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Wednesday, March 22, 2023

A Tale of 2 Exchanges : As FMDQ Thrives NGX Plays Catch Up

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FMDQ Group, a vertically integrated financial market infrastructure (FMI) group, which only began operations in 2013 is now much larger than its 61 years old predecessor the Nigerian Exchange Group Plc (Formerly Nigerian Stock Exchange), which dates back to 15th September 1960, when the Lagos Stock Exchange was founded.

The change in fortunes are stark.

FMDQ is today 5 times larger than the NGX by revenues and 9 times larger by total assets. It currently operates the largest Securities Exchange in Nigeria, with a turnover of N215 trillion ($567 billion) in 2020.

Market operators MoneyCentral spoke to while researching this story said FMDQ, came about as a result of a formalisation of an existing fragmented and weakly regulated market, into a self-regulatory organization or SRO.

“FMDQ has brought sanity and innovation into the market, enhancing transparency and effective reporting of trades. The launch of the FMDQ private market has helped a major challenge that State Governments have in raising long term funds in the capital market, thus helping to deepen the sub-national debt market,” a market operator said on condition of anonymity due to the sensitive nature of the topic.

“The revitalisation of the Commercial Paper market has also been very supportive of FMDQ’s performance. The capitalisation of FMDQ is partly buoyed by the consistent issuance of FGN securities, which provide a strong and steady pipeline of new securities and market capitalisation growth for FMDQ unlike the NGX which relies mainly on private sector listings, which has been subdued due to the macro environment,” the market source said.

FMDQs revenues are well diversified with about a quarter (23%) coming from the Central Bank of Nigeria (CBN) as a transaction party on the OTC FX Futures market, 41 percent from clients local and foreign, 17 percent from Dealing Members (Banks) and 18 percent from other sources including securities admissions, interest income, settlement and depository services, private market notings among others.

Market operators tell MoneyCentral that FMDQ’s innovation on Naira-settled Non-Deliverable Futures has been very supportive of foreign investors’ participation in the Nigerian bond and Nigerian Treasury Bills (NTB) market.

FMDQ reported revenues of N31 billion for the 2020 financial year compared to N6.01 billion for the NGX, data from both their audited financial statements show. Total assets at Full year 2020 for FMDQ came in at N329 billion, compared to N35 billion for the NGX, while FMDQ booked net income of N11.23 billion for the 2020 period compared to NGXs N1.83 billion.

Other market insiders tell MoneyCentral that the NGX may have unwittingly dropped the ball regarding fixed income trading for which they initially had first mover advantage.

“NGX was initially the Bourse for Debentures and subsequently bonds issued by government securities but banks, being the Market Makers were not comfortable with the structure of the NSE/NGX trading on fixed income, especially as the rule that only licensed brokers can trade all securities on the NSE didn’t go well with the banks,” a second market source told MoneyCentral.

The NGX has also been negatively affected by the 2008/2009 Nigerian stock market crash which wiped out the interest of a generation of Nigerians in investing in the stock market.

Both FMDQ and the NGX have also been affected by the opaque foreign exchange (FX) market in Nigeria which has led to a major slide in foreign portfolio flows into equities and bonds, negatively affecting turnover.

Both exchanges have continued to innovate in response to these challenges.

In 2020 FMDQ admitted 82 securities, with a total value of N2.07 trillion, and recorded a total of thirteen (13) Bonds, sixty-seven (67) Commercial Papers (CPs), and two (2) Funds, across various sectors, listed and quoted on its platform, as well as the registration of eleven (11) CP Programmes.

For its depository franchise, FMDQ Depository admitted a total of twenty-one (21) securities – fifteen (15) Commercial Papers and six (6) Bonds – valued at circa N411.00 billion in 2020 and the number of active Participants on the Depository’s platform grew to fifty-three (53), from twenty-one (21) in 2019, across seven (7) of its nine (9) Participant’s categories.

“FMDQ Exchange will focus its efforts on facilitating the development of a thriving derivatives market with the imminent introduction of exchange-traded derivatives products, starting with Fixed Income Futures products, having received the SEC’s approval for the FMDQ Derivatives Market Rules in February 2021. The Exchange will also focus on the activation of the Repo market with collateral management service,” Bola Onadele. Koko Group Managing Director/Chief Executive Officer of FMDQ said.

For the NGX, in its fixed income market, capital-raising activities increased significantly, as its bond market capitalization rose by 35.52% to close 2020 at N17.50 trillion.

“We will continue to execute on our 2018 – 2021 corporate strategic plan, with an even keener focus on executing our long-term market development initiatives. Following the completion of our demutualisation process, we welcome the new possibilities that have opened up for us and will prioritize those which enable us to deliver greater value to our community of global investors and issuers,” Oscar Onyema, Group Managing Director/ Chief Executive Officer of the NGX said.

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