Engendering Transparency & Liquidity in the Foreign Exchange and Fixed Income Markets Bola Onadele. Koko Managing Director/CEO May 8, 2018
Outline Defining Transparency and Liquidity in 2. FIC Markets 4. Overview of the Nigerian FIC Markets Importance of Transparency and 7. Liquidity in the FIC Markets Global Emerging Themes on 10. Enhancing Transparency and Liquidity FMDQ and its Role in Driving Transparency and Liquidity in the FIC 12. Markets 1
Defining Transparency and Liquidity in FIC Markets Nigerian FIC Markets Coverage ▪ Foreign Exchange ▪ Treasury Bills ▪ Bonds ▪ Repurchase Agreements ▪ Unsecured Placements & Takings ▪ Commercial Papers TRANSPARENCY LIQUIDITY ▪ The ▪ The widespread availability of ability of a market to absorb large volumes of information relating to current transactions without causing opportunities to trade and recently completed trades – volatility in prices/ significant IOSCO* (November, 2001) change in asset prices ▪ Most ▪ Ready access to required evident where minimal differences exist in the spread financial information between the bid/ask prices of securities/instruments *International Organization of Securities Commissions 2
Outline Defining Transparency and Liquidity in 2. FIC Markets 4. Overview of the Nigerian FIC Markets Importance of Transparency and 7. Liquidity in the FIC Markets Global Emerging Themes on 10. Enhancing Transparency and Liquidity FMDQ and its Role in Driving Transparency and Liquidity in the FIC 12. Markets 3
Overview of the Nigerian FIC Markets Unlisted Derivatives Equities Market Turnover ($’bn) FX NASD FMDQ FI Exchange 2014 2015 2016 2017 NCX N/A N/A N/A N/A ACE N/A 0.01 N/A 0.01 Bonds NASD 0.02 0.26 0.04 N/A ACE & NCX NSE NSE 8.61 4.78 2.26 4.03 Commodities Unlisted FMDQ 647.31 697.95 444.84 447.35 Equities , *Near Estimate ACE : AFEX (African Exchange Holdings) Commodity Exchange; FI : Fixed Income; FMDQ: FMDQ OTC Securities Exchange; FX: Foreign Exchange; NASD : NASD PLC; NCX : Nigerian Commodities Exchange; NSE : The Nigerian Stock Exchange; N/A: Not Available 4
Overview of the FMDQ FIC Markets../2 FI Product Category ($’mm) FX Product Category ($’mm) Period Period T.bills Bonds Repo Others Spot Derivatives FY 2017 65,946 53,693 FY 2017 190,321 31,456 100,673 5,168 Q1 2018 28,858 14,826 Q1 2018 46,931 7,855 19,386 1,043 FX Market Turnover FI Market Turnover 2% 1% 31% 26% 34% 55% FY 2017 66% 62% 45% 10% 58% 10% YTD2018* Spot Derivatives Treasury Bills Bonds REPO Others 5
Outline Defining Transparency and Liquidity in 2. FIC Markets 4. Overview of the Nigerian FIC Markets Importance of Transparency and 7. Liquidity in the FIC Markets Global Emerging Themes on 10. Enhancing Transparency and Liquidity FMDQ and its Role in Driving Transparency and Liquidity in the FIC 12. Markets 6
Benefits of Transparent FIC Markets Price discovery in the markets is promoted, leading to more Improves Market efficient markets where quoted asset prices reflect their intrinsic Efficiency values (i.e. arbitrage-free prices). Promotes Competitive Significant reduction in transaction costs for market participants Pricing are better achieved through competitive pricing. Information asymmetry is reduced, thereby lowering bid-ask Boosts Liquidity spreads and encouraging increased market activity. Investors are able to better manage their risks as a result of make Reduces Market Risk informed investment decisions made possible by transparency. “ Improved, Well-Targeted Transparency is an essential element in preserving financial stability” Donald Kohn ( Vice Chairman, Board of Governors, Federal Reserve 2006 – 2010 ) 7
Benefits of Liquid FIC Markets Improves Data Quality and reliability of pricing data for investment decision is Reliability higher in liquid markets due to the availability of more trade data. Promotes Financial Liquid markets ensure market participants can effectively hedge System Stability risks and meet funding needs. Aids Economic Domestic and foreign participation is encouraged in liquid Growth markets thereby contributing to economic growth Facilitates Risk The efficient distribution of risk across market participants is Allocation facilitated by increased market activity. “ The high degree of liquidity in U.S. capital markets historically has contributed to the efficient allocation of capital through lower costs and a mix of bank- and market-based finance that supports the flexibility of these market Stanley Ficher ( Vice Chairman of the Federal Reserve 2014 – 2017 ) 8
