Lock, Stock And Barrel Transformation

LITTLE OVER A YEAR AGO, THE NIGERIAN STOCK Exchange (NSE) was in a state of shambles. An unmitigated bear run was compounded by accusations of gross inefficiency and scandals. Share prices plummeted and the DG/CEO was dismissed in 2010. US-educated Oscar Onyema was appointed to take over the troubled but economically crucial institution in April 2011.

Onyema brings his vast experience on Wall Street and New York exchanges to the NSE. His vision is to transform the exchange and turn it into a modern and accessible trading platform with more products and more flexibility. We caught up with him in London and Washington to find out a little more about the changes and developments which are taking place as Lagos aims to be the financial centre for Africa in the next decade.

Onyema completed his first degree in Nigeria at the University of Ife and then worked in Nigeria for an IBM business partner, Data Processing Maintenance Services, before leaving for the US in 1996 to do an MBA in finance and investment, where he proceeded to work in the US financial services on Wall Street and then on the New York Mercantile Exchange (NYMEX), the largest futures exchange for oil and commodities.

He moved to the American Stock Exchange (Amex) in 2001 to help with strategy. He became the chief administrative officer and senior vice-president. When the New York Stock Exchange and Amex merged in 2008, Onyema was instrumental in overseeing the integration work of the two exchanges. Subsequently he ran the NYSE AMEX equity trading business and set it up as a premier market for small and medium-sized enterprises.

In June 2009, he set up Market Strategists LLC, which is a consultancy firm that provides advisory services to large corporates, investment banks and consulting firms that are looking to understand the intricacies of financial markets across products and across market structure.

African Banker: What are you doing to increase the efficiency of the market?

Oscar Onyema: We are doing a number of things to ease entering and exiting the market. First, we are introducing market making, securities lending and short selling. This should help make the market more efficient and liquid as well. The securities and exchange commission of Nigeria (SEC) recently approved our market making rules, guidelines for securities lending and rules around short selling. So we have started working to roll those out from April this year.

Other things include improving the process flows of broker-dealer firms. We have just proposed minimum requirements needed to play in the market as a broker-dealer and are working with SEC and market operators to come out with one industry standard that reflects global best practice.

Q: There are a great number of stockbrokers in Nigeria and people who sit in the exchange. Is there a concern that some would be squeezed out by these measures?

A: Well, you can’t drive transformation without breaking some eggs! So there might be some collateral damage, but we are trying to strengthen the market and create more efficient brokerage houses that are more responsive to their customers. These reforms are not focused only on the brokerage community but on the exchange itself. We spent a lot of time last year enhancing our processes, strengthening skill sets, and we have come up with new departments which are focused on and are tasked with certain deliverables.

On the company side, we have increased our enforcement of reporting requirements and standards. We have also recently released SEC-approved rules. So it is really a transformation of the entire value chain. We are not focused only on one constituent of the market.

Q: So where in the value chain will there be the greatest change?

A: We have taken drastic measures around corporate governance, around the organisational structure, our values and the culture of the exchange. We have taken a more customer-oriented approach to business. We are rapidly building up capacity so that we can support the new products we are rolling out including the new trading platform scheduled for next year. But unless all the other supporting infrastructure around the capital market is upgraded, we would not have succeeded. That is why we are dragging everybody along with us.

Q: You mentioned trading platforms – what do you have in mind there?

A: We have selected Nasdaq OMX to be a partner in developing our next generation trading platform. We will roll out the X Stream platform, which is based on a 21st century technology and a generation above the system we are currently using – which is called Horizon.

Q: And what impact will this have on the trading?

A: Greater efficiency, speed and a more predictable trading floor. I can begin to guarantee that if you put in an order, you will get a report back in X number of milliseconds. It will probably be the fastest system in Africa. It will also give us the flexibility to do other things like sponsored access, and co-location. It should position us for high frequency trading if that ever gets to Nigeria.

It also gives us reliability, and the ability to trade the new products that we will be rolling out – like Exchange Traded Funds which came out in December. The first one has been launched and trading and doing very well. It is called NewGold ETF.

