Archive for the 'Strategy' Category

Dar Stock Exchange shares double on first day of listing in hectic trading

Trading has been fast and furious in the shares of Dar es Salaam Stock Exchange PLC, which self-listed at 9am on 12 July. The first day of trading saw the shares listed at TZS 500 each and soaring as high as TZS 1,000 after hitting TZS 800 in the first 20 minutes. They closed at TZS 935. Turnover was 201 deals out of all the 248 deals for the day, according to the DSE daily report and TZS 794.8 million ($363,750) worth of shares were traded (out of TZS 817.9m traded for all counters).
DSE continued scorching up its own trading boards today (13 July), climbing further to TZS 1,100 and then ending at TZS 1,000 in 289 deals (out of 356 total) for a total value traded of TZS 1.1 billion (out of daily traded value of TZS 1.25bn).
Huge interest had already been seen in the initial public offer (IPO) of shares which ran from 16 May and closed on 3 June. Total bids were TZS 35.8 billion ($16.4 million), or 4.8 times the offered amount of TZS 7.5bn ($3.4m). This follows its demutualization in 2015. The Capital Markets and Securities Authority (CMSA) approved that DSE could augment its “green shoe” option from 10% (i.e. TZS 750m) to 35% or TZS 2.6m). That means the DSE raised TZS 10.1m in total.
IPO applications for up to 10,000 shares (TZS 5m) got their application in full, the full 3% allocation was given to staff, and those who applied for more than 10,000 shares received shares pro rata and a refund.
Government is planning pressure to encourage more listings. Speaking at yesterday’s launch, Finance and Planning Minister Philip Mpango said Government would start with encouragement for privatized companies to list, but it could consider a new law and regulations: “If the mutual talks fail, then the Government will push them to offload some of their shares at the DSE” (as reported in Daily News).
Listed companies that were previous privatizations such as Tanzania Breweries, Tanzania Cigarette Company, National Microfinance Bank, CRDB Bank, Simba Cement, Twiga Cement and TOL Gases are among Tanzania’s 15 largest taxpayers and rated as top-quality employers. Mpango said listing would encourage transparency and good corporate governance, making tax administration easier while enabling citizens to participate in economic activities.

Minister of Finance and Planning Philip Mpango (source rai.co.tz)

Minister of Finance and Planning Philip Mpango (source rai.co.tz)


DSE CEO Moremi Marwa said more than 400 state-owned enterprises (SOEs) had been privatised in the last 20 years, but only 7 listed on the bourse: “It is advisable that future privatizations are conducted through the capital market.”
Nasama Massinda, CEO of CMSA, said they were very pleased by Government’s move to force telecom companies to list 25% of shares at the DSE. “We believe this is the right thing as we want Tanzanians to own shares of these companies… the trend is that some of the firms are allocating shares to one or two ‘mwananchi’. We want them to sell their shares to the public. And the good thing is that these shares are not given for free since local investors would buy them.” She added that the Mining Act also requires that mining firms with special mining licences should sell part of their shares to citizens through DSE.

Investors who want to buy or sell shares can contact the DSE stockbrokers (licensed dealing members) or trade on the DSE’s mobile phone trading platform by dialling *150*36# and selecting “DSE Shares” from the list.

daressalaamse_new logoJan2016

Building African Financial Markets seminar

The 5th Building African Financial Markets (BAFM) capacity-building seminar is coming to the Nigerian Stock Exchange Event Centre in Lagos on 28-29 April. This is the top seminar for professionals and strategic leaders from capital markets all over the continent, including securities exchanges, clearing and settlement, stockbrokers, investors, government officials and any organisations which are part of capital markets system. It is organized by the NSE and the African Securities Exchanges Association.

The seminar includes a market closing/opening ceremony and focused learning interactive sessions on key topics around driving liquidity in African capital markets. Topics are very relevant, including securities lending, strengthening equity market structures, derivatives and CCP, optimal price mechanism, global reporting standards, information security, and capital markets integration.

