The National Pension Commission has said that it is amending its regulations to allow Pension Fund Administrators to trade pension contributions as securities on the Nigerian stock market.
Kangiwa said the initiative to be known as ‘Security lending’ became possible with the passage of the business facilitation Act of 2023.
The theme for the workshop was, ‘Business Facilitation Act 2023 as a Catalyst for Deepening Securities Lending in Nigeria.’
Security lending and borrowing involve the owner (lender) of the shares or bonds temporarily transferring them to the borrower in exchange for a fee. The borrower gives the lender other shares, bonds, or cash as collateral in addition to paying a borrowing cost.
The borrower also must agree to return the security to the lender on demand or at the end of the loan term.
Nigeria’s Contributory Pensions assets are N16.8trn as of the first half of 2023, according to PenCom.
Kangiwa said, “Section 89 of the Pension Reform Act 2014 has a provision regarding restriction from sale and borrowing of pensions assets. So, this has been a major incumbrance for security lending. The passage of the Business Facilitation Act of 2023 has actually enabled us (PenCom) to proceed with developing guidelines toward enabling securities lending.
“This is something that has actually been on the radar of the commission. We have been looking at it but because of the prior provisions of 2014, we could not actually proceed.
“Coincidentally, we are looking at the investment regulation that guides the investment activities of the PFAs. We are trying to update it and amend certain aspects of the regulation to broaden the available assets and also deepen it in terms of what is on offer for PFAs.
“We know the current challenge: the business environment. We know the issues with inflation and currency, so, we are trying to diversify the investment space, and it is a very good time to also include securities lending.”
The collateral for securities lending, if you are dropping cash as collateral, is 120 per cent of the asset that you are borrowing, and for equities as collateral, the borrower pays 130 per cent.
If the borrower is using government securities like FGN Bond, OMO, and Treasury bills, the collateral is 125 per cent.
Kangiwa said, “What we are doing is we have actually had an engagement with the NGX and other stakeholders to better understand and dimension how it is going to fit into the broad spectrum of the investment activities of the PFAs and also ensure we put in our own internal risk management measures within the regulation.
“The nature of the scheme is contributory and the contributor bears the risk. Once you are investing you are taking risks but those risks have to be understood. They need to understand what they are doing and put in the required mitigants.
“The plan is currently we are doing our own in-house due diligence with the regulation, once that is done, we are going to expose the regulation to relevant key stakeholders for comments in our usual way which is consultative and once that is done, we will issue the regulation and it will become effective.”
She explained, “There is an opportunity for lenders to have additional income and make more money. Imagine your idle securities making money for you. For the whole market, it improves market liquidity by increasing the volume of securities potentially available for trading.
“For the borrower, it provides market-making opportunities. You get additional income from increasing volume and short sales and also have arbitrage opportunities to make a lot of gains.
“One of the things that is included in the agreement (Global Master Securities Lending Agreement, GMSLA) for securities lending is manufactured dividend, which means that when someone is supposed to receive dividend or coupon payment on the securities they have lent out to a borrower, the borrower makes them good. That means the borrower pays them the dividend that they should have received.
“So, a lender should not worry that they will not receive the economic benefits that should accrue to them because they have given out their securities.”