The West African market has exceeded all growth expectations this year, with the value of assets on loan up 27,000 percent YoY, its first CCPs being approved and the introduction of ETDs
At the start of 2020, few can honestly claim to have known what was to come this year, but one man can. In February, the CEO of the Nigerian Stock Exchange (NSE) Oscar Onyema boldly predicted “exponential growth” in the West African country’s budding securities lending market, in part thanks to regulatory changes laid down in a new Finance Bill.
Nine months later, and on-loan volumes are up more than 27,000 percent. No that’s not a typo. So, what happened?
The NSE first launched its triparty securities lending market model in 2012, alongside its market-making programme to enhance market liquidity, price discovery and reduce bid-offer spreads following the regulatory approval of its securities lending guidelines. Onyema explains this was to support the growth of the market and ensure adequate risk management, the Securities and Exchange Commission (SEC) licenced firms to act as third-party agents which are referred to as securities lending agents (SLA)”. Since then, the exchange has made amendments to the guidelines to provide clarity and to ensure that the use of the Global Master Securities Lending Agreement (GMSLA) conforms to the SEC’s regulation.
Additionally, rules governing the inclusion of retail investors were published in 2019 to allow for retail investor participation in the securities lending market by pooling together securities authorised by the retail investors for lending, through accredited broker-dealer firms who can act as intermediary agents.
Nigeria’s securities lending market has developed more generally in recent years, it is smaller than a few other African markets but only by a thin margin. Although a lack of granular data makes exact comparisons hard to make, Nigeria is understood to be the fourth-largest securities lending market if measured by assets available to lend. It sits close behind Mauritius and a long way behind Senegal, and all African markets are dwarfed by South Africa. However, Nigeria’s ascension appears to be in the making.
In its most recent securities lending market report (published weekly), the NSE details the eye-popping scale of the growth so far this year.
The volume of securities lending transactions has increased from 61,435 units in 2019 to 7.38 million units between January and October 2020, indicating an increase of 11,909 percent.
Meanwhile, the value of these securities borrowed shot up from NGN344,000 (US$903) in 2019 to NGN97.18 million (US$255,065) in 2020; a 27,525 percent increase. These numbers may seem minuscule compared to developed markets, but the growth represents a concerted effort by local regulators and market infrastructures to develop securities finance markets that they see as a valuable addition to Nigeria’s capital market.
Onyema explains that this volume growth is the result of unilateral efforts to increase the operational efficiency and regulatory framework for securities lending and borrowing.
The latest report references a list of 12 which are equities pledged to the five licenced SLAs to be lent out. To grow this list further, the NSE continues to drive engagements to have significant inventory of securities held by long-term, large institutional holders like pension funds, insurance companies and exchange-traded funds (ETF) issuers available for securities lending. Oneyma adds: “Our ETF market is also fast-growing and we expect that this growth will further deepen the pool of assets that could be pledged for lending.”
“Riding on the good work done in creating the securities lending and borrowing regulatory framework, we have worked actively with the Central Securities Clearing System (CSCS), Nigeria’s central depository, and licenced securities lending agents to improve the transaction cycle for securities lending and borrowing transactions.”
Securities can now be moved from a securities lending agent’s account to a borrower’s account within a transaction cycle.
The NSE also engages with regulators like the Pension Commission of Nigeria, the commission does not currently allow pension funds to participate in securities lending and borrowing, to permit pension fund participation in securities lending and consequently grow the pool of pledged assets with the SLAs.
He explains: “We would also be relaunching our market-making program early next year which will help increase participation from market makers looking to cover their positions and fulfil their obligations.”
Onyema adds: “Additionally, in collaboration with the Federal Ministry of Finance, SEC and other stakeholders in the capital, the long concerns around the double taxation of manufactured dividend has now been addressed under legislation in the 2019 Finance Act.”
Introducing derivatives
The Nigerian SEC has additionally decided to develop a derivatives trading market in Nigeria. So, the SEC issued an amendment to its rules and regulations in December 2019, providing for new rules on the regulation of derivatives trading and CCPs. This combination of new rules and products is opening up derivatives trading in Nigeria to new investors and participants as both regulators seek to bolster the market and offer new risk management products.
