Fresh facts have emerged why the Nigerian Stock Exchange, NSE rescinded its N1 trillion market capitalisation target by 2016. Lack of liquidity , low capacity building, unfavourable economic policies have been adduced as major constraints militating against the growth of the market in the past fours years.
According to Vanguard’s investigation, after four years that the guidelines for securities lending, short selling were introduced by the NSE to boost market activities and in turn increase market capitalisation, capital market operators are yet to execute transactions from these products, a situation they attributed to lack of liquidity, capacity building, unfavourable economic policies, among others.
Securities lending is one of the products initiative introduced by the Nigerian Stock Exchange that was expected to boost the amount of money that is quickly available for investment spending and in turn boost market capitalisation to the level of N1 trillion mark by 2016.
Securities lending is the market practice of temporarily transferring securities, for a fee, from their holder (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender either on demand or at the end of the agreed loan time. This practice usually requires the borrower to back the transaction with cash or other valuables equal to or greater than that of the lent securities, in order to protect the lender against counterpart credit risk.
Securities lending plays an important role in capital markets by providing liquidity, which in turn reduces the cost of trading and promotes price discovery. It will be recalled that the Securities and Exchange Commission, SEC appointed Stanbic IBTC, UBA, Capital Bancorp and First Bank as securities-lending agents in 2012 and since then no transaction has been executed. For short selling, it is the practice of selling securities that the seller does not currently own, and subsequently repurchasing them (“covering”).
If a broker has sold securities short, it must borrow those securities in order to fulfil its settlement obligation in the securities settlement system. The short-seller hopes to profit from a decline in the price of the assets between their sale and their repurchase, as, in that scenario, the seller will pay less to buy the assets than it received when selling them. On the other hand, the short-seller will incur a loss if the price of the assets rises, as it will have to buy them at a higher price than it sold them. There is no theoretical limit to the loss that a short seller can incur.
Short selling is a legitimate trading strategy on the floor of the Nigerian Stock Exchange, provided that, prior to initiating a trade on a security, that security has been borrowed and is in the account of the seller. Naked short selling – the practice of selling shares a broker does not own without borrowing them or making arrangements to borrow them – is banned for all participants in the NSE. In an exclusive chat with Vanguard, Managing Director, Highcap Securities Limited, Mr. David Adonri said: ”Lack of liquidity and knowledge base are the major constraints militating against the implementation of these products in our market. There is no liquidity in the market and the awareness of these products has not spread. In advanced economies, these products help to move the market as investors are highly educated.
So, government has a big role to play in terms of educating the investing public. Once there is demand for the products, I believe the operators in the market will execute transactions. “Also, liquidity is another key factor; local investors like to keep securities for long. How would such people lend to people that requires the shares. So, we need a lot of education so that the local investors will know that it is better to sell securities than to keep them for long term purposes.” Speaking as well, Executive Director, Valueline Securities & Investment Limited, Mr. Erem. O Erem said: “The Nigerian capital market is suffering from lack of liquidity and inconsistent government policies that have been affecting the growth of the market. If there is no liquidity, how do you think there will be securities lending, market making, short selling among others. So, the market requires enough liquidity for these kinds of advanced products to take place in the country.
Another major problem is education, as lack of knowledge of these products by local investors has made it difficult for market to grow. Even when some of the operators are knowledgeable about the products, the investors are lagging behind. It is the investors that will initiate demand for the products, while operators will execute them. So there is need for government to intervene in this regard by educating Nigerians about these products.” The Chairman, Association of Stockbroking Houses of Nigeria, ASHON, Mr. Emeka Madubuike said: “Lack of enlightenment about securities lending and short selling is a major constraint to the development of these products. It is the investors that will demand for the products before the market will key in.
Another problem is liquidity. If there is no liquidity these products will not fly. Asset Management Corporation AMCON has many shares. If they can offload them, there will be shares in the market for investors to trade. Also, the operating environment has been unfavourable to quoted entities and other capital market operators. The monetary policy is not helping matters and this affecting our market. The foreign investors are ready to come to our market but government’s policies are scaring them away. For securities lending to be active in Nigeria, government must do a lot in terms of educating the masses. There should be massive enlightenment from government and complemented by the private sector.”
