CENTRAL BANK OF NIGERIA/ SECURITIES AND EXCHANGE COMMISSION GUIDELINES AND RULES ON MARGIN LENDING FOR

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1 CENTRAL BANK OF NIGERIA/ SECURITIES AND EXCHANGE COMMISSION GUIDELINES AND RULES ON MARGIN LENDING FOR BANKS, BROKERAGE FIRMS, ASSET MANAGERS AND OTHER FINANCIAL INSTITUTIONS 1

2 Definition of Terms: In these rules unless otherwise stated: (a) (b) (c) (d) (e) (f) (g) (h) (j) (k) (l) CBN means the Central Bank of Nigeria established in accordance with the Central Bank Act. Client or Customer means any person who executes margin agreement to borrow money to buy securities in accordance with the rules and regulations issued by CBN or SEC for the purpose of margin trading from time to time. Debit Balance (DB) means the amount owed by the account holder to the market operator. It changes with additional purchases or sales in the margin account. DMO means Debt Management Office established by the Debt Management Office Act. Equity means the long market value minus the Debit Balance. Free Float means number of shares outstanding available to be traded on a securities exchange. Hypothecation means to pledge assets or securities to a lender to secure a margin facility obtained from that lender. Long Market Value (LMV) means the total market price of all securities in the margin account. It changes with fluctuations in market prices. Loan Value means the complement of CBN Reg. C times the long market value. Maintenance Margin means the minimum amount of margin that must be maintained by a client in a margin account; Margin means the amount of cash and or approved securities deposited as security by a client as a percentage of the current market value of the securities held in a margin account; Margin Account means an account maintained with a lender, (Bank or Broker/Dealer) which records transactions of margin trading; 2

3 (m) (n) (o) (p) (q) (r) Margin Agreement means the agreement between the lender and his client for the administration of margin account for the purpose of margin trading; Margin Financing means financing the client for the purpose of margin trading; Margin Trading means the buying and selling of securities by the Broker/Dealer for themselves or for their clients through margin financing; Margin Call or CBN Regulation C Call means a notice issued in writing by a lender to his/her client requiring the client to provide additional deposit in order to maintain the margin. Margin List means a list of CBN and SEC approved Securities that meet the laid down procedures and criteria and can be traded on margin in margin accounts. The List will be published by SEC monthly. Net Capital means net capital as defined under the rules of the CBN or SEC; (s) Net worth means the total Assets minus total liabilities or shareholders funds. (t) (u) (v) (w) Prudent Man Rule is defined by the actions or investments that would be taken by any man or woman acting prudently. Re-hypothecation means when already pledged securities (customer to Broker/Dealer) are re-pledged (Broker/ Dealer to Bank) to secure a facility to fund several margin transactions for different customers of the same Broker/ Dealer. Restricted Account means the equity has fallen below the CBN Reg C requirement. Sales and Purchase can still be performed in a restricted account. SAME DAY SUBSTITUTION : means a purchase and sale of securities on the same day in a margin account. If the amount of the purchase and sale are the same, there would be no additional deposit required. For example, if a customer sold N10,000 worth of securities and purchased N10,000, there would be no deposit required. 3

4 (x) (y) (z) (aa) (bb) (cc) (dd) (ee) (ff) (gg) (hh) SEC means the Securities and Exchange Commission established by The Investments and Securities Act 2007 Securities in this rule means shares of listed companies deposited as margin and which are quoted on a Securities Exchange; Single Limit means the margin loan limit allowed to a single investor. Special Memorandum Account (SMA)/Excess Equity means the margin account equity minus the CBN Reg. C requirement. Standby Margin Loan means a loan approved by a bank to a Broker/Dealer but has not been drawn down by the Broker/Dealer, therefore does not incur charges. Sophisticated Investor means any investor that has a net worth of over twenty million Naira in securities, cash or real estate assets or earns annually the sum of five million Naira whichever comes first. However he or she must have been actively investing for a minimum period of three years. Third Party Margin Accounts means margin accounts held on behalf of a beneficiary and are managed by professionals such as Asset Managers, Trustees, Financial Advisers, Lawyers, Custodians, Accountants etc, Trustee in this rule means a financial institution or a depository having legal title to securities, and holding such securities in trust for the benefit of another person or entity and owes a fiduciary duty to that beneficiary. Tenancy-in-Common account means, if one party in the joint account dies, that person s portion of the account reverts to his or her estate, and not to the partner in the account. Joint Tenants with Rights of Survivorship account means that if one party dies, the survivor retains the entire account. Minor means any individual that is less than sixteen years of age at his or her last birthday. 4

