29 TH OF J UNE , 2015 T ABLE OF C ONTENTS I NTRODUCTION - PowerPoint PPT Presentation

(PRIVATE & CONFIDENTIAL) D RAFT C OMMITTEE R EPORT S UBMITTED TO THE D IRECTOR G ENERAL S ECURITIES & E XCHANGE C OMMISSION ON A U NIFIED L ICENSING M ODEL FOR OPERATORS ACROSS M ONEY & C APITAL M ARKETS 29 TH OF J UNE , 2015

T ABLE OF C ONTENTS I NTRODUCTION ………………………………………………………………………………… 4 I MPACTING E CONOMIC D EVELOPMENT ……………………………………………………… .. 5 T HE F UTURE OF B ROKER /D EALERS …………………………………………………………… 9 O UR C URRENT M ARKET S TRUCTURE …………………………………………………………… 13 T HE M ALAYSIAN MODEL APPROACH …………………………………………………………… 16 T HE C ASE FOR U NIFIED D EALER L ICENCE …………………………………………………… . 22 T HE C ASE FOR A F INANCIAL M ARKET D EALER /I NVESTMENT B ANK ………………………… ... 28 T HE P ROPOSED O PTIONS FOR U NIFYING C APITAL & M ONEY M ARKETS …………………… 39 C ONCLUSION & R ECOMMENDATIONS …………………………………………………………… 42 T HE C OMMITTEE & C ONTRIBUTORS …………………………………………………………… .. 47 FMD DISCUSSION PAPER 2 2

I NTRODUCTION 3 FMD DISCUSSION PAPER

I NTRODUCTION The purpose of this presentation is to consider the pertinent issues of having a Unified Licencing Model for operators across the money & capital markets. Though Merchant Banks provide a Unified Model, we explore the merits/challenges with the issuance of additional licences to expand the universe of participants across the money and capital markets. 4 4 FMD DISCUSSION PAPER

I MPACTING E CONOMIC D EVELOPMENT 5 FMD DISCUSSION PAPER

T HE IMPORTANCE OF I NTERMEDIATION Generally speaking, all markets have two types of intermediation. 1. There is the: • Bank based intermediation • Capital market based intermediation 2. In Nigeria: • Only bank based intermediation works efficiently • Capital market based intermediation is much less efficient as operators face significant challenges accessing wide sources of funding and thus have inefficient sales & trading operations or maturity transformation activities. 3. Merchant Banks are the only institutions currently allowed to operate across markets • This is a step in the right direction. • However, the minimum capital requirements are prohibitive and exclude the other key players regulated by SEC. 6 6 6 FMD DISCUSSION PAPER

T HE IMPORTANCE OF INTERMEDIATION We need a major shift in our thinking to create an enabling environment which supports institutions’ ability to intermediate short, medium and long term securities across the entire financial markets. This is an important consideration for: • Enhancing Financial System Stability. • The entire financial market to begin to see real growth and add value to the economy or significantly increase its % of GDP. 7 FMD DISCUSSION PAPER

W HERE ARE MARKETS TODAY 65,000.00 55,000.00 45,000.00 35,000.00 25,000.00 15,000.00 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 • The stock market (a barometer of the economy) is underperforming: • Index is approximately (50%) below 2008 levels, whilst other markets around the world have recovered. • There has been very limited primary activity, (as many stocks trade below book value).

T HE F UTURE OF B ROKER /D EALERS 9 FMD DISCUSSION PAPER

W HERE ARE MARKETS TODAY I NSTITUTIONS THAT ARE PURELY REGULATED BY SEC ARE NOT I NVESTMENT B ANKS BUT B ROKER /D EALERS They are endangered species - Why? • They face significant challenges in funding their businesses as they cannot easily access the money markets. • They cannot access formal repo markets for liquidity, and this adversely impacts their sales & trading operations. • Their equity trading businesses are also mainly small brokerage operations, and market making is highly inefficient. • The aforementioned significantly curtails the services they offer and the impact they can have on economic development. 10 FMD DISCUSSION PAPER

