Over-the-counter trading and alternative exchanges offer opportunities for liquidity growth in Nigeria

The last year has seen the launch of several new market platforms in Nigeria, ranging from an alternative board on the Nigerian Stock Exchange (NSE) dedicated to high-growth small and medium-sized enterprises (SMEs) to platforms for trading over-the-counter (OTC) equities and fixed-income securities. The new tools have seen varying levels of success, with the fixedincome OTC platform having garnered the most liquidity and interest by far. However, the diversification of trading platforms is not a zero-sum game, and the NSE actively supports each of the new platforms, which are licensed as self-regulating organisations by the Securities & Exchange Commission (SEC). These platforms are a significant step towards introducing more transparency in the large OTC segment. Meanwhile, greater liquidity should promote more efficiency across the various platforms of the Nigerian capital markets.

Alternate Board

 The NSE has strived to reinvigorate listings on its primary market by relaunching the old Second-Tier Securities Market as the Alternative Securities Market (ASeM) in April 2013. With 10 SMEs initially listed (four in oil and gas, two in consumer goods, one in industrial goods, one in services, one in construction and real estate, and one in pharmaceuticals) the specialised board boasts less stringent listing requirements and more support for its member firms.

Listed companies are only required to produce a minimum of two years of financial statements, albeit ones that are compliant with International Financial Reporting Standards; a two-year business plan; and audited statements not older than nine months. The minimum float is reduced from 20% on the NSE’s main board to 15% on the ASeM, with owners of the issuing firm required to hold 50% of shares for one year after listing and have at least 51 shareholders. “ASeM is a growth market, whose structure we have changed to support designated advisors,” NSE CEO Oscar Onyema told OBG.

Firms are able to stage initial public offerings (IPOs), listings by introduction, offers for sale and offers for subscription. The 14 designated advisors assist listing firms in handling regulatory requirements, including post-listing ones, in addition to providing value-added and advisory services such as branding and advice on alternative capital-raising channels.

The fees for listing have also been eased relative to the main board, including a flat N100,000 ($610) fee for new or additional listings and a N200,000 ($1220) annual fee – contrasted with a 0.3% of market capitalisation fee for application to the main board and a rolling scale of fees from N200,000 ($1220) to N4.2m ($25,620), depending on firm capitalisation.

The impact of the new board has been modest, with only one company listing on the ASeM since its restructuring: Omoluabi Savings and Loans in November 2014. However, the total current listings on the board are comparable to a number of secondary or alternative markets in frontier economies. The ASeM’s capitalisation at launch of N4.1bn ($25.01m), equivalent to 0.03% of the NSE’s total capitalisation at end-2013, saw 109% growth through to the end of 2014 to N8.57bn ($52.3m), even as the main board dropped around 25%. “We are striving to make it more attractive to listings, by switching from quarterly to biannual reports and revisiting our pricing structure,” Onyema told OBG.

OTC Equities

 In early July 2013 the National Association of Securities Dealers (NASD) launched a platform for OTC trading of shares in unlisted companies. The SEC not only licensed the platform, which is owned by several domestic investors including Tony Elumelu’s Heirs Holdings, but also required that all OTC equities move to the NASD platform in a February 2014 circular in a bid to improve transparency in price discovery.

Nigeria has long boasted an active informal market in unlisted shares, yet it has remained opaque given the lack of open price quotation. “The launch of the OTC markets is welcome as it formalises the previously grey market for securities,” Kyari Bukar, managing director of the Central Securities Clearing System (CSCS), told OBG. Roughly one year after its launch, the platform hosted 16 unlisted securities, including milk producer FrieslandCampina WAMCO Nigeria, upstream oil and gas firm Niger Delta Exploration & Production, Industrial and General Insurance, Food Concepts, Consolidated Breweries and the CSCS itself, among others. As of April 2015, some 17 securities were actively traded.