Its suitable for seniors from capital and financial markets in product development, regulation and policy, information technology, investor relations, trading, clearing and settlement.

BAFM-III (1)

  • Role of securities lending in boosting liquidity in African capital markets
  • Strengthening equity market structures in Africa to better address low liquidity
  • Instituting an optimal price mechanism on African stock exchanges
  • Capital market integration – a catalyst for boosting liquidity on African stock exchanges
  • Liquidity enabling regulation
  • Role and importance of CCP in a derivatives market
  • Trading derivatives products – how the products work?
  • Rules governing CCP
  • Adhering to best global reporting standards
  • Information security – protecting your market’s digital assets.

According to the organizers: “As African economies reposition themselves following the significant impact of global headwinds that have challenged the continent’s growth prospects, African capital markets are instrumental in financing the continent’s infrastructure and capital requirements.”

Cost is NGN70,000 plus VAT/$350. For more go to NSE website.

Exchange trends from World Exchange Congress 2016

A couple of interesting statements from speakers at the excellent World Exchange Congress 2016, happening 22-23 March at Bishopsgate in London.

Exchanges – back to the information coffee house
Stu Taylor, CEO of Algomi: Fixed-income trading was dominated by banks who use voice trading and support it with their balance sheets. Most banks and their clients prefer this way and are not naturally going to switch to putting limit orders through the exchanges. We try to see how we can help with parts of the transactions, we worked first with the regulated Swiss exchange to put technology components at banks and that can help them sometimes with their trades, the exchange can help them find different counterparts, or with missed trades or, when they are struggling to complete a deal, the exchange can make suggestions. We suggest actions into the existing workflow, rather than trying to change the workflow. Exchanges can connect information sources so the exchange is the place to see what’s going, it can offer “bond dating”, trying to match buyers and sellers into a transaction.

Historically the technology focus for exchanges has been on execution, but now the innovation is that the exchange is about the information itself. Technology is shrinking the world, we used to talk about 6 degrees of separation in the world. Technology such as Facebook has made that number closer to 3 degrees of separation. Exchanges are back to the origins of exchanges as the coffee shops, finding a place to know someone who knows someone. Information and pre-trade are where the next waves of innovation for exchanges are going to come from.

Exchanges role in banks' bilateral bond trading, source www.algomi.com

Exchanges role in banks’ bilateral bond trading, source www.algomi.com

Can technology create liquidity?
Ganesh Iyer, Director of Global Product Marketing at IPC Systems: “Technology has become a facilitator of liquidity. Uber has no taxis but it provides taxi “liquidity”, Airbnb has no rooms but provides accommodation “liquidity”. Technology does not create liquidity on its own but it brings together market participants and that leads to liquidity. In the capital markets it can bring very diverse market participants together, for instance a mutual fund seller with a diverse “buy-side” community including hedge funds, retail, etc.

Move over-the-counter (OTC) trading onto exchanges
April Day, Director, Equities, Association for Financial Markets in Europe: “There is always a need for keep some balance, some trades are not suitable for exchange trading, there is still a time when investors choose to trade off exchange for reasons such as not wanting to share market information, reduce costs, less disclosure, etc.

Sergio Ricardo Liporace Gullo, Chief Representative EMEA BM&FBOVESPA; The Brazil market has reached a big harmony, we have survived many crises and we have a sophisticated system offered by the exchange which offers central clearing and makes all parties’ lives more efficient and offers better use of capital.

Keisuke Arai, Chief Representative in Europe of Japan Exchange Group: The Japaese experience is that it’s important for the exchange to strike the right balance between market efficiency and investor protection.

Global community heading to World Exchange Congress 22-23 March

Momentum building fast ahead of the key event for securities exchanges worldwide, the World Exchanges Congress, now in its 11th year and back in central London from 22-23 March.

This is the key gathering where more than 300 members of the global exchange community get together from all continents to share trends and to hear from experts and bourse leaders. Topics of interest in the fast-changing world of established and emerging trading venues regulated exchanges include “new customers, new revenues and new partnerships”.

For more information, check the website here.

