MD, FMDQ OTC, Mr. Bola “Koko” Onadele
On Thursday, FMDQ OTC that will operate the fixed income securities exchange will be formally launched in Lagos. In this interview with Goddy Egene, the Managing Director of FMDQ OTC, Mr. Bola “Koko” Onadele, traces the history of the trading platform and the impact it would have on the Nigerian economy, among others. Excerpts:
Can you assess and give us run down of the transformation of the financial markets over the years?
The Nigerian economy and the financial markets have grown in tandem with developments in the country. Bearing in mind that the first issuance of bonds was in 1946. When I say in tandem, I mean there was a period of growth and a period of downturn. Treasury bills came into being in 1959 and the Nigerian Stock Exchange (NSE) in 1961. Many years back, the financial markets were not as active. But in 1986, the interbank foreign exchange market came on stream and the financial market development commenced on the over-the-counter (OTC) side. Foreign exchange (forex) trading was the first to kick off. But the federal government stopped bond issuance. The two-way quoting in forex commenced 1995/96, then the Nigeria Interbank Offered Rate (NIBOR), the interest rate benchmark, came into existence in 1989. After that, the Nigerian Interbank Foreign Exchange Rate (NIFEX) was introduced in 2000. In 2003, bond issuance, which was abandoned for many years, commenced again during the administration of Olusegun Obasanjo.
This was made possible through the efforts of the Economic Management Team then, made up of Dr. Ngozi Okonjo-Iweala, Mr. Fola Adeola on the National Pension Commission side, and Prof. Chukwuma Soludo, among others. Also, the setting up of the Debt Management Office (DMO) was a major milestone because prior to that time, that activity was embedded in the Central Bank of Nigeria (CBN). So if you look at the financial system, it has evolved. Things went down at a point, and then 2003, we refocused on financial markets. The revolution and sort of activities we see in the financial market today, therefore, really should be accorded to the efforts of that economic team of Okonjo-Iweala, Chukwuma Soludo, Adeola, the DMO people including Dr. Mansur Muhtar and Abraham Nwankwo. All of them did a lot to refocus the Nigerian financial market. Besides, the introduction of the pension contributory scheme also stimulated the financial system and economy.
Due to the success with the 2003 issuance, the government in 2005 decided to seek the assistance of the United States Treasury Department on the bond issuance process. A resident advisor, named Jack Delany was seconded to DMO in Nigeria. Delaney is now the Chief Operating Officer of FMDQ OTC Plc. His secondment to Nigeria marked the take-off of the secondary market of the federal government bonds in 2006. The Central Bank of Nigeria (CBN) then followed with treasury bills trading despite the fact it was first issued in 1959, but the trading in treasury bills was not as active. However, the two-way quote system was adopted and trading in this method began in 2007. Today we have the forex market trading on the two-way quote system, we have the bond market trading on the two-way quote, and we have the treasury bills trading on a two-way quote. All these happened with the support of the Financial Market Dealers Association (FMDA) and different government agencies and regulators.
By 2000, FMDA had a strategy session where it looked at the Nigeria market and saw what was coming up on the radar. From then, they decided that there must be a self-regulatory organisation (SRO) to do things properly in the areas of governance and development in some cases. That effort was the foundation, so to say, of FMDQ OTC. FMDA, which was formerly known as the Money Market Association, then introduced work groups, including the money market workgroup and the bond work group, even at that time when there was no FGN bond trading. FMDA even created an equity workgroup ahead of time because they believed that the market would naturally evolve. After the financial crisis came in 2007/8, the idea of actually transforming the interbank market into a securities exchange came up to give the required drive to market development. This idea was adopted quickly by the governing council of the FMDA, and was first taken to the bond workgroup and then the governing council adopted the idea. It was thereafter taken to Board of Trustees of FMDA, which then took it to the Bankers’ Committee. The endorsement of the Bankers’ Committee allowed the company to be formed and then sought the licence from the Securities and Exchange Commission (SEC). So that, in a nutshell, were some of the important milestones in the history of the Nigerian financial markets.
