The Central Bank of Nigeria (CBN) recently issued a notice that from November it will take over the platform for trading and conduct of Fixed Income and Government Securities. This business is currently handled by the FMDQ (Financial Markets Dealers Association Quotations), a securities exchange platform where dealers buy and sell these securities. Essentially, the CBN is taking this market away from the FMDQ.
The CBN claims it wants a more transparent approach. However, the specifics of what FMDQ Securities was doing wrong are not publicly known. My plea is for the CBN and FMDQ to have an adult conversation. They should agree on rules, implement necessary corrections, and return the business to its proper home. The CBN is not an Exchange; it should not be involved in the business of issuing, dealing, and settling securities. This involvement could actually create the lack of transparency the CBN is trying to avoid. Market participants want a third-party Exchange to mediate between issuers and settlement.
The undisputed fact is this: these are trading securities. They fall strictly under the purview of the Securities and Exchange Commission (SEC). The CBN has no jurisdiction here. These securities are registered with the SEC and trade on a SEC-registered Exchange. The roles are clear: FMDQ Securities Exchange trades and allots these securities, and the CBN settles all transactions via a book entry format. This allows investors to have immediate value when buying and selling.
These distinct roles should not be mixed. Conflating them creates unnecessary risk that the market should avoid. The CBN has no need to control this market.
The independent FMDQ infrastructure is a welcome addition to our financial market. FMDQ functions much like TRACE (Trading and Compliance Reporting Engine) of FINRA, the US Securities Dealers Association. As long as these are market securities, they must be traded on a registered Exchange where dealers and investors interact. The CBN should simply fulfill its role of final settlement. If the CBN wants to make inputs, they should sort that out with the SEC.
FMDQ is a strong part of our financial market infrastructure. Credit goes to those who made it possible, especially the CBN, which saw the need, encouraged its creation, and even provided a startup grant. FMDQ should now transition into a demutualized Exchange, like the NGX. It should become another strong competitor and an alternative trading exchange for our securities market. It should be listed, and its shares should be made available for the investing public to buy and sell, just like the NGX.
The SEC has been slow to act. Perhaps they are in talks with the CBN to resolve this amicably. Their silence is reminiscent of the bank consolidation exercise some years ago. At that time, the CBN imposed upon itself the task of verifying bank capital raised in the market. There was never any public information about the result of that exercise.
That prior exercise only disrupted our issuing timetable. It allowed unscrupulous bank management to cheat investors. It stretched the usual issuing period — typically 6-8 weeks, with a possible two-week extension — to up to six months for some banks. These banks used the undefined period to claim they were waiting for CBN verification.
Some banks took advantage to manipulate the process. For instance, the bank that calls itself the West Africa bank was particularly guilty. They first pushed their share price too high by buying their existing shares, to artificially create scarcity, using their local Nigerian subsidiary’s depositors funds. When their new share issue failed, they used more of the local Nigerian depositors’ money to buy up their unsubscribed shares.
Their activity artificially created scarcity ahead of the new issue, allowing them to issue new shares at inflated prices. However, the market was wiser; investors did not buy the shares. To meet the necessary 25 percent subscription threshold for SEC approval, they bought their unsubscribed shares, pushing the subscription to 30 percent.
When the stock was listed, this bank was the first to start selling the shares it had bought at issue. They were in a hurry to return deposits back to the local depositors. The resulting large supply of shares depressed the price from the issue price of N38 to N8 within six months. The stock has not traded at N38 in the last 23 years. This was the scale of the fraud, and people got away with it. Investors never recovered from their losses. The bank even had to make a provision of $22 million for the losses, resulting from these activities. They reported it in their 2013 financial statements as “other Nigerian Legacy Assets.”
(More on this is forthcoming in my book, CASINO BANKING: The 2009 Stock Market Crisis in Nigeria.)
It is vital for the CBN to avoid decisions that may result in unintended consequences. Markets are fragile. Anything that undermines trust in the system can easily unravel things we do not expect and trigger unexpected risk.
The SEC must stand up and defend its statutory responsibility and jurisdiction. When everyone fulfills their role well, all players and the market become efficient for everybody. The CBN has enough on its plate. It should focus on its primary duties, not undermine market confidence, and not trigger unnecessary risk.
