Kyari Abba Bukar is the CEO/MD of the Central Securities Clearing System (CSCS) Plc, Nigeria’s only Central Security Depository for the capital market. In this exclusive interview with Bashir Ibrahim Hassan, General Manager (North), he assesses the state of the Nigerian capital market and the plan to move settlement date to T+2. Excerpts:
CSCS plays a big role in the capital market development, can you tell us more about your role in the capital market?
The Central Securities Clearing System (CSCS) is the number one company that promotes the country’s financial market infrastructures. When you talk about the capital market, you talk about exchanges; of course this plays a significant role in the formation and deployment of capital.
CSCS PLC is the Nigerian Central Security Depository House where all Dematerialized share are kept.
CSCS is what is called the Central Security Depository (CSD). We do the clearing and settlements of transactions in the Nigerian capital market. What that means is that, if for example, you want to buy a share of one company, we may have never met, we don’t know each other from Adam so how do you trust me? The market has been created in such a manner that you trust it. When that transaction happens, the entity that moves the shares of the company you bought to your account and moves your cash into the seller’s account is the CSCS. It is a trusted party in the middle; it is unknown because things work efficiently. CSCS exists but you don’t see it.
Central Security Depository keeps in a secured manner, all the shares traded on the stock exchanges in the country whether it is NASD which is over the counter (OTC), or NSE, FMDQ or Nigerian Commodity Exchange or the new AFEX which will soon go live.
Central Security Depository or the role of CSCS is that of being the clearing and settlements entity for the market. What is clearing? When trade happens on the floor of let’s say the Nigerian Stock Exchange, clearing simply is the determination of the obligations of the parties that are trading. The traders are the broker dealers who were admitted by virtue of some criteria established by the Securities and Exchange Commission (SEC) and also the Nigerian Stock Exchange. Also, for you to become a stockbroker there are some requirements you have to meet and fulfill with the SEC, even after you have done that, you still have to meet some criteria and conditions of the NSE before you get admitted to start trading in that market and the same with the other markets.
..What are the criteria?
The criteria may vary, NASD may have different criteria, NSE may have its own criteria which are different from others too, and same goes to Commodity Exchange or FMDQ. But once you are a participant, you also subscribe to be a participant of CSCS; otherwise, you will not have access to our system. By virtue of that, we basically relate directly with brokers, registrars and to a lesser extent with the companies that have been listed which are the entities we called the issuers.
In a nutshell, we are the custodian of all the shares that have been dematerialised. Dematerialisation is the process of converting a share certificate into digital record. That is why when somebody says you must have an account with CSCS that is what they really mean. You open an account with your broker who uses the CSCS system to create the account and we then assign you what we call a clearing house number, that way, all transactions are done electronically. Also, at the point where you are doing the transaction, we also notify you, if you are buying or selling we let you know what you are doing or just done through SMS or email. If it is not you (that did the transaction), then you can raise an alarm so that we can quickly jump in and do something about it.
Essentially, you may call us as catalysts in the development of the market and by extension, the economic development of the country.
What is the volume of the shares cleared and settled on your platform in the last 3 to 4 years?
I can give you the statistics, the volumes are moving targets, for example, I was telling somebody that a little over a year ago, our daily value of transaction was around the volume of N4 billion, majorly the one trending on the NSE. Volume is the unit of shares traded while value is the Naira equivalent. I’m basically sharing with you the Naira value, since the beginning of the year, it has gone to around N1.5 billion per value and there has been a substantial decline in the value of transactions due to economic challenges we face as a nation. In our case however, it is easy to diagnose easily and that is because foreign investors have decided to stay on the sideline and by that I mean they are not bringing their monies to invest in securities anymore or if they are doing it, they are doing it at a level that is insignificant. Of course when the economy is in the situation that it is now, you expect the market to reflect negativity.
…What is the percentage of its negativity?
It has probably gone down close to 20 percent or let me say it is around 15 to 16 percent down negatively. That is just the index but the volumes and values have dried up which may be attributable to the fact that foreign investors have stayed off the market. Even the domestic investors are nervous to throw their monies into the market. In the long term, it is probably a good time to buy but the situation is a predictor of how the economy is as things are not as pretty as they ought to be.
