Nigerian financial infrastructures increasing cooperation
At Nigeria's third Capital Market Committee retreat, Kyari Bukar, the head of the country's central securities depository, reports on progress liberalising the market - and dealing with unclaimed dividends
Nigeria has in the past suffered from an image problem that has contributed to investor deterrent. But having recently overtaken South Africa as the largest economy in Africa, that could be about to change as Nigeria’s financial services leaders work together to modernise the country’s capital markets.
There is much in the pipeline. The launch of an exchange-traded derivatives market in Nigeria is planned for Q4 2014, with the creation of a central counterparty (CCP) on schedule to be finished next year and securities lending is set to begin properly in January, says the head of Nigeria’s central securities depository.
Speaking from the third retreat of the Capital Market Committee (CMC), at which Nigerian market participants, regulators and financial infrastructures convene annually, Kyari Bukar, managing director and chief executive of the country’s Central Securities Clearing System (CSCS), is on track to finish building a CCP before exchange-traded derivatives are introduced. Nigeria already has an OTC derivatives market up and running.
“The CSCS is in the initial stages of establishing a CCP, trying to get all the interested stakeholders to be part of it. The derivatives products are still being talked about and we have a preliminary roadmap from the exchange. I have been tasked by my board to conclude the establishment of a CCP in 2014, so I may end up building an infrastructure that doesn’t have any transactions on it for a while,” he says.
Securities lending is expected to be fully rolled out even earlier than that – although the project was briefly delayed from moving at a faster pace following its official launch by the Nigerian Stock Exchange (NSE) in September 2012. Since then Capital Bancorp, First Bank, Stanbic IBTC and United Bank of Africa are among those registered with the Nigerian Securities and Exchange Commission (SEC) as securities lending agents (SLAs). Citi is among a number of non-domestic custodians interested in obtaining a licence to operate as an SLA, but it says it has not received approval yet.
A pilot is about to be launched with one major potential securities lender, the Asset Management Corporation of Nigeria, which has acquired securities due to its role as a bank bail-out institution. “What delayed us was the regulatory component and that is now in place. We have started a pilot with one entity. Our intention is to have the pilot for three to four weeks, and then probably early in January we will have the full-blown stock-borrowing and lending kick-off,” says Bukar.
However, one major source of securities for lending is missing. The NSE has lobbied for pension funds to be allowed to lend stock, but they are currently prohibited from engaging in this activity. Nigeria’s Pension Commission is wary, but its new acting director general, Chinelo Anohu-Amazu, is looking to inject more liberalism into pension investment by modifying the Pension Reform Act 2004. Funds are largely restricted to investing in government bonds and lack significant participation in equities with current allocations only around 13%, although up to 25% of portfolios could be invested into the asset class. A review of the act began in the middle of 2013 and could be concluded by early 2014. It is likely to lead to increases in contribution levels and the Pension Commission says pension industry assets may triple to hit $70 billion by 2016.
Nigeria is also considering a move from a T+3 settlement cycle to T+2. Bukar says: “We have had discussions with both the NSE and the SEC. If the industry feels comfortable by next year that we should go to T+2, then I would advocate very strongly for us to go to that. In terms of technically or structurally achieving it, we can just toggle a switch, but obviously the settlement banks have to make their processes more robust.” He adds that shortening the settlement cycle will be “better for the entire risk management framework because if you have an extra day somebody could sell and then buy within the three-day cycle”.
Any increases in liquidity and deepening of capital markets will be encouraging to foreign institutions, which have so far held back from launching products in Nigeria. From 2005 to 2013, Nigeria averaged 6.8% growth in gross domestic product, according to the Central Bank of Nigeria (CBN). The NSE All Share Index, meanwhile, is up 42% year to date.
“We did look into launching a Nigerian product as someone approached us with an index idea, but at the moment there is not sufficient liquidity or the level of transparency we would need to set up a Nigeria-only exchange-traded fund. Maybe in a couple of years’ time Nigeria could be sufficiently transparent in terms of how dividends are paid and corporate actions get carried out, which would then support the creation of a tradable product,” says Manooj Mistry, head of exchange-traded products, EMEA, at Deutsche Asset & Wealth Management.
