Nigerian Exchange mulls insurance cover for dealer-related losses

The NGX Regulation, a wholly owned subsidiary of the Nigerian Exchange Group (NGX Group), in a commendable move seeks to engage a consortium of insurers to administer insurance to its Trading Licence Holders, the Nigerian Exchange Limited (NGX) and the Investors’ Protection Fund (IPF).

The insurance companies that are to submit their proposals latest on Monday, July 12, are expected to provide insurance products to create a waterfall in the event of a claim, such that the IPF becomes the last resort to compensate investors for losses.

Interestingly, all Trading Licence Holders of the Exchange will be required to take up the insurance product to be implemented by the consortium of insurance companies selected and/or approved by the Exchange and the Board.

The requirement of having an Insurance product for Trading Licence Holder(s) is provided for in Rule 27A of the Securities and Exchange Commission’s (SEC) consolidated Rules and Regulations, 2013, approved by the Securities and Exchange Commission in December 2019.

Olufemi Shobanjo, head, Broker Dealer Regulation, notes in the request letter to insurance companies that “the Insurance Product should address the following: place responsibility and liability for payment of the premiums on the Trading Licence Holders; create a structure which ensures that the Fund and The Exchange are named as the co-beneficiaries of the Product and that all payments under the policy are made directly to the IPF”.

He also notes that the Insurance Products will provide ways to manage and mitigate risks such as interest rate risks, credit risks, foreign currency risks and equity related risks that are inherent in derivatives investment portfolios or liability structure where derivatives transactions are carried out by a Trading Licence Holder; and shall cover all Trading Licence Holders of The Exchange and their market segments.

The NGX maintains Investors’ Protection Fund in line with part XIV of the Investment and Securities Act 2007. The purpose of the Investors’ Protection Fund is to compensate investors with genuine claims of pecuniary loss against Trading Licence Holder firms resulting from: insolvency, bankruptcy or negligence of a Trading Licence Holder firm of a securities exchange or capital trade point.

Investors’ Protection Fund’s financial statements as of December 31, 2019, showed total number of claims verified under Board of Trustees approved methodology was 839 (742 as of December 2018), of this total number, 307 (December 2018: 241) have been N85.5million (December 2018: N65.6m). The financial statement showed that a total of N150million was provided for in full as of December 31, 2019, based on the maximum amount of N400million payable under the IPF rule.

The Fund also takes care of defalcation committed by a Trading Licence Holder firm or any of its directors, officers, employees or representatives in relation to securities, money or any property entrusted to, or received by the Trading Licence Holder firm in its course of business as a capital market operator.

The NGX Regulation in its request for proposal to engage insurance companies states it is to ensure investor protection, insurance cover for the Trading Licence Holders of The Exchange, sustenance of the IPF to meet the objectives of its creation in the immediate and long term and to avoid the risk of depletion by the payment of compensation, and also to protect the Exchange in cases of potential claims in relation to actions of Trading Licence Holders of The Exchange.

In carrying out its functions as a securities exchange, The Exchange has Trading Licence Holders who can buy and sell securities listed on The Exchange on behalf of the public.

In compliance with Section 197 of the Investment and Securities Act 2007 (the ISA) The Exchange established the Investors’ Protection Fund and inaugurated its Board of Trustees in September 2012. The purpose of the Fund is to compensate investors who have suffered pecuniary loss as a result of situations reckless activities of trading licence holders.

Based on the foregoing, the Exchange intends to appoint reputable and experienced insurance companies to undertake the following: provide an Insurance Product, which can be utilized as an additional means to compensate investors who suffer pecuniary loss as a result of the reasons outlined earlier.