The World Exchanges Congress was launched in London in 2005 and has been hosted in Istanbul, Madrid, Doha, Monaco, Dubai and Barcelona. CEOs from virtually every exchange and trading venue in the world have attended. In 2010, the event expanded to look at technology opportunities and challenges and there is strong participation from chief technology officers (CTOs) and other top executives with a focus on trends and innovations.

In 2016, the congress continues to be seen as the unofficial AGM of exchanges and it is the most significant date on every exchange executive’s diary. It gives bourse leaders the opportunity to harness the latest innovations, overcome their biggest challenges and be inspired to drive their organisations forward.

The gathering will focus on the most critical future trends affecting exchanges and changing the exchange landscape, including cyber-security, crowd-funding, bitcoin, big data, crypto-currency and post-trade automation. Core topics running through the programme are the growth of financial centres, market integrity and finding ways to succeed through innovation.

Confirmed speakers are CEOs and other leaders from securities exchanges and other trading venues around the world as well as from the World Federation of Exchanges. They will explain their successes and challenges driving into new partnerships and revenue opportunities including commodities, derivatives and FX, regional expansion, the trading landscape under Europe’s MiFID II directive, opportunities for automation, over-the counter (OTC) trading on exchanges, distributed ledger/block chains, attracting more listings, crowdfunding platforms, data and index revenues for exchanges, post-trade models, innovation pitches, latest developments in central clearing, cyber security and finding new customers and new partnerships.

The conference has a strong tradition of formal and informal networking. It continues to be the key place where exchanges come to meet their peers and colleagues, benchmark their organizations and share ideas. Interactive exchange-led roundtables in 2016 mean that this year’s event will be no different.

For more details and to book your attendance, please head to the conference website.

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London Stock Exchange allowed to give Hong Kong brokers direct access

The London Stock Exchange has been licensed by Hong Kong’s Securities and Futures Commission to operate as an alternative exchange operator. This means that brokers based in Hong Kong can join as direct members of the LSE and trade for Hong Kong clients in LSE-listed stocks and fixed-income products, provided they meet requirements. They will also get access to the LSE derivatives market, according to this Reuters story.
LSE chief executive Alexander Justham said on Monday (15 June), according to a report in South China Morning Post: “The SFC license is an important move for the London Stock Exchange to further develop our business related to Hong Kong and Chinese companies.”
He expects the new links would encourage more mainland firms to list for trading on the LSE as well as more dim sum bonds, which could create more competition for Hong Kong Exchanges and Clearing. He said: “The London Stock Exchange is not a competitor to Hong Kong but we could have a cooperation relationship.”
Two Hong Kong financial firms are members of the London Stock Exchange through branches in London and 57 mainland Chinese firms are listed. The LSE signed a memorandum of understanding with 4 companies – Agricultural Bank of China, Bank of China, China Construction Bank, and Haitong Securities – to help bring more Chinese firms to list in London.
London is developing as a trading hub for yuan.
The LSE has a list of its 883 members based in various countries around the world.

Johannesburg Stock Exchange scores record with 395,969 equity trades in one day

Johannesburg Stock Exchange (credit: JSE)

Johannesburg Stock Exchange (credit: JSE)

The Johannesburg Stock Exchange (www.jse.co.za) equity market scored a record number of 395,969 securities trades on 16 October. The total value was just over R24.6 billion ($2.2 bn).

The previous record of one day’s trading on the JSE Equity Market was just under 300,000 trades on, but the average number of trades per day during 2014 is approximately 176,000 per day on the equity market.

Leanne Parsons: Director Trading and Market Services at the JSE, says in a press release that the JSE’s trading systems handled the large number of transactions without any difficulty: “Records like this show that the JSE continues to provide a stable, credible and world class trading platform as well as access to a very liquid market with deep pools of capital.”

The JSE offers a fully electronic, efficient and secure market and is the world’s best-regulated exchange. It has world-class trading and clearing systems, settlement assurance and risk management. It has been a marketplace for trading financial products for 125 years, connecting buyers and sellers in equity, derivative and debt markets and is in the world top 20 exchanges for market capitalisation and a member of the World Federation of Exchanges (WFE).

