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‘Securities lending will move Nigeria from frontier market to emerging market’

Jesuseun Fatoyinbo, head, Transactional Products and Services, Stanbic IBTC Bank is excited to see great transformations happening in the financial services market, both in the medium and long term following key roles by his bank and other stakeholders in enhancing securities lending. In this interview with Hope Moses-Ashike, he shares his experience, changes in the market and what the future holds for investors.

Let us begin with your role as head, Transactional Products and Services (TPS) business at Stanbic IBTC Bank, what does this entail?

Transactional Products and Services (TPS) is a division of Wholesale Clients and Transactional Banking that provides working capital solutions to corporate clients. These are tailored in the form of cash management, trade finance and investor services.

Cash Management delivers payments, collections, liquidity management tools such as sweeps and account services via digital platforms that enable clients to be efficient and effective in managing liquidity, optimising interest earnings and meeting their working capital requirements. Trade finance, however, provides financing and risk management solutions to both importers and exporters using traditional trade offerings (that is, Bills for Collections, Letters of Credit, Bank Guarantees) and other supply chain finance products.

The Investor Services pillar warehouses our assets custody business to support both local and foreign investors in safekeeping their assets. This business also provides a steer on securities lending, a recent development in the Nigerian capital market where clients can play as a borrower or lender with Stanbic IBTC Bank as the agent. The service offers clients new opportunities to grow new income lines whilst creating liquidity in the market.

In 2015, Stanbic IBTC became the first in Nigeria’s capital market to introduce securities lending transaction. How would you describe the process and journey that led to this feat?

The Securities and Exchange Commission (SEC) in Nigeria issued licenses to five (5) Securities Lending Agents (SLA) in 2012 and Securities Lending and Borrowing (SLB) services was officially launched in the Nigerian market in December 2015. However, only Stanbic IBTC Bank of the five licensed agents has been active since the launch of securities lending in Nigeria.

We are excited that since the first commercial trades in Nigeria in December 2017, we have seen noteworthy progress on securities lending and borrowing on the equities side. We have also ensured increased awareness and continuous engagement with key market participants, including The Nigerian Exchange Limited (NGX), asset managers and a closed focus group of brokers, to increase participation and appreciation of the product in the market.

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Nigeria’s security market

We are commencing the inclusion of securities for lending or borrowing purposes such as Federal Government Bonds as well as Treasury Bills.

We have equally reviewed assets that would be considered for collateral purposes and are concluding the process of including Federal Government Bonds and Treasury Bills to enhance our daily mark to market process whilst providing flexibility to borrowers to use other asset classes as collateral besides cash.

Bearing in mind that Stanbic IBTC pioneered and drove the initiative in Nigeria’s capital market, can you please tell us what Securities Lending transactions entail?

Securities lending is the temporary transfer of securities from one party to another, with a simultaneous formal agreement to return the securities either on demand or at an agreed date in the future.

Full legal title to the securities is transferred from the holder of the security “the lender” to the party temporarily taking ownership of the security “the borrower” so that the securities can be sold by “the borrower” for short selling.

Securities lending and borrowing transactions are governed by the terms of securities lending agreements aligned to terms and conditions as agreed by the parties and in line with international best practices. The lending agreement must be completed, and it sets forth the terms of the loan including duration, fees and the nature of collateral (cash, government securities, equities among others).

It is also important to mention that during the tenor of any securities lending transaction, the title and ownership of the security are also transferred to the borrower. The borrower is obliged to return the security either on demand or at the end of an agreed term.

Borrowers are typically market participants such as market makers, portfolio investors, broker-dealer firms, investment banks, intermediaries, stockbrokers and other similar organisations.

Lenders are usually institutional investors, pension funds, mutual funds, sovereign wealth funds, investment companies, some High Net-worth Individuals (HNI) as well as insurance companies that are long or medium-term investors in the securities market. We also have high net worth individual investors whose interest is to grow the value of their portfolios over the medium to long term. They, therefore, lend securities to earn a lending fee, cover costs, create performance enhancements, and increase the return on their portfolio.