Having said that, we will not be in this situation forever so we have to do something to kick start by offering incentives for companies to list and creating enabling environment for them.
You act like the middlemen, how do you juggle all these responsibilities with different investors?
CSCS is purely technology driven outfit, because of the huge volume of transactions, if not for technology it will be impossible to manage. Consider its level of growth in one or two decades, CSCS has been able to co-opt many folds and we have managed to do that with the use of technology.
Two, we do have rules and regulations. Basically, before you subscribe to CSCS platform, there are basic things that are required of you. If you are a broker, there are certain things required from you. Of course, the register and brokers are regulated by the SEC and we at CSCS are also regulated by SEC because we are also a major stakeholder in the capital market structure.
We also comply with certain global standards; it is called CPMI-IOSCO. The CPMI-IOSCO standards have about 23 principles and we comply with most of those principles that have to do with CSD except two or three that are not related to us. We do a self assessment of ourselves and we also open ourselves to an international rating agency of Thomas Mary.
…What is your rating?
Our rating is A- with a positive outlook. They have just done a new rating at the beginning of the year and the rating result would soon be released and we have been giving a heads up that our rating has improved so it may actually be an A when it is finally released.
There are only a few countries in Africa that have achieved that; I think South Africa is AA. In the World, the United States of America has triple A’s, many other European countries have double A’s. So in terms of average, CSCS Nigeria is above average. A- Means we are a low risk CSD, with the new rating coming out, we will be better from where we were like a single A.
How do intend to move the market to T+2 like we have it in Europe or T+1 like we have in India?
Right now, for debt instruments like bonds and Treasury bills, it is T+0 which means as transaction is happening; it gets settled the same day. As regards the equity side of the capital market, we are doing T+3. Europe has migrated to T+2 recently; Asia-Pacific is a mixture of T+2 and T+3. By the way, South Africa is T+5, they just moving to T+3. We have been in T+3 for a long time, for us, moving to T+2 is just a matter of informing all the stakeholders and agreeing to it and then executing it. It is a combination of the Stock Exchange, the Securities and Exchange Commission and ourselves to bring on the migration to T+2. Our system as it exists today, all we do is toggle our switches and then it will be T+2 but there are some elements that need to come into play like risk management and so on. Because it even reduces risk since T+3 means you have unsettled trade of two days, even if we are settling today, the other one that is three days ago, you will still have two days of unsettled trade. If you move to T+2, you will have one day of unsettled trade that you are settling today so you reduce the risk by one third. I do believe that once the market is ready, we can pull the trigger and migrate to T+2. I think the market is ready for it and I see that happening towards the end of this year or early next year. Globally, people are moving towards T+2, so it will be in our best interest to synchronize with the rest of the world. United States is T+3, it has gone beyond that and I don’t see them moving to T+2 until probably two or three years from now because they are talking about doing business case for that kind of migration, so it is something I foresee happening in shortest possible time in the Nigerian market.
Generally speaking, you are a technology driven institution that is why you have been able to maintain strong relationship with various stakeholders. How do you protect the platform security wise against cyber attack?
It will be difficult for me to say that we have the most secured system in the world. However, we just have to be diligent in terms of deploying security assets and security processes in place. It is not about having firewalls or a dimilitarize zone and all of that, it is about the entire culture, the entire ecosystem and how you train people and the processes. In a nutshell, security becomes every employee’s business, when that happens, we are all in it to ensure that we safeguard what people have trusted on us which is their hard earn investment assets.
The other thing is that because you give me the security to your own business, we also by extension include even the investor into safeguarding the system, by sending you an alert when a transaction happens; if it is not you that did it, you can always raise an alarm which means you are also part of the security infrastructure.
We are also in constant communication with our major regulator which is the SEC and the law enforcement agencies. So far, we have not experienced what I will call a frontier attack on our system.
What are some of the new innovations we should be expecting from you?
