The Casablanca Stock Exchange (CSE) is at the centre of an ambitious official strategy to turn its home city into a financial hub for international investment in sub-Saharan Africa. It is obviously working, since dozens of major fund and firms are basing their African operations in Morocco, and the CSE is leading a project to link a string of African stock exchanges into a liquidity-boosting network. Karim Hajji, the CEO of the CSE, thinks financial market infrastructures have such a vital role to play in enabling this strategy that he is looking forward to a fundamental realignment of the trading, clearing and settlement infrastructures of Morocco.
With a market capitalisation of MAD 590 billion (c. US$62 billion) in mid-February 2019, the value of the Casablanca Stock Exchange (CSE) now lies behind only the Johannesburg Stock Exchange (c.US$1 trillion) among the equity markets of Africa. Though its volumes are lower than those of the Egyptian Exchange (EGX), the performance of the CSE has tracked its North African counterpart closely, climbing in value through 18 months to the beginning of 2018, and dipping since. But if the CSE remains tied to world markets, that has not prevented the exchange from pursuing a distinctive strategy of its own.
Casablanca is positioning itself as the entrepot for investment in Africa
In June 2016, CSE demutualised. This transferred ownership from the brokers which controlled the exchange from its privatisation in 1993, and through the sweeping structural reforms of the mid- 1990s, to a new class of institutional shareholders. Brokers may retain shareholdings in CSE but its share register is now dominated by banks, insurance companies, the Caisse de Depot et de Gestion (CDG), the State-owned savings institution, and Casablanca Finance City (CFC), the public-private partnership set up by King Mohamed VI in 2010 with the aim of establishing Casablanca as a financial hub for Africa.
In fact, at the time of the demutualisation, the stated goal of the sale was to reinvent CSE as a platform for channelling savings not only into domestic enterprises, but into the array of untapped investment opportunities that litter the vast continent to the south of Morocco. That same year CFC first ranked as the most competitive financial centre in Africa in the Global Financial Centers Index (GFCI) published by London-based Z/Yen Partners. CFC retained that status in the survey, which assesses investment and trading locations on a mix of quantitative and market research factors, in 2018.
Casablanca Finance City is attracting funds, insurers, banks and the professions
The attractions of the CFC include fiscal incentives, and simplified processes for establishing businesses and securing work permits for expatriates, but it also provides access. Casablanca has air links to more than 30 African cities and Moroccan banks have networks that extend through 22 African countries. The Casablanca Finance City Authority (CFCA) has brought the African Development Bank (AfDB) infrastructure fund – the Africa50 Fund – to the CFC, along with other funds investing in green energy projects in Africa. More than 150 global businesses and professional services firms operating in Africa, including AIG, BNP Paribas, BCG, EY, PwC, McKinsey, Clifford Chance and Allen and Overy, are also based in the CFC.
Unsurprisingly, the CSE is a strong supporter of the Casablanca financial hub. In common with the central bank, the banks, the insurance companies and the central securities depository (CSD), Maroclear, it has a shareholding in CFC. “CFC will help us attract dual listings to Casablanca,” explains Karim Hajji, the CEO of the CSE. “It will also help us to draw African investors to the stock exchange.” But CFC is not the only initiative the CSE is pursuing to boost local and regional listings and liquidity.
Cooperation agreements are in place with the Ghana Stock Exchange (GSE) and the Nigerian Stock Exchange (NGX). Hajji is currently president of the African Securities Exchanges Association (ASEA), which is working with the AfDB on the African Exchanges Linkage Project (AELP). This aims to connect the trading platforms of the CSE, the Johannesburg Stock Exchange (JSE), the EGX, the NGX, the Nairobi Stock Exchange (NSE), the Stock Exchange Mauritius (SEM), and the Bourse Régionale des Valeurs Mobilières (BRVM) in Abidjan.
Work has begun on an ambitious project to link the stock exchanges of Africa
“The idea is to make it easier to buy and sell shares which are listed on other exchanges,” explains Hajji. “We will not create a single platform for all the exchanges, because every market has its own infrastructure and market rules. We cannot implement one single trading platform, because that would be too complicated. Instead, every exchange will keep its own platform, and we will link the individual platforms to give the opportunity to brokers based in each country to connect to one another. It will be a sponsored access, not a direct access.”
In other words, the AELP will leave the existing trading platforms and CSDs, and the networks of local investors and brokers that use them, undisturbed. Share orders will still be placed by local investors with local brokers and settled in local CSDs. “It is easier for settlement to take place in the same country where the transaction took place,” explains Hajji. “Adding settlement links between CSDs to the AELP would create additional risks, which might discourage trading activity.”