Q: This was an ETF that was issued by Absa, the South African bank, part of Barclays Group. It is now the third-largest gold ETF in the world. It has done well in South Africa and was recently rolled out in Nigeria. It is mostly used by high-net-worth individuals.

A: We are waiting for Pencom, which is the pension fund regulator, to give the PFA the go-ahead to invest in this type of product. We are working closely to update the guidelines so that the pension funds can also invest.

NewGold is a gold ETF that gives you the opportunity to hedge and have access to gold, while remaining in the market. So you are hedging currency risk, dollar versus naira, and you are also getting exposure to gold.

Q: Isn’t that quite advanced for the local market?

A: It is advanced, but it is catching on fast. To date it is yielding 8-9% returns, which is higher than the oil shares index right now. In terms of your ability to get in and out, it is traded like any other stock. So it is an interesting ETF and we expect to launch more this year.

Q: Are international investors becoming increasingly interested in Nigeria as an asset class, or a place to launch?

A: The majority of our trading activity is actually driven by international investors, about 80% or more. That is really very high. So there is significant interest, and we believe that if we are able to regain the confidence of our local investors, we would see even more foreign activity coming in because there is a lot of money on the sidelines.

Q: And are those local investors that were burnt by 2009?

A: This was the first significant sustained downturn in the market; most local investors went into the market without properly constructed portfolios, without proper asset class diversification. So their risk profile was very high and they were really burnt.

We have introduced an ‘investor clinic’ series to work with high-net-worth investors on structuring their portfolios and getting proper asset class diversification. We held our first clinic last year with Morgan Stanley collaborating with us. Over 300 high-net-worth investors participated in that. We intend to have a few more, collaborating with other broker dealers, such as Citi, JP Morgan, Deutsche Bank, and others.

Q: And do you have any foreign companies lined up for any further listings in the NSE?

A: We have been very aggressive in our pursuit of companies to list, and we are actively talking to about 550 companies right now. We have categorised them into Tier 1, Tier 2 and Tier 3 companies. The first are those who are ready to come to market, if market conditions are right. We have good indications that 20 will come to the market this year. We have already listed the first one, Austin Laz, a local company that makes industrial refrigerators. We are working actively to list some of the “marginal field” operators in of oil and gas exploration. We hope to list at least two of those this year. We have a number of agricultural firms that we are targeting too.

But really, the big prize will come from telecoms. We are working hard to engage the telecom companies and making sure they understand the value proposition for listing on the exchange.

Q: What is happening to the turnover of the exchange?

A: It has really come down significantly, given the fact that a lot of local investors have pulled out of the market. We turn over some $13m on a daily basis, which is lower than where we were even last year, when we were doing more like $21m. And compare that to the heydays, when we were doing about $100m! So we are actively trying to bring in new quality companies that would create excitement and who have solid fundamentals behind them to drive the trading activity in secondary markets.

Q: Are you planning any tie-ups with any foreign exchanges?

A: In the exchange world everybody is talking to everybody else – that is all I can tell you right now! Because we are a mutualised exchange, our corporate structure really does not allow us to do tie-ups.

But as you know demutualisation is one of the major initiatives for this year. It will give us flexibility to do a lot of things. Given our current structure, we have publicly stated that we want to partner with global leaders in different aspects. We are offering value-added services to our listed companies. Investor relations is one of the service we will provide to our clients.

Q: And will that be an outsourced venture?

A: Yes, it is a value-added service. Independent equity research is another area where we are partnering to provide coverage for our companies who are not covered by sell side equity research analysts. Corporate access services is another – we are talking with some big names but I cannot mention them right now because we are in the early stages.

Q: What is corporate access exactly?

A: Well, each company has a diversity of investors who hold their shares in different quantities. So if I want to move a large block, I need to know who holds it and who wants to sell it. If you subscribe to this service, it allows you, on a daily basis, to know who holds what.

We are looking into other areas of possible collaboration with global leaders. That also translates to our relations with exchanges. As we introduce options and futures, we will be looking to collaborate with leaders in these fields, so that we are not reinventing the wheel.