JSE seminar on African capital markets development

Johannesburg Stock Exchange (credit www.jse.co.za)

Johannesburg Stock Exchange (credit www.jse.co.za)


The Johannesburg Stock Exchange and the African Securities Exchanges Association, supported by the World Bank Group, will host the 3rd Building African Financial Markets capacity-building seminar. This will be in Johannesburg, South Africa from 10-12 September.
The aim of the seminar is to promote growth and development of African financial markets by giving representatives from stock exchanges, regulatory bodies, stockbroking firms and other interested parties the opportunity to learn about topical subjects in the area of capital markets.
The seminar includes speakers from African and global securities exchanges, banks, stockbrokers, major financial institutions, issuers, multilateral organisations and regulators. The topics covered include Are exchanges playing a meaningful role in African growth and development?, Exchange demutualization – perspectives and considerations, Listings – what do exchanges need to do to get companies to list
This year is the first to introduce a series of parallel workshop sessions to allow for a more interactive environment for engagement. Workshops include constructing exchange-traded funds, building electronic bond markets and the role of exchanges in bond markets, data commercialization, effective ways to enhance financial literacy, commodity derivative exchanges, increasing market liquidity, sustainable stock exchange initiative.
The conference sessions will be held at the JSE during the day time of 11 and 12 September. The seminar will start with a cocktail function at the Johannesburg Stock Exchange (JSE) for all delegates and speakers on the evening of 10 September, and a stockbroker networking session will in the afternoon of 11 September.
The detailed programme can be downloaded from the JSE website via the link BAFM Programme on this page.

Nairobi Securities Exchange scores megaprofits and heads for own IPO and listing


The Nairobi Securities Exchange (www.nse.co.ke) celebrated its 60th annual general meeting by taking key decisions to advance its demutualization into the final stages. It also made record profits for the financial year to 31 Dec 2013 and paid its first dividend to shareholders.
NSE Chairman Eddy Njoroge was one of the directors re-elected at the 60th annual general meeting of the exchange, held last week. He thanked the NSE shareholders for passing key resolutions and said the demutualization process is nearly finished with the next step the NSE doing an initial public offer (IPO) and then listing its shares for trading on itself. According to a press release, he noted that the Board had appointed Transaction Advisors who are currently working towards the Self-Listing of the Exchange through an IPO on the Main Investment Market Segment (MIMS) of the NSE, before the end of June 2014: “The Capital Markets Authority has received our final application, and we expect formal approval to be granted by the regulator shortly. This will open the door to the long-anticipated self-listing.
“The NSE’s impending demutualization will provide further impetus for the exchange to support the attainment of Vision 2030, further positioning our capital markets as the hub for East and Central Africa. The NSE IPO will enable a wide cross-section of Kenyans to both own a piece of the exchange and to share in the future financial success of this company with a very rich national heritage”.
The NSE had total income of KES 622.7 million ($7.2m), up 62% from the previous year’s KES 384.3m. Net profit soared 210% to KES 263m, up from KES84.8m and the highest in the bourse’s 60-year history. The total value of trading in equities was up 79% to KES 155.8 billion ($1.8bn) from KES86.8 billion and market capitalization was up 50% to KES 1.9 trillion ($22.6bn). The AGM resolved to pay a first dividend of KES 2 per share.
According to another press release, Chief Executive Peter Mwangi said: “Our strong financial performance in 2013 was a result of the very strong market performance and the efforts of management to diversify revenue streams from the traditional sources of transaction levy and annual listing”.