Now the FMDQ has been formed and its launch is scheduled for Thursday, what will be its focus? And what are the instruments to be traded on the exchange?
Its focus, in terms of products, will be fixed income and currencies. But in terms of a market, it will be the cash market first before transiting to risk management products. These instruments are already being traded, so what we are talking about now is improving the way things are done and adding governance to how they are done. If two of us in this room decide on some things and if I do not do it, what choice have you got? We are going into an environment, as FMDA wanted it, to have an SRO that will ensure governance of whatever rules, so that we can have a market that has credibility and integrity. In terms of activities, it will be market governance, market development and information. There are huge opportunities in what we have in these big boxes. If you ask me, is the market not trading dollar to naira now, yes it is, but are there issues in the market from time to time. Yes, expectedly. But FMDQ will bring governance and market development and transparency to the market. If you move to the next market, which is FGN bonds, are they trading the FGN bond, yes they are. So do not let us assume that things were not being done. Things were being done, and the FMDA had done a lot to ensure that the market thrives.
However, with FMDQ, we are taking it to the next level so that when there is volatility in the market something positive can be done. Now FMDQ would like to have a relationship with the CBN so that we can give forewarning for systemic market risks and also agree on operational standards to support the market risk management team. Things are very volatile. The CBN is making huge investments in the development of financial markets because monetary policy implementation goes to the financial markets. So CBN has a stake in the financial markets. Every stakeholder has a role to play in managing this volatility. If everybody is selling a product and the CBN feels there is volatility, the CBN dealing room has an independent body in FMDQ to discuss the market. We do not work in banks, though we may have worked in banks in the past. With FMDA, as we had before, the members work in different institutions, while FMDQ is bringing more stability and transparency, among others to the market.
Considering the fact that FMDQ OTC will operate as an SRO, don’t you see any overlap with the role of the CBN?
The regulator of all our activities is the Securities and Exchange Commission, then we have other regulators, who are the major stakeholders. Of course you know that the Federal Ministry of Finance is a regulator. The CBN is very much interested in activities of the fixed income market, the activities of the currency market, and the activities of the money market, so there has to be a working relationship with the CBN. Also an oversight relationship on what we do and what our members do. The DMO is the agent of the government for federal government debt, both domestic and foreign, and in organising the primary dealers’ market makers before we came in 2006. This has imposed some responsibilities for that framework. We therefore also are looking at supporting the interest of the DMO. For us, there is no overlap with any regulator. We are giving focus on how things are done. The CBN in examining the banking system, looks at the financial markets in addition to so many other areas. We will look at the secondary market, strictly the operations of the secondary market, the legal framework, the documentation. So there is no overlap. We are like a sub-agent of the activities; we self-regulate our members and our report will be of importance to the CBN. We have some compliance report from our primary regulator SEC. The DMO will also be interested in knowing the performance of members of FMDA, in knowing their breaches of the standards and so many other things. So rather than overlap, we will be highly complementary and all to the benefit of the financial market.
What have you put in place to guard against market failure and ensure investments are safe in the market for both investors and operators?
As I said earlier, the FMDA sponsored this initiative. The Board of Trustees took this and presented it to the Bankers’ Committee then it became the Bankers’ Committee initiative. As you know, the committee is made up of the CBN, NDIC and CEOs of deposits money banks. In fact, the capital contribution was made by the 29 banks and discount houses at that time. And the CBN, in support of the initiative, also contributed to the capital.
To ensure that the institution, which is just starting, develops with experience of capital market regulation, the Board of Trustees of FMDA welcomed the investment from the NSE. The NSE has been around since 1961 and indeed, has experience, exposure and competence in capital market regulation. To ensure success in this area, though not entirely new to the OTC, FMDA decided to have the NSE as part of the owners of FMDQ. So the promoters of FMDQ, if you want to call them that, are the CBN, all the discount houses operating in Nigeria, the FMDA itself, and NSE Consult Limited, which is a 100 per cent subsidiary of the NSE. In terms of comfort for institutional investors and end users, of course as we are aware, trading with our members today, the standards will be different going forward. We have codified all the rules of the different markets, the rules will be exposed for them to be more understood. From the point we launch, the members, institutional investors and end users will not have complaints. But more importantly, there will be governance over all the processes of our members. However, we are not stopping there because we envisage that there may be one or two issues, even among our trading members, and we will put in place a Trade Guarantee Process or Fund. Again, this will require the support of the CBN to ensure that when members trade, there are no issues.