5 MARGIN ACCOUNT PREAMBLE When a Broker/Dealer firm extends credit to a customer engaging in securities transaction, the transaction must be executed in a margin account. In addition when a customer opens a margin account with a broker-dealer, the customer is required to sign a Margin Agreement. When a Bank or Financial institution operating under the Banking and Allied Matters Act extends credit to a Broker/Dealer to support the purchase of securities or the facility is used for the purposes of onward lending to the customers of the Broker/Dealer in question for purchase of securities, that transaction must be carried out in a Margin Account. The Broker/Dealer must sign a Margin Loan Agreement with the Bank. For the purposes of this Margin Rule book and guide lines as stated in all sections of this document including the introduction, Margin rules apply to all transactions that are carried out in the Capital or Financial Markets where credit is sought and used to purchase securities. GENERAL RULES GOVERNING MARGIN LOANS (Regulation A) The general rules governing margin loans cover the types of securities that may be purchased on margin as well as the profile of investors that may participate in margin trading. Strict rules apply for the general rules regarding marginable securities as not all securities may be purchased on margin. Investors are advised to check the list as published by the Securities and Exchange Commission from time to time before giving mandate to a Brokerage Firm or Bank. Rule 1. REQUIREMENTS OF A MARGIN AGREEMENT: Any margin agreement between the Broker/Dealer to Bank and Broker/Dealer to customer shall entail the following: (iii) consent of the customer to pledge his securities to the broker-dealer as collateral for the loan the broker-dealer may extend to the Customer. consent of the Broker/Dealer to pledge to a Bank combination of securities from several customers who have approved margin accounts opened and operating within its operations for the purposes of obtaining a margin loan from the Bank for onward lending to its customers. consent of the customer to grant to the broker-dealer permission to re-hypothecate (pledge) the securities at a bank in order to use the securities as collateral for a loan. The amount of securities that the broker-dealer may use is limited. 5

6 (iv) (v) (vi) (vii) consent of the customer that the broker-dealer may re-hypothecate the customer s securities with those of other bonafide customers as collateral for a bank loan. That Securities belonging to Customers trading in Cash accounts and whereby customers have not signed any margin agreements with the Broker/Dealer may NOT be used as collateral for getting a Margin Loan from a Bank. That the Bank extending the loan to the Broker/Dealer shall request to sight the margin loan agreements of the customers whose securities are being hypothecated. That the Broker/Dealer grants the Bank permission to sell securities if the margin requirements or equity maintenance requirements are not met after the mandatory time required by these margin rules has lapsed. (viii) That the Broker/Dealer firm or Bank shall send its customers a statement of the amount of interest that will be charged in a Margin Account. The statement shall contain the following:- 1. the method by which interest will be computed, 2. the conditions under which interest charges will be imposed, 3. method of determining the debit balances on which interest will be charged. (ix) A written statement shall be sent to all customers to whom credit is extended on a monthly basis. (x) The Central Securities Clearing System (CSCS) will ensure a technological link for all securities that are hypothecated or placed on lien for the purposes of Margin Trading. In addition the CSCS will report to the SEC on a monthly basis a comprehensive list of hypothecated securities and the Brokerage houses to which those securities belong. 6

