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
'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
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
are obliged to be fully conversant with all aspects of
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
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.
Associate, G. Elias & Co
T: +234 (1) 460 7890
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
Associate, G. Elias & Co
T: +234 (1) 460 7890
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.