Trading in the OTC market is T+2. You trade today with settlement in two days’ time (T+2). It does not mean you have, immediately, what you have bought or what you have sold. But it means that you have two days to make arrangements for this and we have the delivery versus payment. But if it does not, we now have the basis for intervention and find out why that happened. We can also have a scenario, where there is market risk, were there are adverse movements in case someone does not settle and by the time he settles, the market has moved against you. FMDQ, along with its members, will tend to build what we call a Market Risk Reserve Fund to support such movement in market risk against it parties. The CBN has made investments in its securities settlement system to ensure seamless transfer of securities and cash because both will be sitting in the CBN technology infrastructure.
Considering the fact the ownership is made up of operators who will also trade on the platform. How will you enforce discipline among them?
FMDQ has a process and we have a Board Regulation and Supervision Committee, which is chaired by the Chief Executive Officer of the NSE, Mr. Oscar Onyema. That committee has independent directors because disciplinary activities are required. The way that committee has been put together is to make it independent. Where there is the need to discuss any of the disciplinary measures at the board level, because we are talking of the board committee, if the institution of any of the directors is involved, they will have to excuse themselves. This board is not only made up of trading members, we have independent directors, we have ex-regulators, and all the activities of FMDQ, every six months, will be presented at the market review meeting with regulators. So even if there are issues like that, they will come up at such meetings. Whistle blowing and all the activities used in today’s world will be put in place in FMDQ. All the chairs of the board committees will be represented and there will be a market review meeting. SEC will be at the meeting, CBN will also be there also. Besides, SEC will always come to FMDQ to examine what we are doing. If any institution has reported a case, how we treat that case will be reviewed by SEC. So whilst FMDQ is an SRO, our activities are reviewed by SEC.
In July we saw the coming of NASD OTC and NSE has existed. What is the relationship among these institutions?
NASD OTC kicked off in July and all of us are witnessing their activities and are impressed. We believe that predominantly, their focus will be on the equities OTC market. You might be aware that they have worked on this initiative for more than 10 years and everyone is proud that it is functioning now. But the FMDQ OTC market is slightly different. It is not a slightly new market, but it is adding a completely new energy, drive and focus to the fixed income securities market. So we are inheriting an existing market in our own case and we are going to upgrade this market to the next phase. In terms of NSE, it has been existence since 1961. It is the most experienced among the SROs, and NSE is a shareholder in both NASD OTC and FMDQ OTC. This is a commendable effort of the NSE. At least on our board and operations, we are benefiting immensely from having NSE on our board. I have visited the executive director operations and technology of NSE and we have exchanged ideas. That level of cooperation is the way we are working with the NSE and they are supporting us in so many ways. Outside, people do not see these different markets; they see the Nigerian financial market. First and foremost, it is important that the three of us, and probably by the time we have the Abuja Securities and Commodities Exchange (ASCE) come on stream, we all must work together to ensure we have a solid Nigerian financial market. For us, people will take on your debt before looking at equity. So it is important that the NSE ensures we are doing things right here because whatever we are doing right and as we do that it impacts on what is going on the NSE. To a large extent, we expect that the NSE, which is already established, would guide the development of the other platforms.
From all indications, FMDQ has a robust plan that will revolutionise the fixed income securities market. But you know the role technology will play in ensuring that your aspirations are met. In this regard, what trading technology are you deploying?
