Demutualization – Catalyst for driving growth in African capital markets (2)
Following demutualization, a number of our peers have re-positioned their markets, building alliances or consolidating within and across borders in order to enhance their attractiveness. For example, in 2006, the Australian Stock Exchange merged with the Sydney Futures Exchange to form the Australian Securities Exchange (ASX). The following year (in 2007), the New York Stock Exchange (NYSE) merged with Euronext to form NYSE Euronext, creating the world’s largest stock exchange with revenues of $4.5Bn.
More peculiar to emerging markets, demutualization could serve as a means of collaborating with strategic shareholders with specialized know-how aimed at importing international skills, knowledge and technical efficiencies into our domestic markets. Additionally, it will enable African exchanges be more agile and responsive to the intensifying global competition for capital market order flow, and presents African exchanges with the opportunity to expand into new markets.
The NSE’s Progress
At the NSE, study tours are vehicles for increasing our knowledge base, learning global best practices and processes, as well as establishing mutually beneficial relationships. Last year, in preparation for the launch of our derivatives market, the National Council and NSE management participated in a technical tour of the Chicago Mercantile Exchange (CME) Group, the world’s leading and most diverse derivatives marketplace, and the Chicago Board Options Exchange (CBOE), the largest US options exchange.
At the CME Group, the CEO at the time – Mr. Phupinder Gill, highlighted the crucial role of demutualization in enabling the CME increase direct access to its trading systems and develop high-calibre staff. He opined that had the CME not demutualized, three (3) of its subsidiary exchanges would not be in existence today. Accordingly, he urged us to remain steadfast in our demutualization drive. The same message was conveyed to us at CBOE, which recently joined ranks with other great blue chip companies listed in the S&P 500 after the acquisition of Bats Global Markets, highlighting its strong growth since going public in 2010.
To strategically position the Nigerian capital market for the next phase of growth, I and my colleagues on the National Council, along with our Management made the strategic decision to demutualize the NiSE in our overall ambition to reform and transform the Nigerian capital market into a world-class market. Following this, we employed an extensive Request for Proposal (RFP) process in the appointment of legal and financial advisers for the demutualization project in 2015.
Recognizing the importance of demutualization to the vitality of our business model, the National Council held a strategy session in the first half of 2016, solely to discuss the NSE’s roadmap to manage issues that could affect the process, including potential regulatory and political concerns. Subsequently, a meeting between the National Council and past Presidents of The Exchange was held with six (6) past Presidents in attendance to discuss solutions and insights on a clear path forward. The value gained with this engagement has dramatically enhanced the likelihood of a successful and seamless demutualization process.
Today, we have submitted a draft demutualization Bill to the National Assembly, which will allow for our legal status as a demutualized entity. We have also completed five (5) key reports in support of the project including: i) Inception; ii) Legal Due Diligence; iii) Tax Due Diligence; iv) Member Register Review; and v) Assessment of Business and Operational Plan reports. In March 2017, we successfully conducted an Extra-Ordinary General Meeting (EGM) to formally empower the demutualization project team (DPT) to fast track completion of the project.
With the expectation of the successful passage of the draft demutualization Bill into law, the National Council, Management team and I will continue to devote our efforts towards completing all necessary documentation stipulated in the SEC rules and effecting the requisite changes in our MEMART. Ultimately, we look forward to re-registering the Exchange and assigning shares to Members based on an agreed apportionment.
Corporate Structuring Consideration
Given my legal background, corporate structuring is of the upmost importance and cannot be taken lightly as we collectively embark on this journey to create a more dynamic financial market across Africa.
Exchanges may opt for a number of corporate structures upon demutualization. The demutualized exchange may adopt a for-profit private company structure where only members or members and outside investors are the owners. Alternatively, the exchange can be listed on a recognized exchange (most times, on itself) with or without restrictions on the number of shares that can be owned by exchange members and non-members. For most demutualized exchanges, a private structure is usually the first step before publicly listing, an example being the JSE which demutualized in 2005 and listed on its own exchange in 2006.
Notwithstanding the overarching corporate structure adopted by the exchange, demutualization brings new conflicts of interest arising from the objective to maximize profits and the self-regulatory function of the exchange. For-profit exchanges can establish a separate entity to conduct regulatory functions, thereby avoiding conflict-of-interest issues. This can take one of two forms, the independent subsidiary model (i.e. establishing a subsidiary with an independent governing board and management, separate from the exchange holding company) or the supervised subsidiary model where the subsidiary’s governing board is the Regulatory Oversight Committee (ROC) of the exchange holding company. Alternatively, demutualised exchanges can adopt the supervised division model, whereby the regulatory function remains within the exchange and reports to the exchange holding company CEO and ROC.
The choice of regulatory model the exchange adopts will depend on several factors: Are there mechanisms to ensure adequate resources to meet the regulatory mission? What is the relationship between the regulatory subsidiary CEO and holding company CEO? If not independent, what is the relationship between the regulatory divisional head and holding company CEO? Further considerations would relate to who will be responsible for rulemaking, rules interpretation and resolution of disciplinary matters post demutualisation.
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