The setting up and running of a Central Securities Depository (CSD) for Treasury Bills and Government Bonds by the Central Bank of Nigeria (CBN) threatens to undermine recent gains made in the country’s debt markets, as well as erode investor confidence in fixed income securities issued by the Federal Government (FG).
FGN bonds and Treasury Bills (T-bill) account for over 80 percent of Nigeria’s debt market.
The Central Securities Clearing System (CSCS) had hitherto handled the clearing, settlement and delivery system for all FGN fixed income transactions, before the CBN entered the fray as a competitor , which has left most bond traders, custodians and investors anxious and perplexed.
BusinessDay learnt that the CBN has been struggling in its efforts to run its new depository the Scripless Securities Settlement System (SSSS) which has caused serious settlement problems for market operators and investors since its inception in early December 2013.
BusinessDay has also confirmed that between Monday 16th and Tuesday 24th Dec, no T-bill transaction was settled or confirmed for settlement by the CBN, as the SSSS system broke down.
“The CBN has stubbornly decided to take up the role of depository to compete with the CSCS, although they are simply incompetent in that business,” said one market source, speaking with BusinessDay.
“They have escalated the settlement risk and foreign investors have begun to pull back from our fixed income market.”
Market sources tell BusinessDay that trading volumes for fixed income securities declined by 40 percent in December, with the inception of the new CBN settlement system.
Fixed income trading volumes usually average N35 billion a day or between N700 billion and N1 trillion a month, according to a source at the FMDQ.
BusinessDay has also learnt that in response to heightened settlement risk, many global custodians are threatening to issue a disclaimer or caveat (buyer beware) on the Nigerian government securities market to the effect that anyone investing here would be doing so at their own risk.
Further investigations by BusinessDay as to why most market participants are concerned about the Central Bank’s moves, threw up a number of serious issues that the CBN may have overlooked in its move to take over the settlement of securities it issues.
First is the fact that the CBN is going against global best practices.
Most serious financial markets globally operate only one CSD for the clearing and settlement of their securities transactions, making it simpler and more efficient for global investors to understand and access such markets.
For example Ghana on Jan. 1, 2014 merged into one, the two securities depositories in its financial market (the Central Securities Depository Ghana (CSD) and the GSE Securities Depository Company Limited (GSD), while the CBN is taking the exact opposite step.
Another issue is that securities depository functions are not core to the CBN’s main business of central banking, as a second source told us, “the people the CBN have there don’t know much about settlement, and keep calling on the officials of the CSCS to help them do their jobs.”
A more fundamental problem though is the fact that according to market participants, the CBN would need to issue ISIN (International Special Identification Numbers) for Treasury Bills and FGN bonds that it issues going forward.
However, since the CSCS is the only body recognised to issue ISIN’s in Nigeria by the Association of National Numbering Agents (ANNA) which issues the ISINs for all securities all over the world, and the CBN is not a recognised member of the global body, it means newly issued Nigerian T-bills are currently the only investment instruments without ISINs, which is against acceptable global standards.
“If the CBN comes up with their ISIN code, unknown to foreigners, it will shut down the Nigerian market,” said a third market source.
Also worrisome, are the conflict of interest questions that arise thereof around the CBN (or government) serving as the issuer, registrar and depository to its own securities.
“The role of the CBN as a regulator makes them the entity that issues T-bills, while the DMO issues bonds, and the CBN is registrar for both. If the CBN assumes the role of central securities clearing for securities it issues, it will bring about a conflict of interest,” Bukar Kyari, MD/CEO of the CSCS, said in a response to BusinessDay questions.
“However if securities are kept by an independent party there will be a level of comfort to investors.”
A fourth source tells BusinessDay that the fact that the CBN issues Treasury Bills does not mean they own those securities, as the participants that buy them are mostly banks, who are themselves regulated by the CBN, another problematic issue.
Meanwhile, all CSD’s are regulated by the Securities and Exchange Commission (SEC) raising the prospects of an independent CBN being regulated by the SEC.
Babatunde Adama Chairman of the FX Dealers Workgroup at FMDQ, tells BusinessDay that while the new CBN system had some teething problems in December, the problems are not insurmountable.
“They (CBN) will sort it out, if not, the market will push back,” Adama said.
Other market participants are not so sure the damage can be undone without the CBN abandoning its plans.
“The major issue has to be that the CBN rollout is premature and there was no agreement with market operators as to a roll-out date,” said a fifth source.
“Foreign investors are alarmed; we are sending a terrible message with our impromptu way of doing things.”
By: PATRICK ATUANYA