PenCom mulls regulations to deepen securities lending for PFAs

By Cynthia Ezekwe.

The National Pension Commission (PenCom) said it is working on regulations to enable Pension Fund Administrators (PFAs) participate in securities’ lending in the Nigerian stock market.

Ibrahim Kangiwa, head, investment supervision at PenCom, Ibrahim disclosed this recently at a workshop tagged “Business Facilitation Act 2023 as a Catalyst for Deepening Securities Lending in Nigeria,’’ organised by the Nigerian Exchange Limited (NGX) in collaboration with Stanbic IBTC nominees and CardinalStone Partners.

Security lending and borrowing involves 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, in this situation, must agree to return the security to the lender on demand or at the end of the loan term.

Kangiwa noted that the provisions of section 89 of the Pension Reform Act 2014 had restricted PFAs from participating in securities’ lending, adding that the initiative to be known as ‘Security lending’ became possible with the passage of the business facilitation Act of 2023.

“As you know, section 89 of the Pension Reform Act 2014 has provisions regarding restrictions on sale and borrowing of pension assets. This has been a major encumbrance to securities lending. With the passage of the Business Facilitation Act 2023, it has now actually enabled us to proceed with developing guidelines towards securities’ lending,” Kangiwa said.

“We know the current challenges,and  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. 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,’’ she added.

Speaking on the benefits of securities lending, Ronke Ayegbajeje, relationship Manager at Stanbic IBTC pointed out that there is an opportunity for lenders to have additional income and make more money.

According to Ayegbajeje,securities lending improves market liquidity for the whole market by increasing the volume of securities potentially available for trading. For the borrower, she noted that it provides market-making opportunities as they 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,” the Stanbic relationship manager added.