I keep saying our regulators don’t know that their primary role is to enable the industry they regulate.
While there is a need to up the capital requirements of capital market operators, because of the many dislocations in the present economy, such as foreign exchange and inflation burdens, there is no need to over do it. And it should be done with a purpose.
This current roll out of recapitalisation is excessive because the thinking is, keep only big players and all will be well. After all, banks have raised capital and insurance has followed. So it is our turn.
Capital has to serve a purpose. What does a stockbroker/stockdealer need N2 billion for? Their role is essentially that of an agent to customers.
Today, many of the risks that allowed fringe players to constitute a problem for the market have been mitigated by the reforms that have taken place in the capital market space. We now have world class regulation of our market.
Dealers who trade volumes for themselves, when they do proprietary trading, take their own risk if they lose money. It is their own money. The market has no role in it. So, the too big to fail does not apply here. If there is market failure to settle, the Exchange moves in, and does a forced sale of securities in their CSCS portfolio. Any loss goes to them. They can fail quietly.
Risk is much more mitigated today. Any buy or sale into or from a customer’s portfolio is immediately notified to the customer by the CSCS via Trade Alerts and customers have two days to challenge that trade if not authorised.
Moreover, the proceeds of a sale go straight to the customer’s bank account and securities go to the customer’s CSCS account. So all the common risks have all been taken away, with these reforms.
Recently, settlement was moved to T+2, a move which further reduces the risk of trade failures. And even this rarely happens. But if it happens, having a N2 billion capital base does not guarantee anything because once the broker/dealer is registered as having shown he has N2 billion today, he can go tomorrow and buy a property with the money in Banana Island.
An issuing house also does not need a N2 billion capital base because its business is mainly advisory. If an issuing house wants to be an underwriter, they should register separately as an underwriter and then N2 billion or more will be needed. Even this is not cast in stone as an underwriter with good relationships can always arrange other institutions to join in any large underwriting in just the same way that banks use to syndicate loans in our days in banking.
The critical infrastructure needed, which is cheaper today because software to manage operations is the critical thing, should be assessed and its cost with sufficient working capital seen to be in place to meet unexpected market events.
The last time this recapitalisation was done, there was debate as to what appropriate capital was needed. Many pointed to the US and their capital requirements. Many of those in that Quarterly Capital Market Committee meeting were ambivalent. I spoke out that given the dislocations at the time after the market crash and the recapitalisation in the banks and other financial market institutions, we needed to do something. At the time the market was small and no one was making a profit.
The regulators called a small group meeting in Abuja and I was in that group. I told them at that meeting that we must be careful to ensure we still have a market. You can not have a market without players. That Nigeria was a vast country and we must ensure we have sufficient players in the market. This was how another category of sub-brokers came about. They were to clear their trades through bigger brokers/dealers. They remained in the market essentially as marketing agents who attracted customers and maintained their relationship. This has worked well ever since.
I think the new capital requirements should have taken these into consideration. The new capital requirements will increase risks and earning a return on capital will become difficult for many.
Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com and marketconversations.substack.com
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