Outline Defining Transparency and Liquidity in 2. FIC Markets 4. Overview of the Nigerian FIC Markets Importance of Transparency and 7. Liquidity in the FIC Markets Global Emerging Themes on Enhancing 10. Transparency and Liquidity FMDQ and its Role in Driving Transparency and Liquidity in the FIC 12. Markets 9
Global Emerging Themes on Enhancing Transparency and Liquidity Increasing Liquidity and Reporting Market and Requirements Exchange Globally for Focus on Rules on OTC Markets Member Trade Liquidity for Reporting Collateral to Minimise Systemic Risk Industry Regulations on Liquidity and Global Best Transaction Practices on Reporting Trade Reporting for Market Infrastructure 10
Global Transparency and Liquidity Standards G20 Principles EMIR IOSCO ICMA Regulatory issues Mandatory central Reporting of derivative Strengthening raised by the impact of clearing for contracts to trade transparency & changes on market standardised OTC depositories accountability integrity and efficiency derivative products Market participants Initial mandatory risk management of Principles to address disclosure standards for Enhancing sound prospectuses for debt non-centrally cleared dark liquidity regulation securities issuances derivatives Regulatory Reinforcing ICMA rules and Transparency of consolidation of rules international recommendations for and standards across structured finance cooperation the secondary market products the EU Disclosure principles Promoting integrity in Established Bond market liquidity for public offerings financial markets overarching regulation library and listing of asset- backed securities G20: Group of Twenty EMIR: European Market Infrastructure Regulation IOSCO: International Organisation of Securities Commission http://www.fsb.org/source/iosco/page/6/ ICMA: International Capital Markets Association https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/ 11
Outline Defining Transparency and Liquidity in 2. FIC Markets 4. Overview of the Nigerian FIC Markets Importance of Transparency and 7. Liquidity in the FIC Markets Global Emerging Themes on Enhancing 10. Transparency and Liquidity FMDQ and its Role in Driving Transparency and Liquidity in the FIC 12. Markets 12
FMDQ’s Strategic Role in the Ecosystem Market Organiser Adviser to Government & Regulators ▪ Championing innovative measures ▪ Promoting transparency, liquidity, market and frameworks to enhance efficiency and market conduct government revenue, access to ▪ Providing access to market data and capital and financial markets information to market participants ▪ Advising and advocating an all- ▪ Integrating issuers, sell-side, buy-side, inclusive approach considering global retail investors and all end-users best practices to the articulation of ▪ Minimising credit and operational risks initiatives and reforms to government, ▪ Facilitating market education regulators and associations Post-trade Organised Advisory Sustainability Advocacy Services Markets Catalyst for Infrastructure Capital Financial Markets Diplomat ▪ Promoting innovative private sector-led ▪ Promoting Nigeria as the investment solutions to the nation’s housing challenge destination in Africa ▪ Disseminating ▪ Projecting the debt capital market as the unbiased financial markets information key source of finance for infrastructure development Integration Foreign Capital Housing and With External Sustainable Finance Infrastructure Capital Markets 13
SEC-Registered OTC Market Organiser and SRO Product Innovation ▪ Fixed Income & Currency Hedging Products ▪ Bond Exchange-Traded Funds ▪ Non-Interest Finance Products Liquidity Enhancement Governance & Advocacy ▪ Market Rules & Regulation ▪ Network Effects (Market ▪ Securities Registration, Listings Integration) ▪ Fixed Income Market & Quotations Specialists ▪ Conduct & Professionalism ▪ Financial Market Volatility ▪ Competency Framework Management ▪ Retail Investors’ Assets Custody Market Data Price Formation & Transparency ▪ Daily Quotations List ▪ Trading Systems ▪ Closing Prices and Valuations ▪ Information Repository ▪ Market Activity Reports ▪ Fixings & Indices Risk Management ▪ Systems Integration ▪ Post-trade Services ▪ Standards & Benchmarks Highlights: Market Data and Liquidity Enhancement 14
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