This content is from: Local Insights

Nigeria: Defining the repo market

Banji Adenusi
As a form of financial derivative involving the sale of securities, repos are central to the provision of liquidity in the financing and trading of treasury securities. The Nigerian repo market, however, remains largely dominated by the money and interbank markets as the main liquidity providers. With their global attractiveness, the primary concerns in Nigeria relate to the validity, enforceability of netting provisions, transfer of title and recharacterisation of repos. Bearing in mind that repos can sometimes be said to operate in a manner similar to secured credit transactions, perhaps these concerns are worth highlighting.

In Nigeria, the laws applicable to derivatives are equally applicable to repos (section 315 of the Investment and Securities Act), while securities lending appears to be a generic term encompassing a host of transactions including repos. The approach favoured by the Nigerian Securities and Exchange Commission (SEC) is to interpret all types of dealings involving securities as falling within the ambit of section 315. The validity of these transactions is guaranteed, further taking into consideration their non-classification as unlawful gaming contracts.

The nature of the interest conferred in the sale and repurchase of the underlying securities and collateral (ranging from treasury bills, government or corporate bonds, to stocks) in a repo has often led to the distinction as to whether such arrangements are classified as an absolute transfer of title or a secured interest. Nonetheless, this is merely a matter of interpretation. In 2006, the Court of Appeal in Alhaji MU & Sons v LBN, held that in modern times, transactions are strictly documented and terms explicitly stated.

Generally, the form of interest requires the absolute transfer of title to the securities from the seller to the buyer, otherwise the risk of recharacterisation as a secured loan arises, since absolute transfer of title is alien to a secured credit transaction. The lender only acquires a right of lien and not full ownership. In repos, the buyer has an obligation to resell to the seller securities equivalent to the purchased securities (and the margin securities) and not the actual securities (that is, securities corresponding and commensurate to those purchased). Rule 389 of the SEC Rules validates this position and also applies an override where a repo agreement makes no provision for an absolute transfer.

This differentiation is crucial to the enforcement of the buyer's rights under a repo agreement in the event of the seller's default or insolvency.

Banji Adenusi

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