7 Rule 2. CATEGORIES OF MARGIN ACCOUNTS All operators in the financial market who wish to operate margin accounts for customers, third party margin accounts or to trade for their own account shall open either: (a) Bank Margin Account, with an institution operating under the Banking and Other Financial Institutions Act and regulated by the CBN. These accounts are restricted to institutions or body corporate that are registered by SEC to act as Capital Market Operators, or to Sophisticated Investors trading for their own account, or, (b) Brokerage Margin Account, with Brokerage or Dealer firms operating under the Investments and Securities Act and that have been registered by the SEC and operating as a licensed Broker or Dealer on a registered Securities Exchange. These accounts are open to all categories of Investors who deal with the Brokerage Firm and may include but are not limited to members of the general public, Corporate bodies, Investment Clubs, Investment Advisers, Trustees, Lawyers, Accountants as well as individuals. Rule 3. (a) (b) (c) RULES FOR OPENING AND MAINTAINING MARGIN ACCOUNTS (regulation B) Opening Margin Accounts: When opening a new margin account, all material facts about the customer shall be obtained and all existing Know Your Client rules must apply. Documents required for opening the Margin Account: A customer shall sign a margin agreement, which state that the customer shall abide by the rules and regulations of the CBN, the SEC and a Securities Exchange. The margin agreement shall contain two separate agreements: (iii) the credit agreement, and the hypothecation agreement. In addition to the agreements the customer shall have a valid Identification such as National Identity Card, a Drivers License or International Passport. A utility bill and such information as address and physical address must also be supplied. 7

8 Copies of these documents shall remain in the file at the firm operating the account. (iv) If the account holder is a Corporate Body then the identification of the authorized personnel mandated to operate the account shall be submitted. (d) (e) Margin Credit Agreement. By signing the credit agreement, a customer recognizes that he or she is borrowing funds from the firm and is responsible for payment of interest and repayment of the loan amount. The margin agreement shall contain, amongst others, provisions which authorize the broker to : (iii) (iv) (v) Extend margin trading and margin facilities to its client up to the limit approved by CBN Regulation C. Choose stocks only from the SEC approved Margin List Sell not more than the prescribed amount State the approved period within which to make a margin call. Indicate that the account holder has a period of 24 hours from the date of settlement to respond to the margin call. (f) (g) Hypothecation Agreement. The hypothecation agreement shall state that the customer hypothecates (pledges) his or her securities to the brokerage firm or Bank and gives the firm in question the right to re-hypothecate the securities to secure the loan at a different Bank or Financial Institution. The firm shall pledge an amount equal to 140% of the cash deposit made by the customer. If a customer wishes to open a Third Party Margin account as Guardian, Custodian, Executor, and Trustee or in any other legal capacity, the Broker/Dealer firm is required to obtain proper legal documentation prior to opening the account. 8

9 Rule 4. TYPES OF MARGIN ACCOUNTS A. Individual account. An individual shall be eligible for trading on margin according to CBN and SEC rules, (iii) All material information about an individual must be provided before opening an individual margin account. An individual may only operate Margin Accounts at a Broker/Dealer firm. Individuals who wish to operate Margin Accounts at a Bank must be sophisticated investors. B. Joint Margin Account. When opening a joint margin account, whether a tenancy-in-common or Joint Tenants with rights of survivorship accounts, information shall be obtained from both parties in the margin account. Documents and cheques to be signed must be endorsed by both parties. C. Corporate Margin Account. When opening a Margin account for an incorporated entity, a copy of the Board resolution authorizing the opening of the margin account shall be obtained. (iii) The Resolution shall list those individuals authorized to act and take investment decisions on behalf of the company. The Company s Memorandum and Articles of Association shall specify that the company is authorised to open investment accounts and or carry out the investments. D Partnership Margin Account. When opening a Margin account for a partnership, information required shall include each partner s name, address, citizenship, signatures and a copy of the partnership agreement. The partnership agreement shall specify those partners authorized to execute transactions on behalf of the partnership. 9