We have had quite a number of things of which I had mentioned earlier like notifying our investors on key issues. We have also done something in the area of our settlement circle; we have moved the settlement circle from afternoon to morning. In that, it gives us a DVP (Delivery Versus Payment) tightly coupled, that is, the movement of the money and that of the securities within a fraction of a second so that nobody has undue advantage. What if I sell you the shares and the money is there or we move your money and the share is not there? So, we make sure that the crossing of the transaction is done instantaneously. Those are technological ways of doing it so as to reduce risk, we call it counter-party risk, the risk that one of them may fail. In the world of today, anything is possible, a company could go under between now and the next hour. Those are some of the things we have done.
We have also made it possible for people to borrow money against their shares especially today that there is a need for some level of liquidity. You can use your shares to borrow money, you can use the same money to pay your child’s school fees or build a house because you know the shares you have will appreciate overtime. That is why you need to have an agreement with the bank. For example, let’s say you have a share of up to N50 million in shares and you don’t want to sell it because you believe that the market is depressed and in a year or two it might doubled and you need N20 or N25 million to build a house, you could go and borrow it against that N50 million in shares. The shares could go down, but we will be informing the bank of the value of the collateral they have which are the shares versus the loaned amount.
This is something we have introduced to the market and the banks love it. What happens is that, you have N50 million and tomorrow it may go down to N40 million and the amount borrowed is still N25 million so the bank is fine as long as it has not gone down below N25 million. In another way round, they may say the threshold is N30 or 40 million, doing this at 30 or 35 million Naira, they may ask you to pledge more shares or they start selling your shares to get their money. So the historical things that had happened in the past may not happen because the collateral is solid. It is a blue-chip security which is liquid at the same time, the margin between the amounts loaned to the total asset value is significant. That way, we inform the bank on a daily basis of the value of their collateral and also charge the banks small amount of fee for the services. It is basically leaning or mortgaging your securities because you feel that there is value in keeping then long-term. Of course you will still enjoy dividends and other values that may come your way.
Do you plan to list yourself on the Exchange?
We are traded over the counter now, when you go to the NASD and look at the top three companies that are listed, CSCS is one of them. Should CSCS be listed in the stock exchange, I will say why not, it is just a matter of time. Once the shareholders or the board agree to be listed so be it. If you look at BusinessDay newspaper where Securities are listed, you will find CSCS there and it is trading at around N6 per share over the counter of NASD platform but there is nothing that is stopping it being listed on the Exchange because the Exchange is a major shareholder, they may not be the one to regulate us as they are regulating other listed companies, we may probably be handed over to SEC to regulate us both on the listing side as well as our infrastructure job. I can see down the road that CSCS is getting listed but that will be the decision of the board.
What is your view about the Nigerian economy and what can we do to move it forward as quickly as possible?
I think this will purely be my personal view. Number one thing we need to do is to look inward and increase our own productive capacity in manufacturing, mining, agriculture and the rest of them. There are industry segments in the country that we have sub-optimally utilised to the benefit of the economy. If it means we will have to layout some incentives so be it, but we need to act fast. There is need for a sense of urgency, because there is a lot of fixation over one or two things.
Everything should be put on the table, if fuel subsidy is bringing inefficiency in the distribution and sale of petrol compared to diesel which has been deregulated, what happens if you remove the subsidy on petrol too? Of course, there would be some pains, but it will be lesser compare to the one we have been going through in the last few months. Doing this, prices will begin to be competitive because if you are not competitive, you are not going to survive in that market.
Secondly, we talked about job creation, how do we do that? We need to look at the value chain whether it is in agriculture or commodity exchange, warehouses, hiring quality managers and the rest. In the process, the entire value chain will create hundreds of thousands of jobs. The value chain will have people at each intersection and it will also be creating thousands of jobs.
Solid minerals are another area where a combination of a public-private partnership can turn things around. Some key infrastructures such as power, roads and other things we believe that if government is borrowing to get them, it will be fantastic because on the long term, those social or capital investments will end up being the catalysts of growth of the economy and creation of jobs but there has to be a sense of urgency.