Q: Have you set yourselves targets in terms of daily turnover, or the number of companies you want listed on the exchange?

A: We are looking for good quality companies. So we are trying to benchmark ourselves in terms of the total market capitalisation – not only for equities but also for fixed income and for ETFs.

We have a target of a trillion dollars in five years. By 2016, we intend to be there or very close to it. It is an aspirational target but we are taking it seriously and working towards it. You must understand that the major sectors of the Nigerian economy are not reflected in our market capitalisation today because they are not listed.

Oil and gas accounts for over 90% of our foreign earnings, yet we don’t have one oil or gas exploration company on the exchange!

We do have about 3% represented but that is downstream oil and gas. So with the deregulation of downstream and upstream through the Petroleum Industry Bill that the government is trying to push through – that gives us the opportunity to bring in NNPC, the national oil company and the joint venture companies that would be decoupled.

That would include the oil majors, the large companies operating in Nigeria. These will have a transformational impact on the market. Telecoms command significant market capitalisation, if we are able to convince them to come to the market.

Agriculture accounts for over 40% of our GDP and yet less than 1% of our market capitalisation, so there is a huge opportunity there.

Regarding power, the federal government has said that they want to ensure that there is a stable power supply so they are privatising the power company, PHCN.

They have created about 18 entities: distribution and generation companies. All of these, as they are privatised, are earmarked to be listed on the exchange. There is much opportunity; we haven’t even scratched the surface yet.

On the fixed income side, this year we will be introducing a secondary retail trading platform. We already offer  listing of fixed income; we have about $34bn worth of bonds listed on the exchange, issued by The Federal Government, state governments, and corporates and we intend to develop this market further, especially with greater exposure to the retail customers.

Buyers of bonds are mainly institutional right now. The minimum size of a bond deal is about N100m ($611,000) over the counter. So we are looking to make it such that it is complementary to the OTC trading platforms.

Q: You mentioned government and also regulation, working closely with the SEC. Are you getting all the support you need?

A: We would like to see more cooperation from the government. We have made certain proposals on how to drive liquidity back into the market. This is in terms of taxes, for example – capital gains tax is zero so there is no tax on that. This is very good. As for transaction taxes – they charge VAT on exchange fees, clearing fees. They also charge stamp duty.

When you look at the total cost of doing a trade, the exchange fee is 10%, the SEC’s fee is 10%, the clearing fee is 10%… taxes can be as high as 12%. Then the rest is brokerage fees. So, taxes are even higher than exchange fees and I don’t really think that adds up! Thus we make the case that these taxes need to be reduced or eliminated. VAT is a consumption tax – it is not an investment tax. If that were eliminated, it would reduce the cost of trading and you might see more activity.

Q: Are you modelling your changes on the NYSE or the AMEX story? Obviously you are bringing a tremendous amount of experience from there…

A: There is no institution that is perfect, and even the institutions that are held up to be the citadel of whatever it is – when you are inside you also see the shortcomings. I have learned from that experience – and we are trying to model ourselves and create an institution that is really unique, by taking best practices from different leading institutions.

In everything we are doing, we are benchmarking ourselves against the best leading institutions, not only in the advanced world but in the emerging and frontier markets as well. So what is good for the NYSE Euronext might not necessarily be good for the Nigerian Stock Exchange. But they have taught me a lot and I really have appreciated the experience gained from a developed and mature market.

Q: What is your policy towards investors?

A: We have five million investors in our system right now. And given that Nigeria is a country of 160m people, we actually believe that this number should be more like 40m investors.

There is also the fixed income side. If you are going to encourage people to have properly diversified portfolios across asset classes, fixed income is a necessary part of that portfolio.

Today, yields from fixed income are closer to 14%, 16%. So that is very attractive But retail investors do not have exposure to them. So by creating a retail market, when the market is booming you have exposure to equities. If equities are coming down and fixed income is booming, you have exposure to that as well.

We will use exchange-traded funds to give us exposure to other types of assets, like gold. And then we introduce hedging tools, like options, financial futures, that will give you a complete package.