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ENHANCING MARKET DEPTH THROUGH FIMM

By NBF News
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It is on record that government bonds were the first securities that were traded on the Nigerian Stock Exchange (NSE) in 1961 and bonds continued to play a key role in the market for more than two decades until the federal government pulled out of bond issuance in 1987.

It is interesting to note that since the first reissuance of bonds in 2003, the DMO has raised trillions of naira for the financing of public projects and the revival of the Federal Government of Nigeria (FGN) bond market has raised the appetite of state governments to raise funds via bond issuance.

The bond market capitalisation which stood at N3.74 trillion ($24.63 billion) in 2011 grew by 55.61per cent in 2012 to N5.82 trillion ($37.44 billion). This figure is likely to grow even further because of the nation's dire need for new and revamped infrastructure coupled with the emergence of fixed income market makers recently introduced by the NSE to boost trading in retail bonds in a bid to broaden and deepen the Nigerian capital market.

Fixed Income Market Making (FIMM) is a platform that allows debt market participants to trade NSE-listed debt instruments issued by the federal and state governments or corporations on a transparent order book with firm orders.

The objective of FIMM is to provide liquidity and transparency through an order book with firm orders, pre and post-trade reporting, clearing and settlement solutions.

The NSE FIMM programme will operate a 'hybrid' market, allowing Market Makers to provide two quotes and licenced broker/dealers of the Exchange to submit orders as is currently done. These quotes and orders interact on the order book to 'discover' the best price for a security.

Market watchers are hopeful that the new initiative will actually drive the activities in the primary market, especially from the corporates now that they know that they can actually participate, from a retail perspective, on the floor of the Exchange.

Commenting recently at a workshop on 'Retail Bonds Trading and Fixed Income Market Making,' the chief executive officer of the NSE, Mr. Oscar Onyema, noted that the Exchange has consistently communicated its objective of broadening and deepening the Nigerian capital market and the development of the Retail Bond Market is clearly in line with this objective.

'While we see this as a remarkable milestone, we are well aware that the bond market largely remains a playing field for institutional investors and high net worth individuals with little retail participation and this presents a clear opportunity to broaden and deepen the capital market.

'Over the last few months, the NSE commenced the implementation of a coordinated approach to developing the Retail Bond Market. Recently, we announced the names of the selected FIMMs on the trading floor of the NSE as a major step towards making fixed income securities accessible to the investing public. The companies selected went through a very rigorous process and met the additional net capital requirement of N500 million. We also examined their compliance history and looked into their operational capabilities, technology and processes.

'I would like to state that the Retail Bond Market is not set up to compete with the OTC market, but rather to complement the structure by opening up participation in the bond space to retail investors who otherwise would have been excluded, as well as institutional investors with a preference for a transparent trading pattern,' he said.