SEC links failure of NSE securities lending, market making to liquidity challenges

The Securities and Exchange Commission (SEC) has attributed the failure of the securities lending and market making initiatives introduced by the Nigerian Stock Exchange (NSE) in 2012 to liquidity challenges facing the capital market.

Mr Mounir Gwarzo, SEC Director-General, stated this at the post-Capital Market Committee (CMC) news conference in Lagos on Monday.

Gwarzo said that the issue of illiquidity had become a major challenge impeding the growth of the market.

Securities lending is the market practice of temporarily transferring securities, for a fee, from the holder (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender, either on demand or at the end of the agreed loan term.

Securities lending plays an important role in capital markets by providing liquidity, which in turn reduces the cost of trading and promotes price discovery.

Market Making on the other hand, is the act of entering bid and offer prices in the automated trading system for a specified security.

The primary role of a market maker is to maintain a fair and orderly market in its particular securities of responsibility and in general, to contribute positively to the operation of the overall market.

Gwarzo said that most of the initiatives introduced by the exchange in the past to boost activities failed because of lack of access to liquidity.

He said that the commission had inaugurated a committee that would commence a study on how to address liquidity issues in the entire gamut of the market.

Gwarzo said that the committee had agreed to submit the report in the next four weeks, after which a team would be set up to kick-start the implementation process.

He stated that the securities lending and other initiatives introduced initially in the market to improve liquidity do not yield reasonable results because market operators could not access the liquidity needed to execute the deals.

“We received a report from the committee looking at the liquidity system in the market. One of the things that are challenging this market is the issue of liquidity.

“Some of the initiatives we come up with like the securities lending, and some other initiatives is because those operators do not have access to liquidity and that is why it has not been very effective.

“This committee will look at the entire spectrum of liquidity in the market, what we are going to do to address some of these challenges and they have agreed that in the next four weeks they will submit the report and we intend to come up with an implementation team,” he said.

Our correspondent reports that the NSE in 2012 commenced market making activities with the appointment of 10 market makers, with the sole aim of stabilising and boosting liquidity in the market and later appointed another 13 supplementary market makers, as supplementary liquidity providers.

Gwarzo said that the commission had made substantial progress in the areas of inculcating capital market studies in both secondary schools and tertiary institutions.

He said that the first phase of the studies would commence in April 2018.

“We have made a presentation to the CMC, they have adopted and approved the budget, we have given a deadline of end of this month for all the stakeholders to pay in their contributions and we expect by April next year, we should be able to get the first phase of capital market studies.

“We intend to work closely with Nigerian Education Resource Development Centre so that that they can inculcate the studies of the capital market both in the secondary schools and tertiary institutions, “ Gwarzo stated.