W HERE ARE MARKETS TODAY • The continued existence and viability of these businesses is threatened: • How long can their businesses survive within the current market structure and No access to wholesale funding. • SEC-only regulated Capital market operators currently operate in “silos” with limited access to the money markets which provide the base liquidity of all financial markets. Where different parts of the market are concentrated in silos, there are only a handful of institutions that can create, price and trade instruments across the curve hence, the impact on the economy is sub-optimal. 11 FMD DISCUSSION PAPER

W HERE ARE MARKETS TODAY I NABILITYOFINSTITUTIONSTOSIGNIFICANTLYGROWORGANICALLYINTOSTRONG INTERMEDIARIES • Market for equity capital is almost non-existent. Recent proposed IPOs and rights issues have had to be shelved. • Market price of shares listed on the NSE is generally below Net Book Value. • Private company mergers are extremely difficult to manage. Empirical analysis available suggest they are more prone to failure than success – principally due to the number of firms that would have to merge where about 27 firms with capital of N550,000,000 will have to come together to form one Merchant Bank. 12 FMD DISCUSSION PAPER

C URRENT M ARKET S TRUCTURE 13 FMD DISCUSSION PAPER

B ACKGROUND TO OUR M ARKET The Nigerian capital market essentially operates in a silos of its own, cut off from the rest of the financial markets: DMB Money Markets D.H / MB D.M.B Bond Markets D.H/MB NBFI 1 (brokers), I.H 2 NBFI/MB Broker/Dealer Equity Markets I.H 1 NBFI – Non-Bank Financial Institution 2 I.H – Issuing House (For origination purposes) 14 FMD DISCUSSION PAPER

B ACKGROUND TO OUR MARKET If we plot these markets in risk/return/duration space, we should get:- Risk Premium Risk Premium Risk Premium Equity Markets Bond Markets Money Markets 15 FMD DISCUSSION PAPER

T HE M ALAYSIAN A PPROACH T O IMPROVING L IQUIDITY AND STRENGTHENING THEIR DOMESTIC OPERATORS AND MARKETS 16 FMD DISCUSSION PAPER

P ARADIGM S HIFT They repealed the Securities Act 1983 (SIA) and the Futures Industry Act 1993 (FIA) and came up with The Capital Market and Services Act 2007 (CMSA) which introduced a single licensing regime for capital market intermediaries. Under this new regime, a capital market intermediary will only need one licence to carry on the business in any one or more regulated activities. This meant less cost and paperwork for the intermediaries who carry on more than one regulated activity. The licences are called: 1. Capital Markets Services License or 2. Capital Markets Services Representative’s Licence 17 FMD DISCUSSION PAPER

T HE CMSA They then adopted seven types of regulated activities under CMSA. The list of regulated activities are: 1. Dealing in Securities 2. Dealing in Derivatives 3. Fund Management 4. Dealing in private retirement schemes 5. Advising on corporate finance 6. Investment Advice 7. Financial Planning The licence issued under the CMSA set out the specific regulated activities that the institution can conduct. Bank Negara Malaysia and Securities Commission then worked together on a framework for Investment Banks and Universal Brokers 18 FMD DISCUSSION PAPER

T HE F RAMEWORK Minimum capital requirement To ensure that investment banks are well-capitalised, the minimum capital  funds requirement for investment banks that are not part of banking groups will be set at RM500m, while the other investment banks would be required to comply with the requirement of RM2 billion on a group basis. Limit on foreign equity participation : The foreign equity participation limit for investment banks will be  increased to 49%. This is part of the overall efforts to strengthen their global linkages and enhance their specialised skills and expertise. This liberalisation also represents Malaysia’s commitment to further liberalise the banking sector. 19 FMD DISCUSSION PAPER

E ST ABLISHMENTOF I NVESTMENT B ANKS An Investment bank will then henceforth apply to the Securities Exchange for approval to carry on the full range of regulated activities under CMSA. In this case, the licence will indicate that the investment bank is allowed to carry on all of the following regulated activities: 1. Dealing in Securities 2. Dealing in Derivatives 3. Fund Management 4. Dealing in private retirement schemes 5. Advising on corporate finance 6. Investment Advice 7. Financial Planning And then, a merchant banking Licence from Bank Negara. It is the combination of the CMSL and MB licence that confers the status of an Investment Bank on an institution in Malaysia 20 FMD DISCUSSION PAPER