Stories by Chinenye Anuforo
Securities lending is the practice of temporarily transferring securities, for a fee, from their 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. This practice usually requires the borrower to collateralise the transaction with cash or other securities of a value equal to or greater than that of the lent securities, in order to protect the lender against counterpart credit risk.
Securities lending plays an important role in capital markets by providing liquidity, which in turn reduces the cost of trading and promotes price discovery.
Securities lending is generally conducted between brokers and dealers and not individual investors. To finalise the transaction, a securities lending agreement must be completed. This sets forth the terms of the loan including duration, lender’s fees and the nature of the collateral.
Benefits of securities lending
Securities lending is an integral part of short selling. In these transactions, the lender is compensated in the form of agreed-upon fees and also has the security returned at the end of the transaction. This allows the lender to enhance its returns through the receipt of these fees.
The borrower benefits through the possibility of drawing profits by shorting the securities.
In all of these scenarios, the benefit to the securities lender is either to earn a small return on securities currently held in its portfolio or to possibly meet cash-funding needs.
Understanding short selling
A short sale involves the sale and buyback of borrowed securities. The goal is to sell the securities at a higher price and then buy them back at a lower price. These transactions occur when the securities borrower believes the price of the securities is about to fall, allowing him to generate a profit based on the difference in the selling and buying prices. Regardless of the amount of profit, if any, the borrower earns, the agreed-upon fees to the lending brokerage are due once the agreement period has ended.
When a security is transferred as part of the lending agreement, all rights are transferred to the borrower. This includes voting rights, the right to dividends and the rights to any other distributions. Often, the borrower sends payments equal to the dividends and other returns back to the lender.
Currently, about 93 per cent of the world’s market capitalisation is available for short selling. The ability to sell short is extremely important for making security prices more efficient and for preventing overvaluation of shares.
Furthermore, short selling is essential for ensuring the fair pricing of derivatives such as ETFs, futures and options, as well as for making it possible for entities acting as market makers to provide liquidity.
However, short selling is highly regulated around the world because of the fear of abuse. Short sellers have often been blamed for falling stock prices. Academic research demonstrates that markets that allow short selling have lower volatility, both for individual stocks and for overall market indices.
In Nigeria, however, securities lending and short selling have been ineffective even with the appointment of Stanbic IBTC, UBA, Capital Bancorp and First Bank as securities-lending agents by the market’s apex regulator, Securities and Exchange Commission (SEC).
According to operators who spoke to Daily Sun in separate interviews, market dynamics, irregularities and lack of enough securities lenders have been pointed out as the major reasons the two initiatives have been ineffective in the nation’s capital market.
Mr. Johnson Chukwu, the Chief Executive Officer of Cowry Asset Management Limited, explained that to have a market where there is short selling, there must also be security lending because short selling means selling what you don’t have, and one can do that if he/she borrows that security and sells, so the two must go hand-in-hand.
He said, “short selling is done when you expect the market to go down further and therefore you go and buy back the shares.
Today, the market is already very low though expectations are there that the market will recover. However, that has not happened.
The second factor is that the process of securities lending has not been perfected in the economic system today. There are not many security lenders today and if you look at the conditions, a security lender must be a high net worth individual and many high net worth people that are qualified may not want to expose their securities for lending purposes.
“The major securities holder today is Assets Management Corporation of Nigeria (AMCON); others are Pension Fund Administrators (PFAs) and I don’t think the market dynamics for the past two years are such that anybody will want to take the risk to borrow securities to short sell or even lending in securities for a trader to use for the purpose of short selling or transactions. So the market has not been conducive, lenders are not many and conditions to qualify as a lender are also stringent.”
The Chief Executive Officer of Pac Securities Limited, Eugene Ezenwa, also argued that securities lending and short selling are initiatives meant to deepen the market so that there will be activities in the market at any point in time but have not been pronounced because of a lot of imbalances and irregularities.
He stated that apart from the imbalances, the condition of the market presently does not encourage securities lending and short selling because the market is too volatile. Prices are very low and are still going low.
“When prices are too volatile, like what we have now, lending out stock may be a problem. Same thing goes for short selling. It is only when the market is booming and there is confidence in the market and there are buyers, that these other elements thrive and work very well,” Ezenwa explained.
Neimeth rebounds, posts 130 % growth in PBT
Neimeth International Pharmaceuticals Plc has released its 2016 year end financials with 130 per cent growth in Profit Before Tax (PBT) over the previous year’s record as turnover grew by 37 percent.
At the last Annual General Meeting in Lagos, the Chairman of the Board of Directors, Dr. ABC Orjiako, announced plans to “overhaul the corporate structure of Neimeth in such a way that it will refocus for meaningful and sustainable growth”.
In the report, it was shown that the benefit of the overhaul has been evident as percentage of cost to sales dropped significantly from 53 per cent of last year to 39 percent in 2016. As a result, the company achieved N95.4 million PBT as against a loss of N315.8 mill ion in 2015.
This achievement is a fallout of the company’s three strategic imperatives, anchoring a short term transformation, cost reduction and optimising efficiency. Significant investments were made to re-engineer manufacturing operations. New practices were adopted which contributed to better inventory management, production planning and coordination between manufacturing and sales activities most importantly, and the organization culture was transformed toward a new Neimeth.
There are indications that the turnover of the company will surge in the current year just as the profit improved in the year under review because of the ongoing effort to introduce new products and expand the market. The management is particularly elated by this performance as Chief Executive, Dr. Ebere Igboko Ekpunobi, is poised to return the company to profitability and begin to pay dividend to shareholders.
Ekpunobi explained that given the difficulties from national economy in the year under review, it was imperative to manage the company’s internal operations very closely and improve processes wherever possible. “Investments were made to re-engineer manufacturing operations and to diagnose issues for improvement.”
She added that, new practices were adopted which contributed to better inventory management, production planning and coordination between manufacturing and sales and marketing activities.
She however assured that despite the national economic challenges, Neimeth was determined to stay the course of the transformation initiated in the past.
Infotech to improve market efficiency
InfoTech Group, a globally-renowned company for wide range of software solutions for financial markets said it is set to improve the business efficiency of operators in the Nigerian capital market through its latest product called MARLIN.
To this end, the company will be hosting an information seminar on MARLIN for Nigerian Stock Exchange (NSE)’s Dealers on February 7, 2017 at the NSE premises in Lagos.
MARLIN is a brokerage industry-specific cloud platform, which has been architected to provide rapid provisioning of high end financial applications for emerging economies to boost their business efficiency. It enables brokerage houses to improve business efficiency by levering on fully managed technology service.
According to the company, MARLIN is an innovative and feature rich application that automate the entire process and workflow of all brokerage firms.
“Regarding the seminar, our aim is to address complex professional needs immediately with cutting edge technology that is relevant to addressing end user concerns and help improve efficiency and transparency,” a representative of the company said.
The company said that it intends to make recommendations to brokerage firms based on its vast working experience in African markets.
Decision makers, technology leaders and custodian are expected at the seminar.
The company’s global presence in multiple continents – Asia, Africa, Europe, and Middle East– empowers it for strong delivery channels and post implementation support regionally.
“ Our solutions for financial markets provide a unique blend of technology, domain, and methodology expertise to deliver cutting edge results at rapid speed and low delivery risk. We exploit our financial understanding to create tangible value for customers in terms of strategy as well as implementation. We specialize in designing solutions for financial markets by leveraging technology of award winning MARLIN and Capizar,” the representative said.