Are African Markets large enough and Instruments mature enough to sustain CCPs?

Hugh Simpson and John Falk have written an article for the Capital Markets in Africa magazine on whether African markets are large enough and instruments mature enough to sustain CCPs?.

Read the article in the magazine here

Or download a pdf of the magazine INTOAFRICA_MARCH_2017

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Is a CCP right for your market?

The increasing focus on the use of Central Counterparties (CCPs) to manage risk in financial markets has led many markets to ask themselves whether they need a CCP. Is it a more appropriate way to manage risks than the mechanisms they are using already? What do they need to do to set up a CCP?

To help markets address these questions, the Africa and Middle East Depositories Association (AMEDA) organised a one-day workshop for CSDs, hosted by the Abu Dhabi Exchange. Hugh Simpson of Bourse Consult presented this together with Stuart Turner, Founder of Avenir Technology (and a former Partner of Bourse Consult).FullSizeRender

There were two important themes in the workshop.

First, there are many different post-trade risks in financial markets and many different mechanisms for managing them. For a market that only trades cash securities on an exchange with low volumes, a CCP may be unnecessarily complex; the simple guarantee funds used in many developing markets may be perfectly adequate. However, once derivatives are introduced, volumes increase or markets become more complex, a CCP starts to become the most attractive solution. It can help to open a market to international investors, as a CCP is a familiar, trusted concept.

A CCP may also have a key role in supporting the market structure: if an electronic trading platform requires pre-trade anonymity, then it also requires post-trade anonymity, but it is very difficult to do this without a CCP to take on the credit risk between two parties who do not know each other.

Second, building a CCP is not just an IT project. A CCP requires many different building blocks to be successful: the legal and regulatory framework; its relations with other financial institutions, such as trading platforms, CSDs, payment systems and clearing members; risk management policies; financial resources and skilled people as well as IT systems. Building a CCP requires a programme that brings all the different components together.

The slides used at the workshop are available on the AMEDA website.

Hugh Simpson will be very happy to follow up any enquiries on this topic.

Is there a road or a highway to the future for African exchanges?

John Falk of Bourse Consult recently wrote this article for the latest NEMA Insider 2015 World Tour Edition on the future for African Exchanges

Is there a road or a highway to the future for African exchanges?

Africa is seen as the next great investment opportunity by international investors due to the very large infrastructure development opportunities, better growth prospects than other continents, a young growing workforce and domestic pension funds looking to invest in their markets.

The pension funds in 10 African countries already have $379bn in assets and then there is the growth of sovereign wealth funds; 15 African countries have created them in last 20 years, managing $159bn by the end of September 2014 with 5 funds started in the last 3 years. A further 13 African countries are in the process of examining or creating sovereign wealth funds.

But are African exchanges positioned to take advantage of these potential investments by major investors, domestic or foreign? As Ashish Chauhan, CEO of BSE India said at the World Exchange Congress in March 2015, “If you don’t work for the larger purpose of the society, exchanges will become irrelevant. Slowly they will become smaller and smaller…… Most of the funds are being raised by private equity, by venture capitalists, not by the exchange industry. Stock exchanges that concentrate on trading for the sake of trading are in a zero-sum game”.

Across most of the exchanges in Africa there is a low level of companies listed to invest in, which means there is a lack of liquidity. When quality companies are listed, their liquidity is usually lower because of a lack of other quality assets for investors to switch to.

Existing exchanges are also facing the challenges of new or alternative exchanges appearing – for example ALTX in Uganda, ZAR X, A2X and 4AX in South Africa – in the same way that has already happened in Europe and the USA. Order flow will be reduced for an existing exchange and they will have to be nimble on their feet to handle the new competitors. Competing exchanges also change the demands made on the post-trade infrastructure: the CSD can no longer be considered to be hardwired into the exchange, but needs the flexibility and independence to accept trades from competing platforms. How many African CSDs are able to achieve this?

Exchanges need to examine how they can create new methods for African companies wanting to raise money for investment. The hurdles along the road are high given that exchanges may not have the infrastructure and corporate governance in place to undertake these changes. Also, breaking the current monopoly of banks providing finance for new ventures is a significant issue to be resolved.

Some of these hurdles can be lowered by working together to improve the services offered by exchanges. With six regional economic communities in Africa – Arab-Maghreb Union (AMU), Central African Economic and Monetary Union (CEMAC), Common Market of Eastern and Southern Africa (COMESA), Economic Community of West African States (ECOWAS), East African Communities, and Southern Africa Development Cooperation (SADC) – all of them offer opportunities for exchange integration facilitating market access at the regional level, cross listing and the cross-border movement of capital. One example already is the work done by the eight French speaking countries in West Africa, which belong to the West African Monetary Union, who integrated their stock exchanges into a single exchange, the BRVM. In East Africa, the Kenyan, Ugandan, Tanzanian and Rwandan exchanges are talking of merging into a bigger East African Stock Exchange (EASEA).

Another area that needs to be developed is the use of infrastructure bonds. As they start to be utilised, how will exchanges react to them given that the majority of exchanges in Africa are weak in handling corporate and government bonds?

Lastly, are the regulators in African countries ready for the new initiatives that exchanges have to develop in a relatively short period of time so that they do not lose out to competitive financial infrastructures?

Big challenges remain for exchanges in Africa but the returning diaspora of highly experienced and qualified people back to their homelands mean that many exchanges are ready to move forward and in a strong vote of confidence for exchanges, a recent paper on the role of exchanges by Norway’s Norges Bank Investment Management, which manages the largest sovereign wealth fund in the world, supports of the role of exchanges as critical to well functioning markets, as regulated marketplaces that facilitate funding, police listing privileges and ensure price discovery

John Falk – Partner, Bourse Consult

The complete NEMA Insider set of articles can be found here

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New Bourse Consult report on RMB growth in 2014

This Bourse Consult report published by the City of London, provides the latest data on the development of the London renminbi (RMB) market and growth trends observed since 2012. It covers the the whole of 2014 and gives an update on three principal RMB product and service categories: trade related services, foreign exchange (forex) and deposits.

The data is collected in a way designed to capture London’s identity as a leading centre for RMB business and is produced in connection with the City of London initiative ‘London as a centre for RMB business’.

Press coverage:
Daily Telegraph Finance
RMB Week
Interactive Investor

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Counterproductive consequences of regulation?

An interesting statement by J. Christopher Giancarlo, one of the CFTC Commissioners, voices a concern that raising regulatory standards for CCPs and clearing members may have the unintended consequence of concentrating risk and shutting end-users out of the market. To quote some key sentences:

… many small to medium-sized FCMs [Futures Commission Merchants – effectively derivatives brokers] providing specialized services to everyday businesses are charging higher fees or leaving the industry because they cannot afford the additional infrastructure, technology and compliance costs imposed by the swelling regulations. Still, others have stopped clearing swaps for customers, which has the perverse effect of concentrating risk in fewer and fewer firms, a dangerous proposition in light of Dodd-Frank’s clearing mandate.

…If we are not careful, America’s rural producers will soon be left with few places to protect against business risk. The Midwest farmer who plants 1,000 acres of corn may have no choice but to go unhedged against market volatility.

These are concerns that have been growing for some time and it is interesting to hear them presented so articulately by a CFTC Commissioner.

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