Omobolanle Lawal and Kafilat Aderibigbe of G Elias & Co explain how the Nigerian repo market is defined and the Nigerian Securities and Exchange Commission’s role in regulating it
'Repo' is the generic name for a financing transaction whereby one party (the seller) transfers proprietary interest in securities at an agreed price to another party (the buyer) with an obligation to repurchase equivalent securities either at a certain future date or on demand at a specified, higher price, called the repurchase price.
Repos are usually used to raise short-term capital where there is lack of liquidity. Central banks use repos as a tool for conducting routine monetary policy operations and providing emergency liquidity to the market in times of financial crisis. The most commonly used securities in repo transactions are high-quality government bonds.
With an estimated nominal GDP of $510 billion, Nigeria is Africa's largest economy and offers numerous business opportunities. Its prospects of sustainable economic growth are raised by favourable improvements in the non-oil sectors, particularly agriculture, information and communication technology, trade and services. While foreign participation in most African markets is largely limited to treasury bills, foreign participation has become increasingly visible in Nigeria, particularly its bond market.
The Securities and Exchange Commission (SEC) is the apex regulatory authority for the Nigerian capital market. It is responsible for regulating investments and securities business in Nigeria. Section 315 of the Investment and Securities Act 2007 (ISA) defines securities lending as 'the temporary exchange of securities, generally for cash or other securities of at least an equivalent value, with an obligation to redeliver a like quantity of the same securities on a future date and includes securities loans, repurchase agreements (repos) and self-buy back agreements'. Rule 389 (11) (g) of the SEC Rules and Regulations 2013 (SEC Rules) made under the ISA, requires that an agreement between the borrower and the lending agent in a securities lending transaction should provide for the absolute transfer of title to securities and collateral.
It would appear that through these provisions, the SEC intends to bring repos within the purview of securities lending. This classification is, however, incorrect as repos and securities lending are distinct types of financing transactions. They are similar in the sense that the buyer/borrower may retain securities in the event of the seller/lender's default. In a repo transaction, legal title in the securities passes from the seller to the buyer. For this reason, the seller cannot recall his securities during the subsistence of the transaction unless the parties specifically agreed on a right of recall at the time of the transaction. Bonds and other fixed income instruments are the typical securities used in repos.
"In a repo transaction, legal title in the securities passes from the seller to the buyer"
By contrast, in a securities lending transaction, one party (the borrower) borrows securities from another (the lender) using cash, government securities or such other securities as may be agreed upon as collateral. The major distinguishing feature is that a seller enters a repo transaction with the primary objective of borrowing cash, while a borrower enters a securities lending transaction with the aim of borrowing securities to cover a short position.
Rules 388-394 of the SEC Rules contain broad provisions on securities lending. They provide for the necessary terms and conditions, criteria for eligibility as an intermediary (lending agent), events of default by the borrowers and the acceptable forms of collateral. In addition, the Securities Lending Guidelines of the Nigerian Stock Exchange, 2012 (NSE Securities Lending Guidelines) expressly provide for the use of the Global Master Securities Lending Agreement (GMSLA) with an addendum as a standard agreement for securities lending transactions in Nigeria subject to appropriate modifications. There are no SEC-specific regulations in respect of the conduct of repo transactions in Nigeria. The SEC needs to make specific regulations for the conduct of repo transactions.
The Central Bank of Nigeria (CBN) in its role as the regulator of banks and other financial institutions in the country has made rules affecting repos by banks. Sections 29 (1) (c) and 42 (2) of the Central Bank of Nigeria Act 2007 (CBN Act) provide that the CBN may exercise its powers as lender of last resort by granting temporary advances to banks at such rate of interest and under such terms as the CBN may determine to any bank which may be having liquidity problems. The CBN conducts repo transactions under the Standing Lending Facility (SLF) for overnight transactions, and the Term Repurchase Facility (TRF) (together the Facilities) for terms up to 90 days using term repo transactions. The Guidelines for the Conduct of Repurchase Transactions under CBN Standing Facilities Guidelines dated April 2 2012 (the CBN Repo Guidelines) specify the terms and conditions for the operation of the Facilities and are to be read in conjunction with the Nigerian Master Repurchase Agreement (NMRA).