10 (E) (F) Fiduciary Margin Account. When opening a fiduciary margin account, a copy of the document authorizing the fiduciary relationship shall be submitted in addition to other documents that may be required. In the case of a trust account, the document shall be a trust agreement. Minor s Custodian Margin Account. (iii) A minor custodian account shall be opened by a custodian on behalf of a minor. A custodian is required to act under the prudent man rule There shall be one custodian for each minor s Margin account. (G) Discretionary Margin Account. (iii) When opening a discretionary margin account there shall be a written Power of Attorney which shall be limited or full, signed by the customer and kept in a file at the Brokerage firm. In a discretionary margin account, the customer shall give an employee of a Brokerage firm (usually the account executive or Asset Manager) the authorization to make purchases and sales in the Margin account without first obtaining the customer s permission. Limited Power of Attorney only gives the authorized person the right to buy or sell securities in the margin account, while full Power of Attorney allows the person to buy and sell, remove assets, withdraw funds as well as make other investments outside the securities market, on behalf of the customer. (iv) Each discretionary Margin Transaction order shall be approved promptly by a principal or Manager at the firm in question. (v) They shall be reviewed frequently to ensure that transactions are not excessive in size or frequency, in view of the financial resources and character of the account, provided that if a customer notifies a Broker/Dealer of the name of the security, whether to buy or sell the security, and the number of shares or units to be bought or sold, leaving discretion only as to time and price, this is not considered to be a discretionary order and the rules guiding discretion shall not apply. 10

11 (H) Margin Accounts Requiring Employer Approval. (iii) Rule 5. If an employee of a Broker/Dealer firm wishes to open a Margin account with another Broker/Dealer firm, prior written authorization of the employer is required. If an employee of a Bank wishes to operate a Margin account with a Broker/Dealer, he or she shall obtain approval from his or her Principal or Manager authorizing the account opening. If the employee is working in a Bank that has recently or in the past loaned funds to the Broker such Margin accounts are strictly prohibited. If a broker/dealer has never borrowed funds from a particular Bank but intends to do so in the future, it must first close all Margin accounts owned or operated by employees of that Bank before accepting a loan facility or Margin facility from that Bank OPERATION OF MARGIN ACCOUNTS A. Margin accounts shall be operated in a manner that conforms to accepted industry practices and the rules and regulations of SEC regarding the Broker/Dealer to Customer, and the CBN regarding the Bank to Broker/Dealer or Bank to Individual Sophisticated Investors. B. Transfer of Margin Accounts i. If a customer wishes to transfer a Margin account from one Broker/Dealer firm (the carrying firm) to another Broker/Dealer firm (the receiving firm),the customer must give written instructions to the receiving firm. ii. Both member firms are required to coordinate their activities in order to expedite the transfer and then the normal Securities Exchange requirements for transfer of accounts shall apply. C. Closure of Margin Accounts. If a registered representative of a Broker/Dealer learns of the death of a customer, the representative shall issue instructions to mark the account deceased and cancel all open margin transactions. No other action should be taken in the account until the proper legal documentation is received and the executor orders disposition of the assets. 11

12 (iii) (iv) (v) The documentation required include a copy of the death certificate, affidavit of domicile and letter of Administration. In the event of incompetency or bankruptcy of a customer, no action shall be taken in the account without the presentation of the proper papers and the instructions of the legally appointed representative. In the absence of the above situations a Customer may close a Margin account at his or her own discretion provided that all debit balances are paid off and the account is in good standing. (D) Margin Account Statements. All activities in a customer s Margin account shall be listed in the customer s account statement. A Broker-dealer is required to forward quarterly statements for inactive accounts (accounts that have had no trading activity for three months straight) and monthly statements for active accounts to the clients, which account statement shall list all current long positions, debits and credits, and account balances. The Bank or Stockbrokerage Firm Customer Statement shall contain the following: i. The total amount of margin facility granted ii. iii. iv. The Securities Purchased The accrued interest The Long Market Value (as at the date of the Statement) v. The Debit Balance (as at the date of the Statement) vi. vii. vii. viii. ix. The Equity (as at the date of the Statement) The Excess Equity (Special Memorandum Account or amount that can be withdrawn as at the date of the statement) Buying Power of the Account Number of CBN Regulation C calls the account has received within the period. Whether the account is in Restricted mode or not. (if in restricted mode then a red stripe will appear along the top border of the statement) 12