As I said earlier, we are inheriting the market and it is therefore imperative to be careful about how we distort the market dynamics. So the rules we are starting with are the existing rules, the technology we are starting with will be the existing technology. However, any technology complementary to the existing one will be thrown in, in due course. The technologies we have in the market are the Thompson Reuters and ICAP. But there are complementary technologies within the space of OTC market. We will allow the existing technology to operate as we start, then spend some time to appreciate all our technology requirements because it is not only trading technology that we require. We acquired from FMDA, a database which also traffics transactions to the Central Securities Clearing System (CSCS), which was a brilliant initiative under the FMDA. That technology is in place, people trade using Reuters and ICAP, so if we find any complementary technology, we will have it and then all these will traffic through the post-trade manager to the CSCS to settle. We will spend time to understand all our technology requirements, because it is not just about the trading platform, we also stakeholders who require reports. We have compliance report to give to SEC and we are trading on different systems. So there will be some common infrastructure to harmonise everything. We also have internal enterprise technology requirements.
Besides, we need to build to the standards of SEC. Do not forget, we have a shareholder in the NSE, who has recently implemented a new system. We are going to learn from them and see if we can leverage on that technology. So the way we are working is to start with what we inherited, introduce what is quickly complementary along that space before we start to talk of a more robust technology. But whatever we do, we have in mind the requirements of the institutional investors. We may add a complementary technology but it will be along the space of the people you already know before we then think of something more proprietary or a working relationship with the NSE on technology.
In very simple language, how will the Nigerian economy benefit from the operations of FMDQ? And what are your strategic plans to ensure you realise your vision?
If you look at the role we are playing, which will be the fixed income debt platform, then it is obvious that we need to look beyond those that are strong on their own to issue papers. And there is model of this in other countries. The smaller companies of this world, the SMEs of this world, the real sector, who have need for financing cannot list on the NSE, as there securities cannot meet the governance requirements of the NASD OTC but may require debt. We will, through innovation and working with the federal government, support these sorts of institutions. Again, our mission is to make the OTC financial market innovative and credible in support of the Nigerian economy. So this developmental area, we intend to pursue.
And looking at it from another area relating to the big institutions, we will be presenting to regulators a registration framework for the shorter end of the market – the commercial papers – and hopefully boost the corporates so as to free the banks’ balance sheets of long-term financing. This, you agree with us, as the financial system gets more stable, the banking system will be stable. We will also promote a lot of securitisation. The more we introduce liquidity and ensure the liquidity of products and instruments, the more we are assisting in the oiling of the economy of Nigeria across every sector. So we have the vantage position of being the debt platform in this country.
But let talk of the sophisticated end. People that understand volatility need to hedge themselves – which are the financial security products, risks management products that we need to introduce. When a bank says I am looking at my asset and liability management, you need to think and say: If interest rates are likely to drop, how does it affect my revenue because you need stability of your interest earnings? All these things are not available today in quantum to assist available players. Therefore, apart from opportunity of employment we are going to create, we will finance contribution to the economy growth. Attraction of capital to the market is huge we will ensure capital inflow if we make our market competitive, if we make our market secure with documentation, with the framework, and if we make our market liquid and then there is diversification.
Regarding our strategy, our immediate focus will be market transparency. We need to quickly deal with that and in this quarter we are going to do a lot in respect of our market transparency.
By next year, we will look at the liquidity of the cash market, the repo market, the money market, forex market, bringing governance to make them very liquid.
The year after, we will be moving towards product diversification. For this, we will require a major programme of sensitisation because at the end of the day, these products are what the corporate treasurers of today would need. CBN has tried by introducing forex forward. But it is not only forex forward, there are other derivatives the CBN has approved but there is no capacity and these derivatives have not taken off. The corporate treasurers need to understand what they need. Interest rates are volatile, commodities price are volatile and the treasurers need to hedge against the adverse movement to their businesses. We will provide this solution going forward.
By year four, we would have established our linkage with the international market. What we have done is like charity beginning at home. And this is in line with FSS 2020. The first is strengthening the domestic market that is what we are doing. The second is integrating Nigeria with external markets. By year five, we will be wrapping up the unbundling of the major impact in the market by so many things we are going to do. Then we should have sorted out technology, seamless settlements, and have infrastructure in place to make dealing financial market exciting and a place of pride that people will want to be part of. We intend to have a lot of financial market education and people dreaming to be part of the process. So capacity and skills is what we will wrap up under our five-year strategy.