Liquidity squeeze threatens settlement at equities market

The inability of investment firms and stockbrokers to access amenable funds is threatening efficient settlement at the Nigerian equities market.

Also threatening the market is the constriction of the income sources and portfolio of most operators

Many stockbroking firms and stockbrokers have been found to be carrying out transactions at the market without adequate funding of their accounts, thus exacerbating settlement risks.

Sources said at the weekend that stockbrokers were facing liquidity squeeze as many of the operators have been consigned to the low-end of trading income in the absence of large activities in the primary market and access to funding windows.

Nigerian equities have made average gain of more than 30 per cent so far this year, but several portfolios and investment firms remain under the red.  The equities had lost N3.98 trillion in the past three years. The stock market had been on a losing streak since 2014. Investors lost N1.75 trillion in 2014 and followed this with another loss of N1.63 trillion in 2015. Against the general expectation that political transition and new government will quicken a rebound, equities closed 2016 with a net capital loss of N604 billion. Aggregate market value of all quoted equities on the Nigerian Stock Exchange (NSE) closed 2016 at N9.247 trillion as against N13.226 trillion recorded at the start of trading in 2014, representing a net capital loss of N3.98 trillion.

A report by NSE obtained at the weekend indicated that non-funding of trading and personal dealing accounts by dealing firms and stockbrokers has been undermining the effectiveness of the settlement system at the stock market.

The report noted that some operators have been carrying out “transactions without adequately funding their accounts thereby exposing the market to settlement risks”.

Under the extant rules of the NSE, stockbrokers are expected to fund their accounts in time to ensure effective settlement, in line with the T+3 settlement system at the Exchange.

Under the “Rulebook of The Exchange 2015”, in order to have a valid transaction, unless otherwise stipulated at the time of a transaction all shares dealt in by a dealing member shall be deemed to be fully paid while all transactions entered into by dealing members shall be for net prices as between the buyer and seller. Also, any offer to buy or sell at a price named, shall be funded.

Besides, compliance manual and code of ethics require all operators to have adequate processes in place to prevent potential conflicts of interest and insider dealing.

Authorities at the Exchange have already served a notice that it may henceforth take disciplinary actions against operators of unfunded accounts.

The Council and management of the Exchange are empowered to exercise their disciplinary powers against a dealing member, where such dealing member “is or has been in breach of clearing and settlement rules”.

“Consequently, all dealing members and concerned employees as appropriate are strongly cautioned to desist from carrying out trades without adequately funding their trading accounts. Please be advised that the Exchange will not hesitate to bring disciplinary action against erring firms and their authorised dealing clerks,” the notice stated.

Liquidity enhancement and ways of improving access to funding for market operators were some of the highlights of the discussions at the recent capital market stakeholders’ meeting.

President, Association of Issuing Houses of Nigeria (AIHN), Mr. Sonnie Ayere recently called for a review of the practice rules and scope of operations of stockbroking firms to make them more viable and profitable.

According to him, the current operational scope of stockbroking firms limits their access to large pool of capital and restricts them from exploring viable business opportunities that can help them to build up substantial capital and profitability.

He described stockbroking firms as “endangered species” as they face significant challenges in funding their businesses, since they cannot easily access the short-term money markets.

“They cannot access formal repo markets for liquidity, and this adversely impacts their sales and trading operations. Liabilities are required to fund an institution’s creation of assets but, institutions under Securities and Exchange Commission (SEC) purview have been denied access to the domestic market’s deepest liquidity pool,” Ayere said.

He pointed out that without a review and expansion of the current operational scope for stockbroking firms, the securities businesses will remain very small with very little if any, impact on the wider economy.

According to him, while all financial markets have two types of intermediation-bank-based intermediation and market-based intermediation, only bank-based intermediation works efficiently in Nigeria. Market -based intermediation is much less efficient as operators face significant challenges accessing wide sources of funding and thus have very inefficient sales and trading operations or maturity transformation activities.

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