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Why regulators should cut transaction costs

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Why regulators should cut transaction costs

The high transaction fees constitute a major impediment to the market’s growth and development, writes CHRIS UGWU

 

Safe for the current rally, trading activities on the Nigerian stock Exchange (NSE) have been relatively sluggish when juxtaposed with the context of and reaction to the Nigerian Stock Exchange’s (NSE’s) drive for global competitiveness.

 

High transaction charges on trading executed on the floor of the Exchange have not only continued to pose potential threat to both local and foreign investors but also constitute a clog to prospective issuers and dealing members at the local bourse.

 

The question market operators and other stakeholders have continued to ask has also remained on how to turn around the market. Hence, several players in the market are calling for the Exchange to lower transaction costs and encourage new listings if it wants to become more attractive vehicles for raising capital and lure new investment.

 

However, following the weak condition of the local bourse, market operators believed the time is ripe for the regulatory authorities to heed the advice and toe the line of other countries who have enacted a compelling law to reduce these obstacles, which is holding the market from being the bastion of the economy, noting that this is the only way to set in motion the necessary machinery required to turn around the market.

 

This is because in Nigeria costs constitute impediment for market operators and even to companies wishing to list their shares, while already listed ones are looking for excuses to delist from the Exchange due to excessive charges and unfavourable operating milieu.

 

NSE costs among highest worldwide

 

Checks on the NSE fee structure in its ‘Green Book’ revealed an array of fees such as NSE fees, CSCS fees, SEC fees, Value Added Tax, Stamp Duty and Brokerage Commission, which exclude securities-tied fees also payable by the listing or delisting corporates. Further investigation showed that transaction costs across global markets appears highest in Nigeria and Ghana while the United States (US) has the least transaction cost with no charges on stock trades.

 

Hence, lower cost of transaction appears consistent with the level of market development and by implication, market efficiency, as costs are lower in U.S., China, India and South Africa, which is more developed compared with the Nigerian and Ghanaian markets.

 

The report noted that a comparative cost analysis embarked on across markets in Africa, showed that Nigeria’s statutory fees (exclusive of brokerage commission) remain the highest not only in Africa but also across major emerging markets across the globe (save for Ghana, which is almost at same level with Nigeria at 0.7 per cent).

 

 

For instance, stockbrokers earn only 1.350 per cent of the total cost of 4.04 per cent charges on the equity transactions.

 

The rest goes to Securities and Exchange Commission (SEC), Central Securities Clearing System (CSCS), NSE and statutorily charges such as stamp duty and Value Added Tax (VAT). Some market operators are of the opinion that given the fact the regulators get money from registration, penalties and others, they ought to receive very minimal commission on secondary market transactions.

 

 

 

Regulators’ efforts

 

The apex regulatory body of SEC recently disclosed its preparedness to work with the NSE to review transaction cost. Director-General, SEC, Mr Mounir Gwarzo, who served as a discussant at a Break out session (Creating Secondary Market for Investors) of the Annual General Conference of the Nigerian Bar Association made this known.

 

Reacting to observations made by Mr. Colin Coleman, Managing Director of Goldman Sachs South Africa on the high quantum of transaction cost in the Nigerian capital market, Mounir as well as the CEO of the NSE emphasised that steps had been put in place to ensure a reduction of both the explicit and implicit cost of transactions in the Nigerian capital market.

 

The DG acknowledged that both explicit and implicit costs in Nigeria are higher than in peer countries, noting that within a short period of time the market would feel the effect of these reductions. He noted that to start with, there would be a haircut on SEC, NSE, Issuing Houses and Receiving Agents fees at the primary issuance side.

 

He said the four cost centres charge about 70 to 80 per cent of floatation cost, adding that the commission would be addressing the secondary market as well. Stopped The DG also urged legal practitioners to refrain from instituting unnecessary litigation at the instance of their clients who are involved in an enforcement action of the Commission.

 

He added that this would ensure the support of the Legal profession to the Commission, thereby allowing the Commission to perform its statutory function and adequately protect investors with the aim of continuously developing th

 

e Nigerian capital market and the economy in general. Concerned by the complaints of high transactions costs on the Nigerian bourse, SEC also noted that one of its near-term targets is the reduction of transaction costs in the stock market.

 

The immediate past Director General of the Commission, Mr. Mournir Gwarzo, who disclosed this while briefing the media on the outcome of the second quarter 2017 Capital Market Committee (CMC) meeting in Lagos recently, said this became necessary to attract more operators in the market. He disclosed that the commission has formulated rules on transaction cost analysis, which is awaiting the approval of the minister of finance. The NSE also last year announced the revision of the listing and trading fees for securities listed and traded on its Fixed Income Market.

 

The revised fee structure, became effective on August 17, 2016, will be piloted for an initial six months period, and evaluated to determine if it has met its objectives. Under the revised fee structure, the NSE will no longer charge trading fees on fixed income traded on its platform.

The initial flat listing application fees of 0.15 per cent for all bond types has been replaced with variable listing application fees.

 

With this, Corporate Bonds exclusively listed on the NSE, with existing equity listing, will attract 0.01 per cent listing application fee. Dual listed Corporate Bonds with existing equity listing and other Corporate Bonds will attract 0.0375 per cent listing application fees. Similarly, the listing application fees for State and Supranational Bonds has been reduced to 0.05 per cent. The Exchange also replaced the fixed Brokerage Commission of 0.0005 per cent with a negotiable rate capped at 1 per cent.

 

This will enable investors negotiate trading commission with brokerage firms, thus driving competition and best execution.

 

Experts’ opinion

 

Following deliberate actions taken by capital market regulators and operators to woo retail investors back to the market, Analysts at Meristem Securities Limited have said a reduction in transactions costs will attract more investors.

 

According to them, the relatively high costs of transactions on the NSE calls for concern to investors particularly at the retail segment of the market with such charges as the stamp duty still being charged on every transaction, which takes place on an electronic platform.

 

They explained that a comparative cost analysis they embarked on across markets in Africa, showed that Nigeria’s statutory fees (exclusive of brokerage commission) remain the highest not only in Africa but also across major emerging markets across the globe (save for Ghana, which is almost at same level with Nigeria at 0.7 per cent).

 

They noted that the new transaction notification system (X-Alert) used to replace the former Trade Alert is a welcome development expected to come as a relief to wide spectrum of investors, especially institutional and high net-worth investors.

 

Last line

 

Transaction costs are important to investors because they are one of the key determinants of net returns.

 

Transaction costs diminish returns, and over time, high transaction costs can mean huge loss of money from not just the costs themselves but because the costs reduce the amount of capital available to invest.

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