NSE promotes better understanding of securities lending with interpretative guidance

The recently released Securities Lending and Borrowing report from the Nigerian Stock Exchange (NSE) shows that a total of 20.8 million shares are available to the investing public for lending.

The securities available include Presco, MTN Nigeria, Okomu Oil, Dangote Cement, United Bank for Africa, Dangote Sugar, Nigerian Breweries, Flour Mills, Chemicals and Allied Products (CAP) and Guaranty Trust Bank.

Securities Lending allows investors to borrow shares at an agreed fee, with the borrower agreeing to return the securities to the lender at the end of the loan term.

It usually requires the borrower to collateralise the transaction with cash or other securities of a value equal to or greater than that of the lent securities.

In order to protect the lender against counterparty credit risk this transaction is done through a Securities Lending Agent (SLA) who stands as an intermediary between the lender and borrower. The SLA stands as borrower to the lender and as a lender to the borrower.

Jude Chiemeka, Head, Trading Business Division, NSE said Securities Lending presents significant benefits to investors in a bull or bear market. “Whether you are a speculative investor looking to make quick gains, or a long-term investor holding stocks, securities lending provides a strong potential to deliver benefits to all market players through capital gains and low-risk incremental income. It also plays an important role in capital market by providing liquidity, which in turn reduces the cost of trading and promotes price discovery,” he said.

In 2017, the Exchange amended its original Securities Lending Guidelines that were first published in 2012 and the amended guidelines were approved by the Securities and Exchange Commission (SEC) in 2017.

Additionally, The Exchange recognised the need to include retail investors in the Securities Lending Program to enable their participation and widen the pool of securities available for lending giving rise to The Rules Governing the Inclusion of Retail Participants in Securities Lending Transaction which was birthed and approved by SEC in 2016. The Guidelines and Rules were given an effective date of 7 January 2019.

To further provide clarity on these guidelines, the Exchange released the Interpretative Guidance on Securities Lending in December 2019. This consolidated Interpretative Guidance – which can be found on the website of The Exchange  highlights areas including general standards, legal titles, corporate actions, governing laws, collateral management, and stakeholder roles, amongst others.

Emphasising the importance of the Interpretative Guidance, Chiemeka said, “This Guidance document has been prepared to adequately address stakeholders’ expectations in Securities Lending transactions. It is, therefore, important that investors – retail and institutional – properly understand the procedures involved in Securities Lending and implement the necessary controls.”

As of October 2019, the country’s securities lending market was valued by the NSE at N1.07 billion ($2.96 million) with five licensed lending agents.