Liquidity plays a pivotal role in financial exchange markets. Without the availability of counter-offers, markets cease to exist, and are inadvertently replaced by individualized bilateral contracts. The higher the liquidity of a financial exchange market, the higher the satisfaction derived by market participants as it expands the range of potential counter-offers and increases the probability of a suitable and favorable match.
The market capitalization of the listed companies on the Nigerian Stock Exchange (NSE) currently stands at about $87.5bn, and the NSE is on a drive to ensure this hits $1trillion by 2016. For this to become a reality, the market capitalization needs to grow by about 1150% over the next two years. Going by the current range of products on offer, we can safely assume this is already a missed target.
Although the NSE has witnessed considerable structural changes in recent times, not much has really been achieved in terms of the diversity of financial instruments traded on the Exchange. A lot of innovation is still required in developing instruments that will cater to the varied and specific needs of domestic institutional and retail investors.
A very good place to start will be exchange traded funds (ETF) built around Transferable Custody Receipts (TCRs). Blue chip companies based in illiquid emerging and frontier markets have long cross-listed shares on the world’s leading exchanges as a means to tap into the most liquid markets. Nigerian companies have also tapped into this opportunity by cross-listing on other more liquid Exchanges. These are usually in the form of Global Depository Receipts (GDR). In recent years, service providers have turned that idea on its head, extending the reach of the Advanced Economies’ leading companies by selling shares and funds through emerging and frontier market exchanges, providing welcome diversification for both sides.
While with a GDR, the issuer sponsors the listing and the company clearly selects in which market the stock will be listed as it is expensive to maintain GDR programmes, the TCRs deploy existing listed securities in creating the local market product. TCRs represent ownership in the shares of a foreign company trading on a local, domestic stock exchange. They are a way for domestic investors to purchase the securities of foreign companies without having to deal with foreign currencies, set up foreign custody accounts or trade and settle securities on foreign exchanges.
The owner of a TCR has the right to obtain the foreign security the receipt represents which could be a stock, bond or ETF. TCRs offer a number of benefits to investors, brokers and the local market as they allow investors to diversify portfolio risk while retaining the value chain of transactions in the local market. This in turn generates more income for the domestic brokers while extending the choice of financial instruments available to investors. The TCR also acts as a natural hedge against Naira depreciation and satisfies many investors seeking to mitigate their exchange rate risk.
In the trade, the underlying assets is held in custody in the source jurisdiction before a certificate is issued in the local market with a one-to-one relationship between the two securities and with the assets held for the buyer in segregated accounts. A custody unit that holds and services the securities and a local branch with a custody unit is therefore a prerequisite. The buyer of the certificate enjoys all the same voting rights and entitlements as any other shareholder and can buy the securities in local currency through a local broker.
A model option to explore is an ETF that tracks an index built around several TCRs weighted with the target investors and purpose in mind. Access and ability to move in and out of these shares as well as ability to short the baskets of securities makes the ETF format attractive. The new instruments will provide a liquid and diverse new market segment to the local exchange.
The success of the products depends on appropriate legislation being in place, a willing stock exchange management and sufficient robustness of systems. The Securities and Exchange Commission will need to partner with the NSE in developing the framework that will allow TCR investments in Nigeria as regulations can play as great a role in the development of the instruments as supply and demand factors.
The arrival of the international blue chip names in Nigeria’s equity market should be a win-win situation as every party gains from the transaction and brokers and the exchange get their cut of fees. The biggest winners, however, will be the domestic investors as it gives them the opportunity to benefit from creating wealth out of the international blue chip companies to which Nigeria/Nigerians, as provider of raw materials for their products or consumers of their products and services, have contributed in no small measure to their success.
I can’t wait to reap from the success of MTN, Etisalat, Airtel, Apple, Boeing, Airbus, GE, Rolls-Royce, Toyota, Honda, Shell, Chevron, Mobil, Twitter, Facebook, Sony, Cisco, Microsoft, IBM and more recently Alibaba (not to be confused with Ali Baba, the Nigerian comedian).
Olugbenga A. Olufeagba