I’m sure your aspiration is that securities lending transactions continue to increase as an integral part of Nigeria’s contemporary securities markets. What are the implications for market participants, infrastructure providers, market authorities and regulators?

Securities lending has an enormous impact from a benefit realisation perspective to every participant in the market. For instance, it translates to more trades and activities both on the buy-side and the sell-side. This would herald continuous liquidity and the exchanges will also become fully functional to accommodate other types of transactions like derivatives. This will steadily improve market development for new products and attract more investors into our market.

What has been your experience driving this initiative and which securities are currently available for transactions in Securities Lending?

Driving securities lending has been exciting as we see it as one of the tools that will move the Nigerian capital market from a frontiers market to an emerging market.

We have had extensive engagements with The Nigerian Exchange Limited (NGX), The Financial Market Dealers Quotation (FMDQ), The Securities and Exchange Commission (SEC), The Federal Inland Revenue Service (FIRS) as well as the Federal Ministry of Finance, Budget and Planning and have achieved results. An example of this is the 2019 Finance Bill which is committed to enhancing the guidelines so that manufactured dividends will no longer be subjected to additional tax.

Just recently we concluded the biggest securities lending transaction in Nigeria’s history between a willing lender and a willing borrower. Securities lending trades have hit an all-time high of N513M. These milestones are very germane in our journey to developing and deepening liquidity in the capital market. This is also a critical piece in moving Nigeria from a frontier market status to an emerging market.

The Nigerian Exchange Limited (NGX) is fully supportive as we share the goal of bringing liquidity into the market.

Market players are curious and aspire to learn more with a handful already getting their clients on board to participate.

We have had different stocks in the pool over the years and currently have the following stocks: Dansugar, Guaranty, MTN, UBA and Zenith whilst we continue to engage more lenders with liquid stocks into the lending pool.

Regulators such has The Nigerian Exchange (NGX) and The Securities and Exchange Commission (SEC) obviously provide oversight and must have played critical roles in this initiative. What are some of the rules, regulations and guidelines put in place by the NGX and SEC to steer the market adequately on its modus operandi?

Some of the particularly important aims of the NGX and SEC is to protect investors and provide information in a transparent and efficient manner. These objectives guide the formulation of rules enacted by them which in turn provides the framework from which products like Securities Lending thrive.

What market enlightenment efforts have you put in place since the commencement of the initiative?

Stanbic IBTC has organised several roadshows, trainings, media interviews as well as other learning initiatives to create awareness on the Securities Lending product. Recently, Stanbic IBTC hosted the Nigerian Securities Lending Forum in partnership with the NGX in 2020. The forum hosted over 290 experienced industry players and regulators to update and unpack the conversations on the future of Securities Lending in the Nigerian market. Some of the clients in attendance included pension funds, PenCom, dealing member firms, foreign clients, asset managers, gentlemen of the press, among others.

The forum also brought the entire investment value chain including regulators up to speed on where we are on the Securities Lending journey and how we can leverage to build more depth and liquidity into the capital market amongst other benefits. Stanbic IBTC will continue to commit efforts in creating more awareness.

In terms of participation, some markets allow more of institutions, some a mix of funds and individual investors, while others do primarily foreign institutional investors. What applies in Nigeria’s case and who can participate?

The Nigerian market has over the years opened the opportunity for securities lending to a wider range of clients. The guideline for retail participation has been issued and individuals who are holding assets for a long term can now pledge their securities for lending purposes for a fee. The target participants will continue to include global custodian banks, asset managers, broker-dealer firms, market makers, investment banks, hedge funds, institutional investors, local investors and Intermediaries.

In some markets, the Securities Lending Transaction (SLT) market is carried out entirely on the exchange; there cannot be any such transaction over the counter. The Exchange, as the Central Counterparty (CCP) provides settlement guarantee for both the first leg and reverse leg. In other places like the United States, it is purely Over The Counter (OTC). In Brazil and South Korea, Securities Lending and Borrowing (SLB) transactions can be either on The Exchange or OTC. In Brazil, one can do a trade outside the market (an OTC transaction), but one must report it on The Exchange and clear it through a CCP. What structure is the Nigerian Securities Lending Transaction operating on and what are underlining factors behind this decision?

