD, Mr. Bola Ajomale, said the NASD was committed to helping investors in unlisted companies trade their shares and get value for their investment.
According to him, “In our radar right now we have at least 200 Plcs, what that means is that investors of those companies can now trade their shares on our market. We are not saying we have captivity over those companies. We do not have control over them all we do is to allow investors of these companies to trade their shares on this market. We are going to deliver a welltested, efficient and robust market for investors.”
The agreement, he said, means that all transaction on the NASD will be transparent adding that NASD has created a platform where securities that are not listed on the NSE can now be traded.
“In the process of the shares being traded they will go through the CSCS. What that means is that every security will first of all be verified and be submitted to the CSCS in a digital form. This means safety, transparency and efficiency to our trading. The banks will make for efficient trading, they will operate on behalf of the brokers they sign on and the brokers will use the banks to pay for what they buy.
“The banks are not guarantors; the brokers will be responsible for what they are buying. The banks are a means by which the whole settlement process can be fully secured and be fully integrated. We are operating with a different model and we are operating in a different market. The NSE operates on a listing model, ours only trade securities that are not listed but have investors who want to buy or sell their shares, “he said.
On the role of brokers who are members of the NSE, he said brokers are not exclusive to one market as there are three trading platforms in the country at the moment.
We sent a request for proposal to the banks and choose those interest based on their reach, experience, capacity and understanding of the securities market. The banks that we have on board service the bulk of the stock broking industry. As a matter of fact one of the banks service over 44 brokers in the country.
The Battle Ahead
Following his appointment as the NSE Chief Executive Officer, Mr. Oscar Onyema, embarked upon a massive market drive to get more companies listed on the NSE. A move the Exchange believe is pivotal to its $1 trillion market vision. Some of the companies the NSE hope to get listed are the same companies the NASD hope to trade as private (unlisted) securities. Also, the NASD is expected to focus on small and medium scale enterprises and provide a platform to trade a broad range of other instruments besides equities and bonds. Tradable instruments also include derivatives like options. The NSE also plan to introduce derivatives such as exchange traded funds and other options. The NSE is also working with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to get small business listed on its alternative market
While both Exchanges operate different models, the survival of the NASD is largely dependent on companies staying unlisted. However, the NSE has since launched the Alternative Securities Market (ASeM) -a specialised board to accommodate small and mid-sized companies with high growth potential seeking to access the capital market. The board, which was specifically designed for emerging businesses, is expected to serve as a veritable platform for them to access the capital market for long term funding. Also, the board seeks to address major challenges of emerging businesses in Nigeria, e.g.: Difficulty in accessing long term capital due to high cost of funds as a result of perceived high risk, informal nature of operations and inadequate accounting standards, controls and management of resources.
Speaking at the launch of the ASeM, President of the NSE, Alhaji Aliko Dangote, said no country achieves its developmental goals without providing enabling environment for SMEs to grow.
Dangote who was represented by a member of council of the NSE and Managing Director/Chief Executive of Access Bank Plc, Mr Aigboje Aig-Imoukhuede, said the ASeM launch is in the interest of the Nigerian economy and small businesses.
Invitation to Emerging Businesses
He therefore called on emerging businesses to take advantage of the ASeM to grow their business, create employment and become global champions.
In his presentation, Chief Executive Officer of the NSE, Mr. Oscar Onyema, said the ASeM is a specialised board that will accommodate small and mid-sized companies with high growth potential seeking to access the capital market.
The ASeM, he added, seeks to address major challenges of emerging businesses in Nigeria, which included, difficulty in accessing long term capital due to high cost of funds as a result of perceived high risk , informal nature of operations and inadequate accounting standards, controls and management of resources.
New Features in the ASeM
Onyema who noted that the now defunct First Tier Market had fundamental problems, stated that the Exchange examined the problems and introduced new features that will ensure the survival of the ASeM and help small businesses to grow.
Some of the features, he added, are: introduction of designated advisers to assist ASeM companies meet post-listing obligations, clearly defined brand identity for the board, support to ASeM companies through value added services and advocacy effort, introduction of alternative capital raising products and the creation of ASeM rule book.
