Fixed Income Market Making An Overview. An NSE Presentation By Dipo Omotoso Head, Product Development Nigerian Stock Exchange

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1 Fixed Income Market Making An Overview An NSE Presentation By Dipo Omotoso Head, Product Development Nigerian Stock Exchange January 29, 2013

Outline 1 2 3 4 5 6 7 Introduction Objectives of the FIMM Program & Market Participants Benefits of the FIMM Program

2 Outline Introduction Objectives of the FIMM Program & Market Participants Benefits of the FIMM Program Obligations of FIMMs Requirements for Market Makers List of Selected FIMMs Bonds Listed on the NSE The Nigerian Stock Exchange 2

3 Introduction Awareness of fixed income securities is growing among investors (both institutional and retail). Retail investors are looking beyond traditional equity to other asset classes in search of higher yields. Retail investors are attracted to the certainty of fixed income instruments and their steady income streams (coupon payments). Liquidity is a requirement for any significant development of the retail bond market. Creating a viable secondary bond market is an important step to ensuring market development. 3

4 What is Fixed Income Market Making? Fixed Income Market Making Facilitates trading of listed debt instruments issued by the Federal Government, State Governments and Corporations. Enables trading on a transparent order book with firm orders. Fixed Income Market Makers (FIMMs) Provide continuous two-way quotes to the market through the Exchange s Automated Trading System (ATS). One quote indicates the bid - the price and size at which a FIMM is willing to buy a particular bond. The other quote indicates the ask or offer - the price and size at which the FIMM is willing to sell that same bond. This applies to all pre-qualified / defined NSE listed bonds. 4

5 Objectives of the FIMM Program The FIMM Program Opens up participation in the Nigerian bond market to retail and institutional investors. Offers a more transparent pattern for trading bonds. Does not replace the OTC market, but rather, complements it. Helps deepen the Nigerian bond market. Ensures all Government (federal and state) and Corporate bonds trade regularly. Ensures liquidity across the spectrum, as a result of appointed Market Makers. Supports a more developed Nigerian capital market. 5

6 Market Participants Fixed Income Market Makers (FIMMs) Are appointed by the NSE. Are tasked with making markets in NSE listed bonds. Have obligations and benefits with providing liquidity and addressing dislocations in the NSE bond order book. Broker-Dealers Are NSE members. Have been approved to represent customers (retail and institutional investors) in an agency capacity; and/or Trade proprietary positions on behalf of their firms. 6

7 Market Participants (contd.) DMO Government Stockbroker Is an NSE registered Broker-Dealer. Is selected by the Debt Management Office (DMO) to be a liquidity provider of last resort in FGN bonds listed on the NSE. AMCON Market Maker Is an NSE registered Broker-Dealer. Has been appointed by the Asset Management Corporation of Nigeria (AMCON) to be the liquidity provider of last resort on AMCON bonds listed on the NSE. Regulators (NSE & SEC) Ensure participants are involved in best market practices at all times. 7

8 Benefits of the FIMM Program 1. Retail-Focused Liquidity FIMMs provide liquidity to the retail market. Liquidity attracts retail market participants. 2. Price Discovery/Transparency Trading bonds on the Exchange platform enhances efficient price discovery; Also provides full transparency rather than subjective pricing. 3. Deeper Bond Market Extends market making beyond FGN bonds to all bonds listed on the NSE. Provides depth of liquidity in the Nigerian bond market. 8

9 Obligations of the FIMMs Catalyst for enhancing retail bond liquidity in the secondary market. Compete for customer order flow by providing two-way firm quotes (bids and offers). Offer quotes at or better than the best bid or offer, most times. Trading bonds on the Exchange platform enhances efficient price discovery; Maintain continuous two-way quotes within a pre-defined spread. Meet anticipated needs of the market by maintaining inventory. Facilitates trading in specific bonds. Anchor opening / closing auctions to enhance the price discovery process. 9

10 Requirements for FIMMs A. Robust Internal Risk Management Framework. B. Inventory Management and Control. C. Appropriate level of Capital commitment. D. Excellent knowledge of trading. E. Understanding of the securities in which the market maker intends to make market. 10

11 Other Benefits of Market Making 1. Listed Bonds More bond activity. Increased liquidity and attractiveness. Price improvement. More transparency. 2. Institutional Investors More liquidity in the market place. Easy entry and exit. Enhanced portfolio diversification and management. 3. Retail Investors More liquidity in the market place. Easy entry and exit. Enhanced portfolio diversification and management. 4. Stock Brokers / Broker-Dealers Increased liquidity. Greater market depth. 11

12 Market Makers Appointed Market Makers for fixed income securities Capital Bancorp Plc Cordros Capital Limited ESS/Dunn Loren Merrifield FSDH Securities Limited Greenwich Trust Limited Investment One Stockbrokers (formerly GTB Securities) 12

13 Listed Bonds Category Capitalization (N) No. of Listed Bonds Corporate Bonds/Debentures 1,400,433,626, Government Bonds--Federal 4,190,043,859, State Government Bonds 341,000,000, Total 5,931,477,485,

14 Thank You Stock Exchange House 2-4 Customs Street P.O. Box 2457, Marina Lagos Island, Lagos, Nigeria

DEBT MANAGEMENT OFFICE NIGERIA

DEBT MANAGEMENT OFFICE NIGERIA APPOINTMENT OF A GOVERNMENT STOCKBROKER: REQUEST FOR PROPOSAL The Debt Management Office (DMO) on behalf of the Federal Government of Nigeria (FGN) is seeking to engage the