The Nigerian regulated Securities Lending programme is currently operating an Over The Counter (OTC) structure. The Nigerian Exchange Limited (NGX) as a Self-Regulatory Organisation (SRO) plays a huge role of maintaining professionalism by regulating her members or participants. It also ensures that there is a proper structure in place for the product to run. The CCPs when fully functional will be used to provide settlement guarantee for derivatives clearing. The engagement of key stakeholders in the operationalisation of derivatives clearing by both CCPs licensed by the SEC is currently underway.

Could you please briefly shed more light on the respective roles of The Nigerian Exchange Limited (NGX) and The Financial Market Dealers Quotation (FMDQ) Over The Counter in Securities Lending Transaction?

The NGX and FMDQ are multi-asset class exchanges licensed by the Securities and Exchange Commission (SEC) in the Nigerian capital market. Their role is to provide information and a platform for trading of securities while also providing guidance, facilitating, and regulating the market through active collaboration with the regulator.

The NGX has been around for about 60 years and currently plays a continually active role in providing guidance for securities lending. It publishes guidelines that guides all parties in a securities lending contract and transaction. These guidelines can be found on the NGX website. Securities Lending agents equally provide reports on activities to the NGX. The Financial Market Dealers Quotation (FMDQ) has also played a significant role in the development of the Fixed Income securities market, and they act as an agent of the Central Bank of Nigeria (CBN) in the settlement of these trades. Their input in the development of securities lending in the Fixed Income space would be important as we formally commence the inclusion of Federal Government Bonds and Treasury Bills into the regulatory securities lending bucket. Borrowers would be able to borrow bonds and bills and they would be able to use them as collateral types.

Expanding the basket of securities eligible for the Securities Lending Transaction market beyond the ones allowed for single stock futures trading could raise volumes in this market. Are Securities Lending transactions permitted in asset classes other than equities, such as government bonds, corporate bonds, and Exchange Traded Funds (ETFs), among others?

Securities Lending is permitted for all listed securities. As long as the asset classes such as equities, government bonds and treasury bills are quoted on a regulated exchange such as the Nigerian Exchange Limited (NGX) and FMDQ, they would be eligible for borrowing purposes. We hope as the market develops with more diverse liquid assets other forms of assets would be included in the securities lending pool.

Standard Bank, Stanbic IBTC Holdings’ parent company is a leading provider of an extensive range of custodial and investment related services, including Securities Lending and investment administration. It played an integral role by partnering with the Kenyan Capital Market Authority, which has proven to be very promising. How much of Standard Bank’s technical expertise and competence was leveraged in the conception and establishment of Securities Lending transaction in Nigeria?

As the leading Custodial bank on the African continent, Standard Bank provides services in Custody, Domestic Clearing, Securities Lending, Trusteeship and Fund Administration. Over the years, the Standard Bank Group (SBG) and Stanbic IBTC Bank have engaged on how to further develop the Nigerian market. This expertise was critical in the commencement of Asset Custody in the Nigerian market by Stanbic IBTC Bank (then Stanbic Merchant Bank) in 1994.

Standard Bank as a continent leading player in Securities Lending has been quite supportive and instrumental in seeing that the product is launched and functional in Nigeria as well as in the continent at large. They provided technical guidance, training and platforms for transacting which has made the process a lot more seamless.

Considering the very challenging economic operating environment in the country over the past few years, how critical is providing a conducive regulatory environment and framework to the having an impressive performance in the capital market in 2021?

The framework and conducive environment provided by regulators are extremely critical in building investors’ (both local and foreign) confidence. Overtime this has led to increased investment in securities and providing liquidity, which in turn reduces the cost of trading and promotes price discovery.

The primary focus of the Securities and Exchange Commission, the Central Bank of Nigeria and other regulators supporting the capital market remains preserving, promoting and safe-guarding investors’ confidence. They do this through the formulation of new rules, guidelines, risk-based tools, supervision, among others. Stanbic IBTC Bank is incredibly supportive and is indeed aligned to the implementation of a conducive regulatory environment.

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