ADDRESSING EMERGING RISKS IN THE NIGERIAN CAPITAL MARKET Mr. Mounir Gwarzo, Director General Securities & Exchange Commission Sunday, 8 th May, 2016

Outline 1Overview 2Emerging Risks Across AMERC 3Nigeria’s Emerging Risks 4Addressing the Emerging Risks 5Conclusion 2

2016 so far defined by high volatility ۞ Volatility is a natural part of the market cycle over the short term ۞ 2016 has been defined by very high volatility across the global financial markets ۞ The major identified factors behind this high global volatility include: ۞ Volatility of the global oil and commodities markets ۞ Slower growth from China and other major emerging economies ۞ US Federal Reserve interest rate policy (time-frame for rate hike still unknown) ۞ Liquidity concerns as global Central Banks consider reducing monetary accommodation ۞ The volatility has led to massive sell- offs with most of the major market indices across developed, emerging and frontier markets in negative territory 3 Liquidity US Fed Policy China Oil

Emerging Risks in the AMERC Markets ۞ Our markets continue to face unique challenges both as frontier and emerging markets ۞ The number one driving force behind this year’s challenges has been the volatility of global oil prices ۞ Similarly, slowdown from China and major emerging economies is adding to the narrative about the state of the global economy ۞ Growth has slowed significantly in our domestic economies ۞ Liquidity is a big concern, policies of central banks around the world towards tightening already impacting liquidity 4 Falling Oil/Commodities Prices Slower Growth Global Headwinds US Fed Policy Low Liquidity

The macroeconomic environment in Nigeria Macroeconomic Indicators Real GDP growth (est. Q1, 2016)3.3% Real GDP per capita growth0.3% CPI inflation11.4% Fiscal deficit as % GDP (2015)-3.7 Key interest rate (MPR)12% Naira exchange rate/USD199 Sources: CBN, NBS, IMF Sources: NBS, World Bank Nigeria’s economy is facing very challenging times  Following over a decade of impressive above 7% growth rate, the economy has significantly slowed to only 2.82% in 2015, roughly equaling population growth rate  The current economic environment is characterized by factors including:  Decline in prices of crude oil in global markets  Exchange rate instability  Inflationary pressures  Energy shortages (power and fuel)  Exit of foreign investors  External headwinds, including slower global growth  Security challenges Nigeria’s economy is facing very challenging times  Following over a decade of impressive above 7% growth rate, the economy has significantly slowed to only 2.82% in 2015, roughly equaling population growth rate  The current economic environment is characterized by factors including:  Decline in prices of crude oil in global markets  Exchange rate instability  Inflationary pressures  Energy shortages (power and fuel)  Exit of foreign investors  External headwinds, including slower global growth  Security challenges ۞ The general sense of uncertainty in the economy is a major concern for government and a major risk for the Nigerian capital market ۞ The fiscal focus of the current administration is massive investment in infrastructure and pursuing diversification of the economy 5

How emerging risks are impacting the Nigerian capital market‘s performance While maintaining its sound fundamentals, the Nigerian capital market is currently reflecting the sentiment in the broader economy ۞ Within the context of the current economic environment, both the fixed income and equities segments of the capital market have witnessed dips in activity ۞ In the last 3 months of 2015 alone, transaction volumes on the FMDQ OTC platform (which reflects the state of the fixed income market) declined by about 50% from N14.54 trillion in October 2015 to N7.43 trillion by the end of that year. This drop in liquidity has continued into the early parts of 2016 ۞ The stock market has also endured similar declines. Major NSE indices lost 17% in 2015 while transaction volumes fell by over 40% within the year ytd performance is currently at -10%, an improvement from the steep declines in the early parts of the year Sources: NSE, FMDQ and Bloomberg The NSE ASI since 2014The FMDQ 2014/2015 Turnover Major Factors Impacting Performance ۞ The oil price shock ۞ The declining foreign reserves ۞ Foreign exchange volatility ۞ The delisting of FGN bonds from major emerging market indices by JP Morgan and Barclay’s ۞ Exit of foreign portfolio investors, etc 6

Addressing the emerging risks through diversification, greater liquidity and enhanced capacity 7 Greater sophistication, improved liquidity, enhanced capacity and diversification will be critical to addressing identified emerging risks ۞ We have ensured reduced systemic importance of any single trading platform by licensing alternative trading platforms. Nigeria now has multiple platforms: The Nigerian Stock Exchange (NSE) for trading listed securities The NASD Platform for trading in unlisted securities of public companies FMDQ is the OTC platform for trading fixed income securities In addition to these platforms we have two commodities exchanges (NCX and AFEX) while a capital trading point will soon be licensed Diversification of Trading PlatformsDiversification of ProductsDiversification of Liquidity Sources ۞ Product diversification is very critical for frontier markets like ours. In addition to conventional products like equities and bonds we are have reviewed our regulations to allow product innovation for new products like: ۞ Securitization: ۞ Infrastructure funds/bonds ۞ Sukuk Note: We are supporting Nigeria’s Federal Government to finance budget deficits by issuing infrastructure bonds The Government is also working on issuing a sovereign sukuk to serve as benchmark for other issuers ۞ As foreign investors have exited frontier markets, efforts must be aimed at developing a domestic investor base capable of filling in the gap ۞ Pension Funds: We are actively engaging the National Pensions Commission (PenCom) whose expected guidelines will see greater participation of pension funds ۞ Unified Licensing: This innovative scheme will grant access to central bank’s discount window to broker/dealers and market makers

Implementing the Nigerian Capital Market Master Plan as Longterm Strategy for addressing emerging risks 8 1 Corporate Governance Scorecard National Investor Protection Fund Dematerialization E-Dividend Direct Cash Settlement Recapitalization Robust Public Enlightenment Strengthening the SEC’s Capacity Major Master Plan Initiatives we have implemented ۞ Our implementation approach is to identify initiatives within the Master Plan at the beginning of the year and to focus on faithfully implementing them ۞ In 2015, being the first implementation year, we selected low-hanging fruits which we are delighted to have fully implemented ۞ A lot of these initiatives had been identified for decades without any meaningful progress in their implementation ۞ Thanks to the Master Plan, there is a renewed focus on ensuring such initiatives are prioritized and religiously implemented

The Master Plan Implementation so far… Second Year (2016) 9 1 Attracting More Listings Establishing a National Savings Strategy Deepening the Non-Interest Products Segment Building Industry-wide ICT Infrastructure Capital Market Literacy Reduction of Transaction Costs A Framework for Derivatives Major Master Plan Initiatives for 2016 ۞ Similarly, in 2016 we shall focus on key areas of the Master Plan, especially prioritizing initiatives that will deepen the market while boosting its attractiveness and competitiveness ۞ We will focus on getting major companies in strategic sectors of the economy to get listed on any of the SEC-licensed platforms ۞ A National savings strategy document will be developed to improve our savings culture and accelerate the development of a domestic investor base ۞ The technology infrastructure across the market will be given prime attention to increase market efficiency ۞ Our cost structure will be reviewed to make the market more competitive ۞ Product innovation will be prioritized, especially derivatives that can help economic agents manage their risk

Conclusion 10 ۞ The risks our markets face present their own unique opportunities to refocus our market development objectives ۞ We must seize the opportunity to further deepen financial literacy in our markets, take measures that enhance depth, breadth and liquidity as well as firm regulation ۞ Our competitive edge should be continual adherence to best regulatory practice

Mr. Mounir Gwarzo, Director General Securities & Exchange Commission Tuesday, 12 th April, 2016 Thank you! 11