FTSE Russell, an index provider owned by the London Stock Exchange, has issued a notice threatening to review Nigeria's status as a frontier market. This threat stems from the Securities and Exchange Commission (SEC)-induced T+1 settlement policy on the Nigerian Exchange (NGX).
The index, which tracks approximately $40 million of Nigeria's $200 billion market, was expected to firm up Nigeria's frontier market status later this year. However, the move to T+1 settlement has become a point of contention.
Understanding the T+1 Settlement Policy
The T+1 settlement policy dictates that transactions on the NGX will settle in one day. Previously, settlement took T+3 days, meaning three days for trades to be finalized and funds to be crossed. Before that, up-country cheques could take two weeks to clear.
Dr. Agama's SEC has championed this shift to T+1, with a long-term vision of achieving T+0 settlement in a few years. This initiative is designed to significantly ramp up market efficiency, boost liquidity, and attract more investors to the Nigerian capital market.
Despite these clear benefits, FTSE Russell has criticized the T+1 policy, claiming it would push the market into a pre-funding mode. This argument is seen as contradictory, given that foreign investors already practice pre-funding for T-Bills and other open market operations in Nigeria's money markets.
The Custodian Industry's Role
Investigations reveal that two major capital market players benefit significantly from the float generated by the T+2 settlement scenario. Specifically, when a foreign investor sends in dollars, the funds are transferred to a Custodian, who then arbitrages and utilizes these funds for the two days it takes for the trade to settle.
This practice allows Custodians to generate substantial income, which is crucial for their survival beyond just their fees. Similarly, Registrars rely on unclaimed dividends and the float on dividends before they are paid out, a business model considered vulnerable to policy changes.
The T+1 policy directly impacts this lifeline for the Custodian business, leading to strong opposition from the industry. Some observers suggest that the Custodian industry is influencing FTSE Russell's stance, using the index provider as a voice against the policy that threatens their operational model.
Nigeria's Economic Reforms and FTSE Russell's Challenges
Nigeria's ongoing economic reforms have led to a B+ S&P rating, a more credible assessment than that offered by FTSE Russell. With continued efforts, particularly from Finance Minister Mr. Oyedele, Nigeria aims to achieve a double B rating.
The nation's foreign reserves and GDP are currently at their highest levels since the Obasanjo era. These gains are expected to trickle down to the populace, significantly impacting poverty levels.
Meanwhile, FTSE Russell's owner, the London Stock Exchange (LSE), faces its own considerable challenges. In 2024 alone, the LSE lost 88 listings while only gaining 18 new ones. Over the last few years, the LSE has seen a decline of over 800 companies, with total listings dropping from 2,365 in 2015 to 1,056 in 2024.
Many new listings are now gravitating towards New York, where liquidity is more assured and valuations are better priced. Despite these internal struggles, the LSE's subsidiary is attempting to dictate terms to Nigeria, whose $200 billion market is thriving, even before the listing of Dangote Refinery.
Calling the Bluff
Other African markets, such as Johannesburg and potentially Egypt, have already adopted T+1 settlement without similar interventions from FTSE Russell. This selective scrutiny suggests a biased approach towards Nigeria.
The strong opinion is that Nigeria should disregard FTSE Russell's threats and focus on building a vibrant economy and transparent markets. A credible investor will not be swayed by a rating platform facing significant internal challenges.