Demutualization – the resolutions
Demutualization is the process through which an exchange stops being a mutual company, often a company limited by guarantee, with the stockbrokers and other stakeholders as members. Instead it turns into a for-profit limited company with shareholders. This can help with management and with capital raising to invest in new technology. The first demutualization was Stockholm Stock Exchange in 1993 and since then most top world exchanges have followed. Some observers ask if for-profit exchanges really work in issuers’ and investors’ interest.
Special resolutions passed at the Nairobi SE AGM were:
1. Subject to approval by the CMA, the share capital is increased from KES 25m (25m x ordinary shares of KES 1 each) to KES 850m by creating 825m new shares which rank pari passu
2. After this, the new 850m shares should be consolidated into 212.5m ordinary shares of KES 4 each.
3. Subject to approval by Registrar of Companies and CMA, the company shall be turned from a private into a public company and new articles of association be adopted, signed and registered.
4. Subject to approval where applicable, part of the credit on the company’s revenue reserve be capitalized value KES 490m to pay in full and at par for 122.5m ordinary shares of KES 4 each. These would be issued as fully paid among the registered shareholders of the company
5. Up to 2.5m ordinary shares of KES 4 each would be offered for subscription to employees of the company.
6. Subject to approval by relevant authorities, up to 212.5m ordinary shares be approved for listing on MIMS. Up to 81.375m ordinary shares should be offered for subscription by the public, and the company will issue a prospectus.

Safeguarding investments – custody banks spur growth of African capital markets

Fast-rising inflows of investment capital to the African markets are spurring an increase in the banks offering custody services. But global players are held back by differences in infrastructure and legal structure in the different markets and the need to reach economies of scale in a low-margin business.
Custodians are responsible for safe-keeping assets. For instance, if a global fund manager wants to invest in different African markets, it might appoint a bank to keep its local holdings of equities or bonds registered in the name of the bank’s local nominee company and to ensure that all is correctly registered and administered including purchases and sales, dividends, voting rights and other actions. They are essential to the progress of institutional investors into Africa.
According to a excellent article by experienced journalist Liz Salecka for FinancialNews.com, the custodians that dominate are “the two pan-African banks”. She writes that demand for custody services is growing fast driven by two factors:
• international institutional investors flocking to take advantage of the region’s growth prospects.
• the rise of pension and unit trust investments as investors grow wealthier and domestic savings institutions increase.
Standard Chartered Bank says capital inflows to sub-Saharan Africa grew 4 times from $13.2 billion in 2003 to $48.3bn in 2012. They are hunting equity, fixed-income and money-market investments in markets such as Kenya, Nigeria, Ghana, Mauritius, Tanzania and Zambia. The article quotes Hari Chaitanya, regional head, investor and intermediaries, Africa, transaction banking at Standard Chartered Bank: “Portfolio equity investment in the region is focused on the most active and liquid stock markets in South Africa, Nigeria, Kenya, Mauritius and Zimbabwe, which the Johannesburg Stock Exchange continues to dominate, accounting for 83% of total market capitalisation in the region in 2012.” He added that, although South Africa will continue to dominate in terms of size, the fastest growth is in other countries. Several African countries are among the fastest growing in the world, with GDP growth rates experienced and foreseen of over 7% a year.
She also quotes Mark Kerns, head of investor services at Standard Bank as saying international investor demand will spur capital markets development: He added: “Domestic demand is also growing as a result of insurance expansion, growth in retail savings and increased pension fund investment in unit trusts and other vehicles as pension systems develop. This, supported by the emergence of a middle class, is further driving stock market growth.”