13 (E) Mail Retention for Margin Account Holders. All Broker/Dealer are required to retain a customer s mail upon request. If a customer is travelling domestically, the mail shall be retained for the customer for two months and if travelling abroad, mail shall be retained for three months. Mail to be retained may include margin transaction confirmations and Account Statement. (F) Customer Confirmations. (iii) A confirmation of every Margin transaction shall be sent to the customer. The confirmation shall be prepared by whoever is responsible for Purchase and Sale in the firm in question and may be sent out electronically such as or in hard copy depending on the customer preference which shall be the only record a customer has of a specific margin transaction. All confirmations shall contain the following Information: a. Trade date. b. Settlement date. c. Whether the transaction was a purchase or sale. d. Description of the Security. e. Amount of the Security. f. Execution price. g. The capacity in which the firm acted (i.e agent as Broker or principal as a Dealer) h. The total amount due. i. The debit balance of the margin facility. j. Commission charged 13

14 k. The time of execution and contra party should be available (upon the customer s request) Rule 6. (a) (b) (c) (d) Rule 7. MARGIN LENDING TO BROKER/DEALERS AND CUSTOMERS Customers purchasing securities may pay for them in full or borrow a portion of the purchase price from the broker-dealer. In order to cover the loan for the customers, the Broker/Dealer shall have a Margin facility on stand-by from a Bank that operates in the Clearing system of the Capital Market. The loan extended by the Bank to the Broker/Dealer to support the onward lending to customers shall also be treated as a margin loan and the same rules apply. Loans from the Bank to the Broker/Dealer for purposes of onward lending to customers shall be regarded as stand-by margin loan and shall only accrue interest and charges when the customer of the broker/dealer have drawn down by making purchases of securities on margin or when the broker dealer draws down to fund its own trading. It shall be unlawful for a Bank to grant a margin facility for the purchase of its own securities or for the securities of a company in which it has substantial interest. BANK AND BROKER/DEALER MARGIN TRADING ACCOUNTS If a Bank or Broker/Dealer is trading for its own account and wants to make some purchases on margin it shall do so in a separate Margin Account designated for that purpose and that account shall comply with these Rules and Regulations as if it were a routine Customer. A Bank or Broker/Dealer shall: a. Not comingle Assets of its own Margin account with the assets of its customers; b. Comply with all reporting requirements regarding its own account to the relevant authorities; c. Not re-hypothecate the securities of its customers to support trading for its own account; 14

15 d. Comply with account opening procedures and have the relevant documentations regarding corporate accounts. Rule 8. CENTRAL BANK OF NIGERIA REGULATION C For Margin loans and margin lending, the margin requirement shall be 50% of the total purchase price of the securities or group of securities or as may be adjusted by the Central Bank of Nigeria from time to time. Rule 9. CENTRAL BANK OF NIGERIA (CBN) REGULATION C CALL A. When a purchase is made in a margin account and the investor or customer has used margin to make the purchase, a Reg C call is initiated. The margin requirement shall be deposited within twenty four hours of the settlement date. A customer initiating a margin transaction will receive a margin or Reg C call. If the amount owed is N1,000 or less, the brokerage firm will generally ignore the call and simply add it to the amount of the loan in the account. B. Only marginable securities shall be used to meet a Reg C call C. Securities in a margin account shall be held as collateral to support the purchases made on margin. The Bank or Broker/Dealer shall have recourse only to those Securities held in the Margin Account and cannot seek additional liability from the Customer. D. Collateral used to support margin accounts shall be sold by the Broker/ Dealer or Bank in any lawful manner in accordance with all existing rules: If the account holder has failed to meet CBN Reg C Call; In order to meet an equity maintenance requirement; Provided that there shall be no recourse to the customer for additional liability if the Broker/Dealer or Bank fails to sell collateral held in margin to meet a Margin Call. E. The amount of margin financing that a Bank or brokerage firm may 15