Transparency pays dividends
Meanwhile, the role that registrars play in the Nigerian market has come under fire for leaving unresolved an unclaimed dividend pool worth around $370 million that stems from lack of full reconciliation between issuing companies, registrars and the CSCS. Among the factors contributing to the problem is dematerialisation (27% of all shares remain in certificate form), a shortfall in bank account penetration and a postal system that is not robust. Most importantly, though, current rules state that registrars can keep custody of unclaimed dividends and invest them in low-risk money market funds, keeping the interest income for themselves.
Bukar has been appointed by the CMC as chairman of an ad hoc committee to come up with a solution by April 2014. He says: “The idea is to quarantine a fund [of unclaimed dividends] and appoint a board of trustees to keep custody of it. We even need to have negative incentives, so if dividends are declared and not fully paid, then registrars should be penalised.”
The committee has started by defining the causes of why a dividend may go unclaimed, of which it has found around 13 reasons. CSCS and the NSE have also reached out to the Nigerian interbank settlement system to effect direct settlement, meaning if an investor sells their shares their account can be credited directly. This has involved enhancing the CSCS database to capture the bank account details of investors. In parallel, CSCS is pushing for use of biometric identification to cut down on issues of identity theft. Nigeria, a nation of at least 168 million, does not have any form of unique identification but is currently developing a National Identity Management Scheme.
Within CSCS, bonus issues and dividends are credited electronically where possible, but “the registrars still believe corporate actions belong to them,” says Bukar. This is preventing efficient processing. He adds: “If I have all the accounts, we can actually credit people when the dividends are declared. I was willing to actually do it for free but found there would be a conflict between us and the registrars.”
The CSCS is also encouraging the regulator to become tougher on when all shares should be dematerialised. Bukar has made a representation to the SEC executive management, “to plead for them to list a deadline so that as an industry we all work towards everything becoming electronic.”
Companies that came to market in the last five years do not have a large amount of unclaimed dividends, as they do everything electronically, but older companies have more of a problem as they are more likely to rely on manual processes.
Yerima Lawan Ngama, Nigerian minister of state for finance, delivering a keynote speech at the retreat, advocated that unclaimed dividends could be used to finance infrastructure in the national interest and if the claimant subsequently shows up then the government would compensate them, reveals Bukar, who adds: “But, generally people in the industry don’t want the money to be given to government because it can get lost or it may not be utilised.”
CSCS reforms
CSCS is in the midst of a number of key technology operations improvements, which include deploying Swift as a means of messaging with custodian banks. Bukar says: “Custodian banks are basically the entities that bring in foreign investors. A little over 50% of our transactions are from foreign investors, and these are managed by only five custodians. Their need for straight-through processing for automating and handling transactions was one of the priority areas that I addressed this year.”
CSCS is also taking steps to clean up issuance of clearing house numbers (CHNs) to users. Investors may have multiple CHNs if they have opened more than one account with a broker. CSCS would prefer investors have one CHN. This would allow them to see their whole consolidated portfolio, avoid paying multiple fees for CHNs and make reporting easier.
Consultant Thomas Murray was due to visit CSCS in mid-December, as Custody Risk went to press, in order to report on improvements to its governance, operations and risk management framework.
In a previous report, Thomas Murray said CSCS’s settlement guarantee fund was not sufficient to cover liabilities in case of the default of large participants and did not employ stress-testing. Bukar says CSCS is putting in place a risk management framework to take care of any potential failed trades. He adds: “We are trying to shore up our settlement guarantee fund, called the Trade Guaranty Fund. We are trying to put in place a form of debit trade limit on some of the brokers to get their buy-in but that is very preliminary.”
Overall, Bukar is confident that CSCS, now with independent directors on its board, can demonstrate improved governance, has a credible disaster recovery plan and is on track to show a reduction in manual intervention in its own operations, such as the bond settlement system.
In addition, he is targeting improvements to the market infrastructure’s settlement model. CSCS operates a non-delivery versus payment (DVP); securities generally settle with finality before cash transfers commence and there is no systemic link between securities and the cash settlement platforms that assure transfers are interdependent. This is being addressed, but awaits action from the CBN. Bukar says: “What happens now is we do the security movement in the morning and the cash movement in the afternoon session of the central bank. That basically means it is not really truly DVP and we’ve written to the central bank to complain. They have said they are going to move us to the morning session, when they implement their new system.”
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