Who are the African custodians?
Standard Bank, the bank with the biggest operation in African markets, offers custody services in 15 sub-Saharan markets. Standard Chartered Bank, which launched a custodian services business in 7 African markets in 2010 after buying Barclays Bank’s custody business in Africa, has since expanded its network to 11 markets since then.
Global bank Barclays used to have a African custody operation but in line with the rest of its confused Africa strategy decided to sell that off in 2010 to Standard Chartered, according to a 2010 press release. Earlier this year, Standard Chartered also entered into an agreement with South Africa’s Absa Bank (also part of Barclays) to acquire its custody and trustee business.
According to the article, Standard Chartered and Standard Bank are expanding and introducing new services in a major movement to service foreign and domestic investors.
Newer global custodians entering Africa start in South Africa – Societe Generale in 1991 and Citibank in 2011 – and are expanding into new growth markets.
Writer Salecka cites Andy Duffin, head of sales, emerging markets at Societe Generale Securities Services: “If you look back at custody business in Africa, the bulk of it was focused on the South African market, which generated the most significant revenue in the region. However, there is now growing demand for custody products and services in other markets such as Ghana, Nigeria and Kenya, and it is no longer the view that South Africa will generate the most significant revenues.” He says believes existing providers branching out into new markets will drive market development more than new players entering.
Societe Generale Securities Services started operating in Ghana in June 2013, according to a press release. It offers custody services for Ghanaian equities and bonds, foreign exchange and cash-management services to local and foreign investors, frontier-market funds and other players looking for increased exposure to Ghana. “Clients benefit from the local knowledge and expertise of a dedicated SGSS team located within SG-SSB, a subsidiary of Societe Generale group, which is directly linked to the pan-African integrated services platform developed by SGSS in South Africa. This platform will be deployed in other African countries in due course. SGSS already operates in Tunisia and Morocco and was reported to be talking to authorities in Mauritius about access to the local central securities depository, where it also wants to offer custody services. Societe Generale is predominately a provider of securities services in this region, and has increased staff by nearly 50% since 2007.

Sub-custodians
A key feature of institutional investment and African capital markets development over the last 20 years has been sub-custody service for international custodians who want to offer their clients services in different markets without actually setting up operations in each country. This provides a significant component of Standard Bank’s business.
State Street is a leading example of a bank which offers fund administration services from its South African offices in Johannesburg and Cape Town but relies on a network of sub-custodians across the region to service the needs of its global and regional institutional clients. Its partnership with Standard Bank was instrumental in bringing American-regulated institutional investors into many African markets in the 1990s.
He also believes international banks cannot come into Africa just to do custody business.
According to Rod Ringrow, senior vice-president and head of official institutions for EMEA at State Street: “At the moment we are seeing significant inflows into sub-Saharan Africa from large institutional investors – and the flows from our clients will help determine where we want to be.”

Custody and capital markets development
Salecka writes: “The ability of new competitors to enter sub-Saharan Africa continues to be hindered by the challenge of building sufficient scale to operate profitably in a region characterised by diverse, small markets with different regulations… The scope for new entrants to offer custody services in sub-Saharan Africa is also hindered by the complexities involved in meeting the regulatory requirements of individual markets.” She points out that infrastructure is improving, and says there are now 26 central securities depositories across the region, but they all evolve at different paces and a couple of markets including Zimbabwe and Namibia still use outdated paper settlement. Different national regulatory, tax and capital market practices complicate the provision of standardised services.
She cites Standard Chartered’s Chaitanya who says providing custody services in sub-Saharan Africa should be part of a global bank’s wider strategy for the region. New entrants have to prove that they can provide a regional presence and commit to ongoing investment in technology and other infrastructure: “Apart from South Africa, many markets in Africa are still considered too small by many global custodians to establish a physical presence in the region. Hence, the domestic custody market is dominated by regional and local banks. Custody is about scale because it is not a high-margin business.”
Dirk Kotze, Africa banking advisory leader at Deloitte (in Johannesburg) told her many banks should consider whether the market is big enough for them to operate profitably: “They must also consider who are the dominant players and what they would provide to differentiate themselves. Potential new entrants must also look into whether they have clients from other markets that need services in this new market. In addition to providing basic services, custodian banks must be able to help clients understand and navigate their way through local regulatory market environments, which are evolving in line with broader economic growth.”
Standard Bank’s Kerns said: “Emerging and frontier markets are characterised by a number of challenges including the fact that many of them are still in the developmental phase. New entrants need to obtain a banking licence and be familiar with local regulatory and other infrastructure as well as the social and cultural dynamics of each country.”

Where African capital markets want to step up the involvement of international and domestic institutional investors they need to work to provide harmonized technical and regulatory environments for custodians, including information flows. Whether CSDs will eventually be able to take business from custodians remains to be seen, but for the meantime global custodians are key strategic partners for the development of the institutional investors that drive capital markets development.