The General Manager, Operations, Central Securities Clearing System (CSCS) Limited, Mr. Joseph Mekiliuwa, in a chat with Vanguard said: “I think the problem we are having in Nigeria on these products is lack of awareness. They are sophisticated products and that is why African Securities Exchange Association, ASEA organised its 5th seminar themed: ‘Building African Financial Markets ( BAFM) Capacity Building’ in Nigeria, being the first time that such seminar is hosted outside South Africa. South Africa is the only market in Africa where securities lending is in operation. In Nigeria, the NSE has come out with the guidelines and it is now left for operators to key in. I believe after this seminar and with more enlightenment we would begin to see some of these products take off.” The Head, Investor Services (West Africa) Stanbic IBTC, Mr Segun Sanni in his remark said “There are benefits in securities lending.
To the lenders, there is additional income from investment portfolios and also market liquidity by increasing the number of potential sellers and buyers in the market. To the borrowers, the market making without having to carry inventory; failed trade protection (covered short selling ); additional income; market liquidity by increasing the number of potential sellers and buyers in the market and hedging against volatility. He stressed that the market will be better for it as liquidity will be enhanced by increasing the number of potential sellers and buyers; there will be price discovery, which will lead to efficient pricing and market depth. Also the market will be more competitive. Sani said that securities lending is very important to market development, noting “Sometime in the early 1990s the G-30 recommended securities lending in order to reduce the high rates of trading “fails” that were discouraging cross border investors and rendering domestic capital markets illiquid and prone to paralysis.”
According to him, “G-30 urges regulators to take down regulatory and taxation barriers that inhibit securities lending. This was so well embraced that throughout the 1990’s, countries like Japan, Australia, UK, Switzerland , Italy, France etc acted to remove the barriers. From the beginning in the 1990’s in Europe, the total repo and securities lending transactions settled on the Euroclear settlement platform amounted to 95 trillion Euro for the year 2000.
It is our hope that African countries, like Nigeria will key into these products.” In this development, he said “Securities lending is crucial to the growth and liquidity of our markets, just as lending is essential to a functional banking system.” Meanwhile, the NSE in its securities lending guidelines stated that the Nigerian capital market has a reputation for the professionalism of the firms that participate in it and their employees. All participants in the securities lending market have a common interest in maintaining this reputation.
They also have a common interest in ensuring that the securities lending market operates in a sound and orderly manner. To achieve these aims it is essential that firms and their staff adopt prudent practices, act at all times with integrity, and observe the highest standards of market conduct. It further stated: “Participants should possess requisite skills and act with due care and diligence. Staff should be properly trained in the practices of the securities lending market and be familiar with these guidelines. Participants must accept responsibility for actions of their staff.
Market professionals should pay particular attention to ensuring fair treatment for and between clients who are not market professionals where conflict of interest cannot be avoided. Participants in the securities lending market should at all times treat the names of parties to transactions as confidential to the parties involved.”
The guideline sated: “In order for the benefits of the securities lending market to accrue generally to market participants, it is essential that securities lending activity does not distort the market either in borrowing/lending or in the securities themselves. To this end, participants in the securities lending market must not in any circumstances enter into any transactions or holding arrangements designed to limit the availability of a specific security or with the intention of creating a false or distorted market in the underlying securities.”
For Preliminary Issues, the guideline states, “Where relevant, participants should ensure that they have appropriate prior authority from the beneficial owners of the securities, or from a party suitably authorized by the beneficial owners, for the security to be lent.
All participants should ensure that there are no legal obstacles to their undertaking securities borrowing and lending transactions and that, where necessary they have all relevant permissions from the regulatory authorities.
They should become familiar with the rules, procedures and conventions of the market in which they will operate in order to fully comprehend the business and its associated risk. Participants should ensure that they have established and fully understood their tax position in relation to securities lending transactions. Such transactions should be carried out in accordance with the relevant market and tax regulations.”