December 11, 2019/NSE
The Securities Lending Guidelines of The Nigerian Stock Exchange (the Guidelines) became effective in March 2012; and subsequently the Rules and Adjudication Committee of the National Council of The Exchange (the remit of which is presently subsumed into the remit of the Regulation Committee of the National Council of The Exchange) resolved at its retreat of 8-9 November 2013 that there was a need to review the Guidelines.
The purpose of the proposed amendments to the Guidelines and the Nigerian Addendum to the Global Master Securities Lending Agreement (“GMSLA”) was to provide clarity and to ensure that the use of the GMSLA by Security Lenders conform to the Securities and Exchange Commission’s Rules on Securities Lending (“SEC Rules”).
The Exchange received the approval of the Securities and Exchange Commission (“SEC” or “the Commission”) on the Amendments to the Securities Lending Guidelines of The Nigerian Stock Exchange and GMSLA (the “Guidelines”) on 24 March 2017. The Exchange via a Notice dated 22 November 2018, notified the market of the SEC’s approval, and the Rules and the Guidelines became effective on 7 January 2019.
In line with The Exchange’s vision for increased stakeholder inclusion in the capital markets industry, it became imperative for The Exchange to include retail investors in the Securities Lending Program to enable their participation and in order to widen the pool of securities available for lending.
In view of this, the Rules Governing the Inclusion of Retail Participants in Securities Lending Transactions (the Rules) were birthed and received the approval of the Commission on 17 March 2016. Consequently, The Exchange via a Notice dated 22 November 2018, notified the market of the SEC’s approval, and the Rules became effective on 7 January 2019.
This consolidated Interpretative Guidance seeks to provide clarity on the following aspects of the Guidelines and the Rules and by extension, the expectations of the respective stakeholders under the Guidelines and the Rules:
- Rules Governing the Inclusion of Retail Participants in Securities Lending Transactions
- General Standards
- Reporting and Administrative Requirements
- The Securities Lending Guidelines of the Nigerian Stock Exchange and GMSLA (as amended)
- Lending Agents
- Principal Intermediaries
- Legal Agreements
- What is Securities Lending?
Securities Lending involves the temporary transfer of securities1 from one party (the Lender) to another (the Borrower) for a fee. These transactions are ordinarily facilitated through an intermediary acting as an agent or principal intermediary between the Lender and borrower; and the borrower is obliged to return the securities, either on demand or at the end of a term. In simple terms, the transaction involves the temporary loan of securities from a Lender to a borrower.
- How can one lend or borrow securities?
Parties would typically do this through a securities lending agent who is a company duly registered as a market maker, custodian, licensed Dealing Member or any other market participant by the Securities and Exchange Commission, through whom the Lender will deposit the securities for lending and from whom the borrower will borrow the securities.
- Why would one borrow a security? Why not simply buy it?
There are instances were a security is required for a temporary time-frame. These instances include where some market participants have agreements to “make markets” in certain securities or an instance where it is important for a buyer to receive the securities by a specific date. In the latter situation, if the seller of the securities anticipates late delivery for any reason, borrowing at short notice can be a way to get hold of the delayed securities and deliver in time in which case it is cheaper and less risky to borrow as opposed to buying it out rightly. In addition, many strategies used in the financial markets rely on borrowing a security temporarily. In which case, borrowing can be used for trading (taking risk for profit), arbitrage (making riskless profit from price differences), or hedging (reducing risk) purposes.
- What happens to the legal title of the security once the security passes from the lender to the borrower?
Securities Lending involves the absolute transfer of title of the securities lent. Therefore, securities must be recalled by the Lender if it wishes to exercise the voting rights attached to the particular securities. Arrangements should be made in the agreement between the Lender and the borrower, to compensate the lender of securities for any dividend paid while any particular security is on loan. These arrangements should make each party’s obligation clear.
- What are the key benefits to securities lending?
Some key benefits to securities lending include that firstly, it provides a low risk incremental income for investors; and secondly, it provides market making opportunities and liquidity to the broader global markets.