Are capital markets taking a wrong turn? Soul-searching on short-termism after UK’s Kay Review

Lots of useful commentary is published this week about what’s going wrong with the world’s leading capital markets and finance. This new bout of soul-searching follows the publication of Prof John Kay’s “The Kay Review of UK Equity Markets and Long-Term Decision Making” on 23 July and available here (and the Interim Report, published in February, with much of the evidence is available here.
The Prof says that equity markets are not working as effectively as they could. “We conclude that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain”. He says that successful financial intermediation depends on: “Trust and confidence are the product of long-term commercial and personal relationships: trust and confidence are not generally created by trading between anonymous agents attempting to make short term gains at each other’s expense.”
He blames the prevailing culture and says that people don’t only work for financial incentives, as widely promoted in current City culture – “Most people have more complex goals, but they generally behave in line with the values and aspirations of the environment in which they find themselves.” Prof Kay puts forward a series of 17 recommendations on how to make things better and this could be useful reading for anyone involved in developing capital markets with an aiming to help grow savings and create better performing businesses. This includes fiduciary standards of care if you manage other peoples’ money, diminishing the current role of trading and transactional cultures, high-level statements of good practice, improving the interactions of asset managers and other investors with investee companies, and tackling misaligned incentives in remuneration, and reducing pressures for short-term decision making. The Guardian newspaper’s Nils Pratley has a useful summary of some of the best recommendations here, ironically coupled with a beautiful rosy photograph of the City!
One background comment is by Evening Standard columnist Anthony Hilton here. He says “The behaviours that led Deputy Governor of the Bank of England Paul Tucker to use the word “cesspool” when giving evidence to the Treasury Select Committee on Libor come in a straight line from the reforms imposed on the Stock Exchange by the then Prime Minister Margaret Thatcher in 1986 when she forced it to open up membership to all comers, and in particular to abolish single capacity — the arrangement under which firms had to confine themselves to a single activity in which they acted for themselves or for the client, but not both… From being a servant of the real economy, finance began its journey towards becoming an end in itself, with deals done not because they had economic rationale but because they made money for bankers and costs, both direct and indirect, that impose a colossal and unnecessary burden on that real economy.” He adds that this kept the system honest “or rather it was dishonest in a less poisonous way. Until Big Bang, the problems came from dishonest people working in honest firms; today the problems are caused by honest people working in dishonest firms. The culture is rotten.” This brought world-beating businesses low “by policies designed to pander to the stock market rather than secure the businesses’ long-term future for its customers, employees and indeed the country.” He says the rewards of finance should belong to customers, not their advisers.
Kay also notes that index investing, as growing popular in some African markets with the rise of ETF (exchange-traded funds) and other derivatives, may not represent a strategy for representative returns, see this Financial Times summary. He also urges less securities lending.
Most of the leading commentators though conclude that the view is rather rose-tinted, and not in touch with the real world. The Financial Times Lex Column says (unfortunately this link may be subscribers only, but you did not miss much if you don’t find a way around): “Dig a little deeper though and this vision – which includes an attack on the efficient markets hypothesis – is flawed”. It says although investors should engage more with companies a falling share price is better incentive for a manager to perform well than a phonecall and that quarterly reporting helps people see what’s going on and reduces insider trading. It points to the UK’s “shareholder spring” in which investors forced change at companies such as Aviva and AstraZeneca. Another Financial Times summary of reaction is that Kay is “no silver bullet” and while people may agree with his views “some.. may prove challenging to implement in practice”. Some recommendations can be implemented by the industry, including investors’ forums for collective long-term engagement and good stewardship, others such as calls for asset managers to disclose all costs, including transaction costs and performance fees charged to funds, may be carried out voluntarily. Only a few may be carried out through legislation, and many others (apart from Lex) support removal of obligations for quarterly reporting and argue that managers’ time could be better spent elsewhere.
It’s a week of interesting reading for people, including many in Africa, building capital markets that are meant to serve economies, the creation of business growth and jobs, and also to encourage more long-term savings.
Discussion is very welcome!