Added that some of the key initiative of the ASeM are, developed brand essence towards launching of the board with identity, purpose and target company criteria, reviewed listing requirements, making listing on ASeM readily accessible and affordable to a wide range of viable emerging businesses.
Others, he revealed, are: introduction of ASeM Growth Ambassador (GA) programme to project the ASeM brand and support the advocacy and quotations drive of the Exchange and the introduction of a bouquet of value added services, including institutional services, to assist listed companies to maximise benefit of their listing status.
“We have also developed Consequence Management Process for rule violation, reviewing and currently enhancing market structure and trading mechanics for ASeM companies towards driving liquidity, introduced ASeM Index to track performance of companies listed on the board, introduced alternative capital raising instruments, other than pure vanilla equity for ASeM companies to achieve optimal capital structure.
“We are collaborating with organisations (SMEDAN,etc) towards developmental programmes for ASeM companies, involvement in the on-going MSME Policy Formulation to address capital market provision for SMEs, advocacy for affordable fee regime for ASeM companies by statutory organisations (CAC, FIRS, FRCN, etc), “he said.
NSE’s Trading Platform
Meanwhile, the NSE had recently refute the allegation that its trading platform cannot trade bonds. The Exchange affirmed that its trading platform ‘Horizon’ designed and maintained by NASDAQ OMX has capacity to support trading in Equities, Fixed Income Securities noting that the platform supports two-way quotes, that is, price to buy and price to sell as against what is being claimed in some quarters.
The Exchange explained that the trading platform, which was installed at the inception of Automated Trading System (ATS) on the Exchange in 1999 has been very effective even as it combines auction-style trades, direct trading, negotiated deals and quote market.
According to the NSE, as against what is obtained in the OTC Market where transactions are between two parties, the Quote market supports many-to-many call auction where many dealers trade at the same time. This, it stated, encourages transparency in price discovery.
Besides, The NSE said its Bonds Trading Platform has various means of trading depending on the options acceptable to the market operators and regulators. “The Trading options include: Order Driven Market for Retail Traders and Quote Driven Market for Market Makers. With these options, the trading facility on the Exchange has the ability to cater for both the wholesale and retail markets for fixed income securities.
“In addition to this, the current trading platform of the Exchange has the facilities that allow brokers/dealers to change a former order, cancel un-filled orders, check outstanding orders, suspend and resume an order. It also supports both Dirty and Clean Pricing. The dirty price of a bond is the value of a bond exclusive of accrued interest, while the clean price is inclusive of accrued interest,” the exchange said.
Market watchers believe trading bonds over-the-counters have its own advantages.
Experts said one of the advantages of trading bonds on the OTC market is price discovery.
“The true value of the instrument is derived. This makes pricing highly transparent. Allotment can be based on: FIFO (First-in, First-out); Equal allotment; Pro rata; Member equal lot and Member Pro rata. The closing price of any security can be determined by the Last Trade Price or Weighted Average, said a market watcher.
Others however, said the bid by the NASD to set up a proper OTC market may face stiff challenges because derivatives to be traded have not been developed.
Speaking to THISDAY on the argument as to who has the right to trade derivatives, analysts said only tailor-made derivatives traded on a futures exchange, are traded on over-the-counter markets.
“These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, etc, “said a frontline broker and Managing Director of Emerging Capital Limited, Mr. Chidi Agbapu.
“In this way, the credit risk is on an entity other than the counterparties to the transaction itself. This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity, which has incurred debt. Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.
“The parties will select which credit events apply to a transaction and these usually consist of one or more of the following: Bankruptcy (the risk that the reference entity will become bankrupt), Failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan). “
A derivative that is expected to be traded on the NASD platform is the futures contract, which analysts described as a standardized contract, traded on a futures exchange, to buy or sell a standardised quantity of a specified commodity of standardized quality. (Which, in many cases, may be such non-traditional "commodities" as foreign currencies, commercial or government paper [e.g., bonds], or "baskets" of corporate equity ["stock indices"] or other financial instruments)
“The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange, ” he said.
He added, “A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. In other words, the owner of an options contract may exercise the contract, but both parties of a "futures contract" must fulfill the contract on the settlement date.”