Foreign investors that wish to hold securities in their own CSD will have to instruct their custodian bank to transfer them afterwards. But, as Hajji points out, there is nothing to prevent Maroclear joining forces with its fellow CSDs in Egypt, Kenya, Mauritius, Nigeria, South Africa and at the BRVM to forge links that make such transfers easier, cheaper and more secure. “The CSDs are part of the long-term thinking behind the AELP,” says Hajji. “First, we want to make sure the link works, and transactions can take place and settle safely between brokers in local markets. We will add CSD links to the project at the next stage.”
CSE has multiple initiatives in hand to boost liquidity on the CSE
CSD links would also make it easier for investors to lend their securities between the markets, further boosting liquidity across all seven stock exchanges. This is easily the most important consideration for any market looking to attract foreign capital. “Foreign investment banks and brokers are interested mainly in liquidity,” says Hajji. “That is their main focus. They want liquidity to be there. The main question we get asked is, `How are you improving liquidity?’”
The need to come up with convincing answers to that question explains a number of developments in Morocco. The obvious one is lengthening the list of government-owned and private companies prepared to list their shares on the CSE. “We have had two IPOs in 2018,” says Hajji. “It is not enough. We need to work on the obstacles to companies going public. A listing has many advantages, which we try to sell to potential issuers.”
Hajji accepts that persuading companies to go public involves more than promising their shareholders higher valuations and giving the management power to issue themselves and their employees with stock options. “The reluctance to IPO is largely a matter of perception,” he says. “People think the stock exchange is not for them. They are shy of the limelight.”
Quicker wins for liquidity are available in less conspicuous areas. One is an overhaul of the regulations governing the lending and borrowing of securities, designed to make the practice easier, especially for foreign investors. This deregulation is under way already. Another avenue being explored by the CSE is the scope to list and trade exchange-traded derivatives, though these are themselves contingent on the liquidity of the underlying assets.
Construction of a CCP could be the prelude to vertical integration of the Moroccan infrastructure
Infrastructure has its part to play too. Which is why the CSE has plans in hand to build a central counterparty clearing house (CCP) in Casablanca, to clear and net equity and bond and (eventually) derivative transactions in Morocco. The exchange is already hiring and training the employees necessary to operate a CCP, and exploring what technologies are available to run the service. It should be in place by 2021.
The eventual intention is to establish a holding company which would control the CCP and the exchange with the CSD – in which the CSE has a 5 per cent shareholding already – to create a vertically aligned market, provided the government agrees to the amalgamation. “There are concrete plans to integrate vertically, to enable us to have full strategic alignment” says Hajji. “If the NGX, for example, wanted a dual-listing agreement with the CSE, it would help to make it work if the respective CSDs also had an agreement.”
He is well aware that CSDs play a crucial role in generating and maintaining the confidence of foreign investors in particular. “Everybody realises the CSD is very important for market integrity,” says Hajji. “The CSD is like the central bank for securities, and Maroclear is doing a great job in upgrading its technology and raising its practices to the highest international standards. We are very pleased with the way Maroclear operates – and we have no problem with Maroclear remaining an independent CSD.”
Hajji nevertheless hopes the Moroccan government will endorse a vertical alignment because he thinks it will increase the level of interest from foreign investors. “Foreign investors are also very keen on clearing trades through a CCP, because it reduces risk. In addition, vertical integration provides a single point of entry for investors, which facilitates access to the market. Trades agreed on the exchange are routed to the CCP, which sends netted positions to the CSD for settlement.”
Importantly, Hajji is confident netting of settlement will not affect Maroclear adversely. This is partly because, as he points out, most of the revenue of Maroclear comes not from settling transactions between the accounts of the custodian banks appointed by investors but from issuer fees and the servicing of the assets it holds. But his confidence mainly reflects his belief that the ease of access created by a vertically integrated infrastructure, in tandem with the AELP and CFC projects, will lead to an increase in overall transaction volumes.
Financial market infrastructures enable investment and reassure investors
It is a powerful statement of faith in the power of financial market infrastructure to influence outcomes. “Infrastructure is critical to our vision of Casablanca as an entrepot for investment in Africa, because you need a solid, robust infrastructure to attract foreign investment and enable dual listings, and so on,” says Hajji. “Infrastructure is not an objective of its own, but it is an enabler of our strategy to establish an international financial hub in Casablanca.”
What infrastructure really provides to investors is a measure of reassurance. “Trust is the most valuable asset of an ambitious market,” as the Maroclear corporate slogan puts it. Neither the exchange nor the CSD are taking trust for granted. Both have invested in securing ISO certification 27001 for the quality of their information security management systems. “There are not many countries where both the stock exchange and the CSD are both certified to the ISO 27001 standard,” notes Hajji.
Intriguingly, CSE is also exploring the potential impact of new technologies, such as blockchain, on the financial market infrastructures of Morocco. Hajji believes that habitual pair of opposites – threat and opportunity – has more immediate implications for post-trade operations than trading on-exchange, but he cannot be accused of complacency. “There is always room for improvement,” he says. “We can never say we have done a good enough job in terms of telling our story. We always think we can improve. That is the way we look at it.”