Investors in the global capital markets can expect the launch of West Africa’s first exchange-traded derivatives (ETDs) on the NSE in the near term following the registration of its CCP, NG Clearing by the Securities and Exchange Commission (SEC). NG Clearing will play a key role in the financial market ecosystem by driving the safety and stability of Africa’s global marketplace through an efficient and timely settlement of derivative trades. The approval-in-principle will allow the exchange to launch ETDs supported by NG Clearing in the risk management process.
Roy Zimmerhansl, NSE equities product advisory committee and lead consultant at Pierpoint, explains: “The approval-in-principle that happened earlier in the year will allow the exchange to launch ETDs supported by a CCP which meets the highest standards of global best practices in delivering clearing and settlement services.”
Two CCPs were registered on the same day which included NG Clearing, a counterparty owned by NSE, CSCS (the CSD in Nigeria) and other top banks is one of the licensed CCP. The other is FMDQ Clear, a fully owned subsidiary of a recently established competitor Securities Exchange.
Tapas Das, CEO of NG Clearing, tells SFT: “In absence of a CCP model, there have been no structured risk management practices, through the imposition of collateral and margins as well as other requirements, such as stipulating position limits on trades.”
“When looking at the current regulations of the cash equity market, security shortages have almost been non-existent on account of the adoption of pre-validation of orders, he adds. “Coupled with this, the regulation, in its current form, does not appear to support short selling.”
With the introduction of CCPs, these pre-conditions are getting addressed, Das explains, as a next logical step, “we shall seek to consult with regulators and other market participants and table a proposal for securities lending and borrowing, which shall factor in some of the points explained earlier and work towards the creation of an active securities lending market.
“NG Clearing is confident when keeping in line with global markets, as and when the cash equity market moves towards a CCP model, making pre-validation of trades will become redundant”. Coupled with relevant regulatory changes in short selling, “we are likely to experience a surge in the need for securities lending activities which would catapult the securities lending market in Nigeria considerably,” Das concludes.
FMDQ says that the achievement will redefine the landscape for financial transactions, including the development of repos, derivatives, and commodities markets in Nigeria. The CCP had also stated that it will introduce “endless possibilities to the scope of permissible products that could be developed and deployed within the ecosystem towards delivering long-lasting prosperity to the Nigerian economy”. In addition, the CCP will be able to manage the consolidated risks in an operational, cost and capital-efficient manner that unlocks value for market participants within its value chain.
Bola Onadele Koko, the CEO at FMDQ Group, comments: “The evolution of FMDQ Clear to a CCP marks a critical and long-awaited milestone in the Nigerian financial markets ecosystem, positioning the markets for revolutionary growth in potentially colossal proportions.”
“NG Clearing will play a key role in the financial market ecosystem by driving the safety and stability of Africa’s global marketplace through an efficient and timely settlement of derivative trades” Zimmerhansl explains, while the initial focus is on its role as a counterparty for clearing ETDs, “we expect that with its best in class risk management expertise, it will also play a key role in the margin lending and securities lending initiatives being pursued by the exchange in the not too distant future”. Moreover, Das notes that whilst engaging with the commission they envisage going live with the first trades being cleared by the end of the second quarter of 2021.
Das explains: “If we go by global experiences, it generally takes a while for the market to absorb the nuances of derivatives. Hence, our immediate target is to consolidate in this space. Having said that, based on the guidelines of the regulator, stakeholder feedback and market requirements, we shall, at some point, expand out of the exchange-traded space in future.”
What next?
Nigeria’s securities lending market is catching up on the league table behind some of the other African countries and appears to be the most up-and-coming market in the region. For now, the heights of Africa’s largest market to the south remains out of reach, but if Nigeria can maintain its new growth velocity, supported by willing regulators and infrastructures, it could become the second-largest securities lending market in the foreseeable future.
NSE’S CEO explains that despite the exponential growth the market has witnessed this year, he believes there is still significant headroom for growth in the Nigerian securities lending programme. The NSE will continually engage with market participants individually to increase awareness of the presence of the securities lending programme as an avenue for deepening the efficiency of the market.
Nigerian market breakdown
• Number of securities lent: 2019 = 61,435 units, 2020 YTD = 7.38 million units, a 11,909 percent increase
• Value of securities lent: 2019 = N344,000 (US$903), 2020 YTD N97.18 million (US$255,065), a 27,525 percent increase
• Number of licenced agents: five
• Number of CCPs: two
• Equities available to lend: 12
• Regulator: Securities and Exchange Commission
