IP and innovation in a post-demutualised Nigerian Stock Exchange

In 2015, the United Nations (UN) Member States adopted the 2030 Agenda for Sustainable Development. At the heart of this Agenda are the 17 Sustainable Development Goals (SDGs) – a call for all countries to work in a global partnership to achieve the goals set. The SDGs deal with issues raising from ending poverty and other deprivations to fostering innovation, addressing climate change, improving health and education, reducing inequality, and spurring economic growth.

A unifying factor in Goals 9, 16 and 17 of the SDGs is the need to foster innovation and build effective, accountable and transparent institutions. See here, here and here. In particular, Goal 9.b aims at “support(ing) domestic technology development, research and innovation in developing countries, including by ensuring a conducive policy environment for, inter alia, industrial diversification and value addition to commodities”.

...money is needed at the Exchange

In many ways, these Goals align with the Sustainability Principles developed by the global industry group for stock exchanges and clearinghouses, the World Federation of Exchanges (WFE) in 2018. According to the WFE, a sustainable financial system is “stable and creates, values, and transacts financial assets in ways that shape real wealth to serve the long-term needs of a sustainable and inclusive economy along all dimensions relevant to achieving those needs, including economic, social, and environmental issues; sustainable employment; education; retirement financing; technological innovation; resilient infrastructure construction; and climate change mitigation and adaptation”. One of the Sustainability Principles obliges stock exchanges to actively engage with stakeholders to advance the sustainable finance agenda.

In 2018, the President of the Federal Republic of Nigeria signed into law the Demutualisation of the Nigerian Stock Exchange Bill, 2017. The Bill, now Demutualisation of the Nigerian Stock Exchange Act 2018 authorises the Nigerian Stock Exchange (NSE) to convert from a company limited by guarantee to a shareholder-owned public company limited by shares. Demutualisation will enable the NSE to diversify its operations and increase its access to capital. As a member of the WFE, demutualisation will also enable the NSE align better to advance the sustainable finance agenda.

This Africa Correspondent looks at a post-demutualised NSE from an IP and innovation perspective.

Demutualisation in context
In January 2019, the global industry group for stock exchanges and clearing houses, the World Federation of Exchanges (WFE) published a statement clarifying the nature and role of market data (i.e. information on the price at which shares are trading). On the nature of market data, the WFE argues that market data are “joint products”, in the sense that are created by exchanges as a by-product of bringing buyers and sellers together. The WFE further contends that the quality and integrity of the market data gives it economic value that should be remunerated based on agreements between exchanges and those who need market data. The WFE also takes the view that free market data are available, but those who need it would need to wait a “short time” for it.

Market data and cost of market data has always been subject of intense debate between stock exchanges and those who operate in the capital market and securities sectors. Traders and stockbrokers want to know what exchanges earn from market data; there is clamour for securities and exchange regulatory authorities to regulate market data pricing and in the US, the Securities and Exchange Commission (US-SEC) recently (October 2018) rejected increase in the price of market data. The US-SEC’s decision agrees with arguments of stockbrokers and investors that the relevant exchanges have been “exploiting their monopoly over market data.” Conversely, stock exchanges contend that regulating pricing of market data and rejecting price increase of market data unduly affects their profits and legitimate business.

Stock exchanges’ source of revenue has taken several knockings in recent years with income from trading dwindling as a result of globalisation and the continuous emergence of innovative technology. In this environment, fees from market data constitute a crucial source of income for exchanges and demutualisation became one of the preferred strategies for stock exchanges to stay afloat. In stock exchange terms, demutualisation is the process of transforming a stock exchange from a not-for-profit entity to a for-profit, investor-owned firm. Proprietary rights of members and cash injection by government are converted to shares, changing the legal status, structure and governance of the stock exchange. As at 2015, more than 85% of all stock exchanges have been demutualised. Of the 28 stock exchanges in Africa; only about 7 have demutualised.

