NASD OTC –The New Contender

It is a new day for companies whose shares are not listed on the Nigerian Stock Exchange (NSE) as they now get the spotlight. On the 1st of July, 2013, the National Association of Stock Dealers (NASD) launched its Over-the-Counter (OTC) market with trading of unlisted shares of 200 companies. Six banks are to act as settlement banks as the trading of the unlisted companies would be carried out over their counters. With this development, the OTC trading in the Nigerian market should subsequently see a boost.

The NASD has a ₦500 million share capital base and 40 registered stockbrokers. It was approved by the Securities and Exchange Commission (SEC) to operate an over-the-counter (OTC) market for the trading of unlisted securities in Nigeria, and the propagation is that the NASD would help sustain Nigeria’s 7% growth rate per annum.

The NASD was expected to go live in May 2013 but had to wait for its updated set of rules to be approved by SEC. As a result, the NASD was inaugurated on the 1st of July while it commenced operation on the 2nd of July.

A company that is not listed on the NSE gets a broker to manage its shares. The broker lists the offer on the NASD and a buyer simply contacts the broker to put in a bid, after which the transaction is completed over-the-counter at any of the settlement banks. Brokers who want a piece of this pie simply register with the NASD.

Unlike the Nigerian Stock Exchange where stock prices are not allowed an intra-day movement of above 10%, the NASD OTC market has no circuit breakers to control the pricing of stocks; hence the prices are basically at the mercy of the forces of demand and supply. Stock prices can move as much as they can all day. Currently 40 stockbrokers have applied to operate in the NASD OTC market, which is set to offer issuers and investors the highest standard of performance and integrity.

The market commenced with equities trading, bonds, and commercial papers. Within the first year, the market would have quite a bit to do with equities, bond, and commercial papers. The exchange uses the measures that the Securities and Exchange Commission uses to protect investors. In addition to the ‘name and shame’ culture of the SEC, there is also a firm regulatory structure to check infractions.

NASD OTC expects to attract growing corporations that need to fund their projects and expand; larger corporations with a record of good corporate governance and good performance; and private companies that have become public limited companies (PLCs) or have seen their shareholder base rise to over 50. High transparency and increased liquidity would attract investors.

The NASD is looking beyond Nigeria. The company’s focus is actually the West African market, and it has the potential of reaching the whole African market.

The NASD platform will complement the activities of the NSE and make the capital market robust and attractive. The NASD had to lease trading capacity from the Nigerian Stock Exchange to function as well as its platform to settle deals. The NASD reached an agreement with the Nigeria Stock Exchange and the Central Securities Clearing System Plc (CSCS) to use their trading facilities and clearing facilities respectively for these purposes.

Both the NASD and the NSE platforms are presented to the world as distinct. The NSE is operating with listed stocks while NASD is dealing with over-the-counter equities. This is however not the full picture.

The Race for Companies
The NASD covers the emerging companies –smaller companies which cannot be listed on the stock exchange. But it will also get to compete with the NSE for bigger companies that could have gotten listed on the stock exchange but are not willing to do so yet. Chances are that these bigger companies might find the NASD more attractive than the NSE. One of the reasons: More price movement, fewer restrictions. Already, Heirs Holding, an investment company and majority shareholder of Transnational Corporation of Nigeria (Transcorp), has shown interest in the NASD OTC market. More big companies will soon reveal their interests.

The NASD has a platform to trade a broad range of other instruments besides equities and bonds, and these include options like derivatives.

The entrance of NASD means that there are now three exchanges in Nigeria: the Nigerian Stock Exchange (NSE), the Abuja Securities and Commodity Exchange (ASCE) and now the NASD Plc.

The NASD would be offering investors an alternative platform to create wealth with fewer restrictions on price. Today over 19,000 companies are having transactions via the OTC market with a daily turnover of over ₦3 billion.

With the NASD, it is likely that we are about to witness a power shift in the Nigerian capital market.  The banks can take on as many transactions and as many brokers as they please (one bank already services 44 brokers), the stock price can move as many times as possible, and the brokers can trade on any or all of the three platforms in the country.

NSE’s $1 trillion Capitalisation Target
Interestingly, the Chief Executive Officer of the NSE, Oscar Onyema, initiated a massive market drive to get more companies listed on the NSE. The vision is a $1 trillion market capitalisation. The implication is that the NASD and the NSE would be hunting in the same jungle for the same game.

The NSE intends to introduce derivatives such as exchange traded funds and other options and is also working with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to get small businesses listed on its alternative market –the Alternative Securities Market (ASeM) –which is promising SMEs access to the capital market for long term funding.

For all these companies the decision would be whether or not to get listed. The NASD has to keep these companies unlisted just to survive.

From July 2, 2013, the NASD became the NSE’s new contender in the race for companies. The NSE is in the race to get those 19,000 companies listed and the NASD is in the race to keep them unlisted. One matter of concern for the NASD is the fact that the derivatives to be traded are not developed yet.

Credit Derivatives
Credit derivatives are bilateral contracts between a buyer and seller. Under this contract the seller sells protection against the credit risk of the reference entity. Only tailor-made derivatives traded on a futures exchange are traded on over-the-counter markets; such as Interest Rate Swaps, Forward Rate Agreements, and Forward Contracts. These credit derivatives should be traded by investment banks that have traders in these markets: commercial banks, hedge funds, government sponsored enterprises, etc.

Derivatives traded in the NASD OTC market are futures contracts –standardised contracts for the trade of a standardised quantity and quality of a specific commodity via a futures exchange. Most times, it is about non-traditional commodities such as foreign currencies, commercial or government papers (bonds, baskets of corporate equity or stock indices), and other financial instruments. The future date is the delivery date and is also called the final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.

A futures contract makes it an obligation for the holder to make or take delivery under the terms of the contract. With option grants, the buyer gets the right (not the obligation) to take over the seller’s position. The owner of an options contract may exercise the contract, but with a futures contract both parties must fulfil the contract on the settlement date.

The Settlement Banks
The six settlement banks are: Guaranty Trust Bank Plc, Access Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Sterling Bank Plc, and Stanbic IBTC Bank Plc.

The banks operate on behalf of the brokers that are registered with the NASD. The bank pays and collects the money for the transactions on behalf of the brokers and their clients. Bringing the bank into the equation is pretty much inevitable. The transactions would be traded, cleared and settled within T+3 day circle (transaction day plus three days). The Central Securities Clearing System would provide T+3 clearing; while registrars would provide verification support.

NASD has affirmed that the banks are not guarantors. Brokers are responsible for what they choose to buy. The banks only serve as a means by which the settlement aspect of the transactions is safely incorporated into the process.

The banks are not novices. They have been dealing with brokers and OTC equities for quite a bit. All the same, intelligence gathered revealed that many of their executives and branch managers were totally oblivious as the NASD OTC era approached.

The Finish line
Certainly the finish line is not at the stables of the 19,000 companies. The NASD’s vision is for West Africa and the entire continent. It hopes to be open to everybody across the world. There are opportunities from major Information Communication and Technology firms, oil firms among others in trading their shares. NASD has also said several companies are clamouring to join the bandwagon and that there was a lot of excitement about the new measures.

Before the NASD, informal OTC trading took place under obscure pricing, and players had to cope with the uncertainties as they initiated and completed transactions. The NASD OTC market is expected to change this and proclaims that it would also expand the depth and reach of the capital market in Nigeria, in the face of sell pressure (sell swap).

The race could get fierce as time passes; or perhaps one contender would run out of steam.

It is a little premature to predict the winner, and we would not be naming a favourite at this point, but there is definitely going to be a race and it would be an interesting one to watch.