The framework for linking the capital markets of West Africa was recently published. First step is direct market access (DMA), allowing a stockbroker on one West African exchange to transact directly on the Nigerian market through the order-management system of an approved Nigerian stockbroker.

The Nigerian Stock Exchange has outlined how this would work in its capital market. The initiative is part of a West African Capital Markets Integration (WACMI) programme, aiming to establish a harmonized regulatory environment for issuing and trading securities across West Africa. The overall programme will be rolled out in 3 phases:
Phase 1: Sponsored Access
Phase 2: Direct Access by Qualified West African Brokers
Phase 3: Integrated West African Securities Market.

The first phase will allow brokers in member countries of WACMI to trade securities and settle in markets other than theirs through local brokers in those markets. In Nigeria, this means that stockbrokers that are not registered market operators in Nigeria can participate in the market through remote access to the NSE’s trading facility through a local Dealing Member firm (stockbroker) licensed by the exchange.

This Day newspaper in Nigeria reports that Oscar Onyema, Chairman, West African Capital Markets Integration Council (WACMIC) and CEO of the NSE, said WACMI aims to ensure successful integration of the various stock exchanges in the West African sub region. Achieving integration would enable momentous growth in region’s markets and would attract investment flows, while creating a much larger market for local and international businesses:

“Additionally, integration will enable the movement of capital within the region, creating flexibility for issuers looking to raise capital and investors looking to invest across member states. Furthermore, integration would speed up the development of our various domestic financial systems, promoting increased competition and innovation, as well as offering opportunities for risk diversification.”

Direct market access – the mechanics

The current direct market access programme is only available to NSE dealing member firms with Order Management System (OMS) vendors been certified by the exchange.

Phase 1 is in two sub-phases: Direct market access (DMA) and sponsored access (SA). The current announcements relate to the first, direct market access. This means that a Sponsoring Member firm in Nigeria can allow a Sponsored Participant who operates in a WACMI member country to the NSE’s trading system under the SM’s trading codes via the SM firm’s order management system and using the dealing member firm’s infrastructure.

In order to allow direct market access to a sponsored participant (SP), the sponsoring member (SM) must notify the NSE of the DMA and should get a “no objection” letter. The application process includes giving full address and contact person for the SP and a “Letter of Good Standing” in respect of the sponsored participant (SP) issued by the domestic securities exchange where the SP is an active stockbroking member.

The notification of DMA should also include a copy of the risk policy/framework that the SM plans to use in monitoring the SP’s trading activities. If it later makes any changes to the risk framework it must tell the NSE’s Broker Dealer Regulation department within 1 business day via email or letter format. It will also include the name and registered or business address of the vendor providing the order management system to the sponsoring member (SM).

If the exchange has an “objection” it will advise the sponsoring member of the problems and can ask for more information, before granting the “no objection”.

The sponsoring member will also help the sponsored participant to establish settlement accounts either with a custodian or with the Central Securities Clearing System plc, which has been the clearing and settlement house of the Nigerian capital market and the NSE since 1997. Once this is set up, the SM will also inform the NSE about it.

The second step, sponsored access, will mean that the SP uses the exchange’s infrastructure. It will submit orders to the exchange’s trading system directly, but under a SM firm’s trading codes and without passing through a SM firm’s order management system. Instead, the SP’s orders pass through a series of validation checks carried out by the exchange and the orders are monitored by the SM firm as they happen (in “real-time”).

Sponsoring broker responsibility

According to the notice, issued by Olufemi Shobanjo, Head of Broker Dealer Regulation at the NSE: “It is imperative to emphasise that Dealing Member firms (the Sponsoring Members) will ultimately bear any risks associated with, and will be held liable for any infractions resulting from the Sponsored Participant’s (SP) trading activities. In line with this, The Exchange may request any information from a Dealing Member firm, regarding its trading activity.”