Nigerian Stock Exchange and demutualisation: the basics
The NSE was previously incorporated as Lagos Stock Exchange, but later changed to its current name in 1977. It was re-incorporated as a company limited by guarantee in 1990 and has operated as such ever since. As a company limited by guarantee, the NSE has no share capital and therefore, no shareholders. Further, its operations are limited by section 26 of the Companies and Allied Matters Act (CAMA) to the promotion of commerce, art, science, religion, sports, culture, education, research, charity or other similar objects. The CAMA also prohibits the NSE from distributing profits.

According to the debate sponsored by one of the Senators of the National Assembly, these restrictions and prohibitions have hampered the ability of the NSE to “operate competitively and profitably”. See page 3. Given this, demutualisation will, inter alia, drive “technological improvements, enhance product offerings and facilitate faster and more real time trading operations”. See page 4 of the debate.

Stock exchange product offerings and sources of revenue: building sustainable financial systems
Stock exchanges have multiple revenue streams with the volume of revenue from each stream dependent on the jurisdiction and the exchange’s business model. Product offerings for stock exchanges include equities, bonds, derivatives, mutual funds, etc. Transaction fees from facilitating the trading activities around these product offerings represent one of the most important revenues for exchanges. Other revenue generating activities include post-trade services, market data and IT sales and services; listing fees etc. See here.

In view of demutualisation generally and given the expectations from a post-demutualised NSE, here are some thoughts on the role which IP may play:

a) Knowledge dissemination as products/revenue-generating activities: With their knowledge of market activities and production of quality data regarding market activities, stock exchanges are a fountain of knowledge. This knowledge extends to effective market rules, company operations and governance. Furthermore, stock exchanges develop, commission the development of and use a wide range of market surveillance tools. By extension, these activities generate knowledge goods. Such knowledge resources and goods developed within and/or for stock exchanges is one area of economic activity particularly concerned with Intellectual Property (IP). Exploiting these IP rights by capitalising on an exchange’s knowledge resources could become an increasing priority for demutualised stock exchanges interested in staying profitable outside listing fees and other traditional income earners for stock exchanges. In the past few months, the NSE has organised fee-based workshops and trainings aimed at disseminating its knowledge resources to its customers and the general public.

b) Facilitate triple helix arrangements: Following from the foregoing, IP and knowledge goods may facilitate an effective triple helix arrangement for the capital market and the Nigerian economy, generally. The Triple Helix argument is that in a knowledge society, universities and developed configurations of the government-industry-university relationship increases the potential for innovation and economic development. Evidence from triple helix investigations indicates that universities are a powerful force in the economic growth of both developed and developing countries. Following from the foregoing, IP and knowledge goods can strengthen the participation of knowledge transfer institutions such as universities and approved training institutes in a post-demutualised NSE. It can also help to engender new institutional formats for the production, transfer and utilization of such knowledge.

c) Transform the regulatory landscape and highlight need for capacity-building: Primarily, the NSE falls within the regulatory competence of the Securities and Exchange Commission, Nigeria (N-SEC). But, in a post-demutualised NSE, it is likely that IP and knowledge goods would transform the regulatory landscape. Exploitation of IP and knowledge goods is not on top of the regulatory agenda of the N-SEC. What naturally follows is concern about how adequate is N-SEC’s regulatory competences to address such issues. Does N-SEC have the capacity, knowledge of policies and guidelines, and relevant legal frameworks, to adequately oversee the IP aspects of a post-demutualised NSE?

With the NSE increasingly monetising its knowledge resources, the regulatory landscape will necessarily transform to highlight increased roles for agencies such as the newly established Federal Competition and Consumer Protection Commission; the National Office for Technology Acquisition and Promotion (NOTAP) and even the Nigerian Copyright Commission (NCC) that have the regulatory competence to deal with economic activities of firms, knowledge production and IP-protected products, including those emanating from the NSE.

Beyond regulation, these agencies and international IP organisations such as WIPO may provide much-needed institutional support and help build capacity for IP management with a post-demutualised NSE.