The CBN Repos Guidelines state, 'the objectives of these facilities are to provide Naira liquidity to eligible institutions that are unable to access funds on the inter-bank market and to set an upper limit on rates. The rates on the Facilities are set at margins above expected market rates so as to provide sufficient incentive for banks to look first to the interbank market before seeking recourse to the CBN for funds'. The CBN also issues circulars on matters affecting repo transactions from time to time.
Eligible securities under the Facilities are: Federal Government of Nigeria (FGN) treasury bills, FGN bonds, CBN Bills, and Asset Management Corporation of Nigeria (AMCON) bonds. The Facilities are available only to banks and discount houses that executed the Nigerian Master Repurchase Agreement NMRA with the CBN. Transactions under the Facilities can be conducted in amounts of a minimum of N100 million (approximately $50,000) and in multiples of N1 million (approximately $5,000) thereafter.
Counterparties are obliged to be fully conversant with all aspects of the NMRA. The CBN Repo Guidelines apply only to repo transactions between the CBN and its counterparties. There are no specific rules governing repo transactions between other parties. However, the CBN Foreign Exchange Manual (Forex Manual) Memorandum 20(2) and (3) provides that residents of Nigeria may buy from or sell to an expatriate any security denominated in Nigerian and foreign currency, respectively, subject to specified documentation. This provides regulatory recognition to repo transactions between foreign investors and Nigerians.
"Counterparties are obliged to be fully conversant with all aspects of the NMRA"
Nigeria boasts of a liberal foreign investment legal regime. Section 15 of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 (FEMM Act) and its guidelines, the Forex Manual, guarantee investors unconditional repatriation of capital, provided that capital was imported into Nigeria through an authorised dealer (usually a bank licensed to deal in foreign exchange transactions). An authorised dealer is required to issue a certificate of capital importation (CCI) to the investor within 24 hours of the capital importation. The CCI entitles investors to repatriate capital, dividends and income through official channels and rates out of Nigeria (section 24 of Nigerian Investment Promotion Council Act 1995 and rule 408 of the SEC Rules). There are thus, no barriers to repo transactions with foreign counterparties.
Stamp duty will be payable on the NMRA or the Global Master Repurchase Agreement (as the case may be) and each confirmation executed or to be used or relied upon in Nigeria. An instrument which relates to any property situated in Nigeria or any matter or thing to be done in Nigeria must be stamped. Stamp duties are to be paid within 40 days of the execution of the instrument if executed in Nigeria; or if executed outside Nigeria, within 30 days of the instrument being brought into Nigeria. Statutory penalties are payable if the duty is not paid within the specified time frame. The stamp duty payable on the agreement would be 1.5 % of the repurchase price. Any instrument on which stamp tax is not paid will not be admissible in evidence in civil proceedings in Nigeria or 'available for any purpose whatsoever'. (Stamp Duties Act, 1939 (SDA) s. 22 and 23.) The Schedule to the SDA, General Exemptions from All Stamp Duties Item (1) exempts from stamp duty, the transfer of shares in the government or legislative stocks or funds of Nigeria. Therefore, where the purchased securities are FGN treasury bills or bonds, the NMRA or GMRA will be exempt from stamp duty.
There is a lacuna in the regulatory framework for repos, especially from the perspective of the SEC. The distinction between a repo and a securities lending transaction should be clarified. The SEC needs to step up in its regulatory role in this field. The SEC should enact specific rules to give much-needed guidance to players in the repo market.
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G Elias & Co
About the author
Omobolanle Lawal is an associate with G. Elias & Co, one of Nigeria's leading business law firms. Omobolanle is experienced in securities and general corporate work. She has advised a leading global financial institution on repo and securities lending transactions with Nigerian counterparties based on the GMRA and GMSLA.
Lawal holds a Bachelor of Laws degree from the University of Lagos. She was called to the Nigerian Bar in 2012.
G Elias & Co
About the author
Kafilat Aderibigbe is an associate with G. Elias & Co. She holds a Bachelor of Laws degree from Lagos State University (with first class honours). Aderibigbe was called to the Nigerian Bar in 2013.