Rules for the settlement and clearing of transactions on exchange market contracts and for the handling of benefit actions such as dividend payments and corporate actions, have revealed with evidence that stiff but good regulation of the market has huge benefits for the market and the traders, although some financial experts may believe such stiff rules in an exchange market might restrict business activities and dimple its growth prospects.
Settlement is the exchange of the title or legal ownership of financial products as bonds, notes, stocks and shares for money between a buyer and seller. Settlement occurs automatically two business days after a transaction which is referred to as T+2. It is an automatic process provided by ASX, and involves two simultaneous processes: Payment is made for the trade by electronic transfer and the legal ownership of the security is transferred to the buyer.
Despite the establishment of the Central Securities Clearing System (CSCS) in 1997, there have been cases of improprieties in the nation’s financial market ranging from delayed transactions due to signature verification process, corruption and other sharp practices. Market analysts had warned that risk in investments was significantly high, resulting in institutional and high net worth investors’ unwillingness to entrust their funds and securities in the hands of many operators due to undue delays, minimal transparency, manually operated processes and the problems associated with keeping accurate record of numerous certificates to determine actual stock holdings at any point in time.
To say the obvious, monetary policies are complemented with adequate financial regulation to curb excesses. The market regulators: the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) took that part last month, releasing guidelines for the settlement of all types of securities in Nigeria. Among other things, the scope of the guidelines set out the procedures for the settlement of securities in Nigeria, including the rights and obligations of the parties in every legitimate transaction.
It also covers the settlement procedures and settlement cycle for the trades executed in the Nigerian Stock Exchange traded securities, FMDQ Over The Counter (OTC) Securities, NASD Over The Counter (OTC) Securities, Nigerian Commodity Exchange (NCX) traded securities and Afex Commodities exchanges.
Under securities settlement rules and procedures, the regulators directed that “any securities transaction must trade or be reported through a licensed Exchange in line with the standard settlement guidelines.” Heeding the call by some market operators for the removal of the clog of delay in the wheel of trading activities in the market, the new guideline ordered that after each day’s transaction (Day T), the clearing/settlement agent (CSCS) shall generate the financial obligations of each dealing member firms, a position many say will bring about accurate record keeping of every transaction in the market. It also held that “on Day T+2 for equities and T+1 for bonds, the clearing/settlement agent shall transmit the final financial net settlement obligation of dealing member firms to settlement banks through a payment system agent (if the clearing/settlement agent has no direct access to the CBN RTGS).”
To win investor’s confidence, the new directive stated that “The clearing/settlement agent shall alert both the settlement banks and the dealing member firms of their net positions on Day T. Where the clearing/settlement agent has direct access to the CBN RTGS, the clearing/settlement agent shall transmit the final financial net settlement obligation of the settlement banks to the CBN RTGS at the same time when the security records are updated so as to achieve simultaneous Delivery versus Payment (DVP).
On settlement day (i.e. Day T+3 for Equities and day T+2 for Bonds), the clearing/settlement agent deliver the security while the payment system agent applies the net settlement advice against the settlement bank account with CBN. On same day, settlement banks shall equally credit or debit (funds) the bank account of the respective dealing member firm,” adding that “On settlement day, the clearing/settlement agent shall update the record of the investors (buyers & sellers) with the registrar,” a move that is interpreted to mean a centralisation of all transactions in the country.
Analysts have applauded the directive on the basis that it is applicable to both federal government traded securities (including primary auction) and Commodities Exchange Spot Market Trades. Those who spoke to LEADERSHIP on the development said the new guidelines have brought semblance of sanity in the market.
They pointed to the fact that customers’ account would now be credited with proceeds from sale of their securities directly into their bank accounts or deposit into their stock broking account or other acceptable payment modes. The guideline has also ordered that payments to beneficiaries must reach their account not later than the next working day after settlement.
The new directive will now see issuers issuing dividends/interests make funds available to the Registrar not later than seven working days after approval, under the payment of dividends and interests to investors’ schedule, while banks are made to credit the account of investors not later than T+1 from the date of receipt of mandate and funds from the Registrars. But apart from that, Registrars have been asked to now pay dividend to investors electronically on due date and advise the investors through a credit advice.
The aim is to promote competitive, efficient, safe and sound post trading arrangements in Nigeria. “This should ultimately lead to greater confidence in securities markets and better investor protection and should in turn limit systemic risk. In addition, the guidelines seek to improve the efficiency of the market infrastructure, which should in turn promote and sustain the integration and competitiveness of the Nigerian securities markets,” the circular read in part.
Market watchers commend the scope of the guidelines because for the first time, the authorities have realised that capital market plays an increasingly important role in many emerging markets in the raising of funds needed for economic development and growth. For Edosa Kennedy Aigbekaen, Director, Legal and Secretary in SEC, the transfer of ownership of securities issued through the capital raising process can only be achieved where there is an effective clearing and settlement system.
Like many other industry experts, without an efficient and effective securities settlement system, the transfer of ownership of securities to the buyer and the final payment of funds to the seller may be put at risk or result in unnecessary costs for market participants. “Clearing and settlement is therefore a critical component of capital markets. When this process functions effectively and efficiently, it allows market participants to determine accurately their payment and securities delivery obligations and to discharge those obligations in a predictable, safe and cost effective manner. Confidence in the mechanics for clearing and settling and holding securities is essential for well-functioning markets,” he said.