The NASD platform hopes to continue attracting unlisted public limited companies. To support its ambitions, the NASD is migrating its trading platform from its Bilateral Interdealer Trading System proprietary platform to X-Gen, a version of NASDAQ-OMX’s X-Stream – the same implemented in September 2013 by the NSE, which will allow for seamless arbitrage between the NASD and NSE platforms.

Fixed-Income & Money Market OTC

The more recently launched fixed-income and money market OTC platform has been even more successful than its equities counterpart. Launched in November 2013 and backed by the Financial Markets Dealers Association for Quotations (FMDQ), the platform tied up with Bloomberg’s e-bonds platform in March 2014. Purely targeting institutional investors, in contrast to the NASD platform, the new fixed-income platform is owned by the banks and the NSE. In Nigeria’s N12trn ($73.2bn) fixed-income market, which accounts for roughly 15% of rebased GDP, the scope for attracting trading is significant, particularly given high trading costs for NSElisted bonds (see overview).

“The comparatively high transaction costs are one reason why there is so little bond trading done on the NSE,” Akinsowon Dawodu, chief operating officer and public sector head of Citibank Nigeria, told OBG. While the market has the capacity to handle a wide range of instruments, including money market, Treasury bills, repurchase, foreign exchange, bonds and derivatives, trading has been dominated by federal government bonds, T-bills and foreign exchange. The platform handles bond trading through the Bloomberg platform; foreign exchange trading via the Reuters platform; and money market transactions via phone calls, according to Samuel Sule, associate director of capital markets Africa at Standard Chartered Securities (Nigeria).

Specifically, the e-bonds platform provides pre-trade price discovery; the ability to handle requests for quotes and order trading from several dealers at once; straight-through trade processing; and integrated trade capture and reporting tools. Interestingly, the OTC platform handles clearing and settlements through a specially created facility at the central bank, rather than through the existing CSCS used by the NSE and NASD platforms.

“The launch of new bond trading platforms like the FMDQ e-Bloomberg market have been better for liquidity,” Sule told OBG. In the first 10 weeks of trading alone, the OTC market recorded turnover of around N2trn ($12.2bn), according to the FMDQ, with the total for 2014 reaching N7.96trn ($48.56bn). Indeed, the FMDQ website says it plans to become “the most liquid, efficient, secure and technology-driven OTC platform in Africa by 2018”. The next steps will be to introduce state and corporate bonds to the platform and, over the longer term, to expand trading in foreign exchange and commercial paper – a market that has remained largely inactive since new central bank regulations in 2009 (see overview).

Moving beyond the existing products on its platform, the FMDQ launched a restructuring of the little-used Nigerian Inter-Bank Offered Rate in June 2014, to comply with the 19 governance standards issued by the International Organisation of Securities Commissions in the aftermath of the London Inter-Bank Offered Rate scandal in 2012. “Liquidity has been improving on FMDQ’s bond platform. Now the company needs to step up its market oversight role and act as a first line of defence in regulatory terms,” Dawodu told OBG. “The FMDQ platform effectively aggregates what was already happening on the OTC markets.”

In May 2014 the FMDQ licensed 26 OTC primary dealers, comprising 23 banks and three discount houses (which are in the process of transforming into merchant banks in 2014), to improve the depth of trading. “The emergence of FMDQ will greatly enhance the liquidity, transparency and safety of transactions in the interbank market for fund intermediation, foreign exchange dealings, repurchase transaction and government securities,” the central bank’s director of banking supervision, Tokunbo Martins, told primary dealers at the licence awards ceremony in May. Martins also called for the establishment of governance measures, including a dispute resolution arbitration mechanism and guidelines for the suspension or expulsion of members who infringe on governance rules.

With more alternatives to trading on the NSE, the outlook for developing liquidity is bright. Yet, the uneven results achieved across the three new platforms are prompting promoters and the regulator to review incentives and streamline requirements for listing, particularly on the ASeM. While compliance with the SEC’s requirement for all OTC equities to be traded on the NASD platform is still pending, the FMDQ platform has achieved the most promising start. That said, supporting liquidity growth on the new platforms should not be achieved by sacrificing governance and oversight.