16 lend to any single client shall be determined by SEC and CBN on a quarterly basis. F. In determining the total amount of margin facilities given to any single client, the term single client may include the following: In the case of an individual, the margin facilities shall be deemed to include the margin facilities granted to the individual, spouse, and the companies over which the individual exercises control and the partnership in which he is a partner. In addition, an individual is deemed to exercise control over a company if the individual or the individual s spouse, severally or jointly:- (a) Holds, directly or indirectly, at least 50.1% of the shares of that company; (b) Has the power to appoint, or cause to be appointed, a majority of the directors ; (c) Has the power to make, or cause to be made, decisions in respect of the business or administration of that company, and to give effect to such decisions, or cause them to be given effect to. (iii) Rule 10. Where such single client is a company, any margin facilities extended to the company, its subsidiaries and associated companies shall be deemed to be margin facility extended to such a single client. COMPONENTS OF THE MARGIN ACCOUNT A customer purchasing securities on margin shall establish a long margin account which shall comprise of the following: (a) Long Market Value (LMV); (b) Debit Balance (DB); (c) Equity (EQ). 16

17 Rule 11. LOAN VALUE (LOANS GIVEN AGAINST SECURITIES) All Marginable securities shall have a loan value which is expected to cover all future lending against securities and represents the maximum percentage of a security s current market value that a brokerage firm or Bank can lend to a customer. The loan value is equal to the complement of the CBN Regulation C requirement which is presently 50%. Rule 12. THE DEBIT BALANCE The Debt balance represents the amount owed to the Brokerage firm or Bank. A change in the current market price shall have no effect on a customer s debit balance. Rule 13. DETERMINATION OF EXCESS EQUITY To determine the excess equity in a margin account, subtract the Reg C requirement (based on the current market value of the securities) from the equity in the account. Rule 14. SPECIAL MEMORANDUM ACCOUNT (SMA) A. Excess funds in a margin account shall be recorded in a Special Memorandum Account or Section. These funds may be used to offset a debt balance when a margin call has been made on the account. The Broker /Dealer or Bank is required to apply the funds from the SMA to offset margin calls first before resorting to selling securities. Funds credited to a customer s SMA shall include: i. Dividends on stock owned in the account; ii. iii. iv. Interest on bonds owned in the account; Voluntary cash deposits made by the customer and Proceeds from the sale of securities in the account B. An entry in the account shall only be deleted if the customer withdraws the SMA as cash or uses it to purchase securities but decreases in market value shall not affect SMA. 17

18 Rule 15. Rule 16. RESTRICTED ACCOUNT An account shall become restricted when the equity falls below the initial CBN Reg C requirement. PURCHASE IN A RESTRICTED ACCOUNT A. Where an account is restricted, the customer can make additional purchases in the account by meeting the CBN Reg C requirement on the purchase. B. The Customer may determine that any additional funds deposited are used to bring down his or her debt balance. Rule 17. SALES IN A RESTRICTED ACCOUNT A. Upon the sale of securities in a restricted account the sale proceeds shall be used to reduce the debit balance. The customer s consent shall not be required as all funds from any sale shall always be used to bring down the debit balance until it meets the CBN Reg C requirement. If the CBN Reg C requirement has been met then the balance of the sale shall be credited to SMA and may be withdrawn by the customer. B. Where the withdrawal of SMA shall cause the account equity to fall below CBN requirements, the customer would not be able to withdraw any further funds except when the equity returns to compliance with the CBN Reg C requirements. Rule 18. SAME DAY SUBSTITUTION A. A purchase and sale of securities on the same day in a restricted margin account where the amounts of the purchase and sale are the same, there would be no additional deposit required. B. where the purchase is greater than the sale, the customer would need to deposit the CBN margin requirement on the difference. C. where the sale is for a greater amount than the purchase, SMA shall be credited with the balance of the net sale proceeds. 18

19 Rule 19. MARGIN MAINTENANCE REQUIRMENTS FOR BROKER/ DEALER AND BANK REQUIREMENTS FOR MARGIN ACCOUNTS A. In addition to the requirements set by the CBN Regulation C and the SEC, margin accounts are subject to the industry requirements of a Securities Exchange, and the Bankers Committee etc, which shall set internal standards and rules to cover both initial transactions and the equity maintenance requirements of all margin accounts. B. Broker/Dealer and Banks may establish their own internal margin maintenance requirements however those standards must not fall below the rules stated in this section. C. Customers must maintain a minimum equity of 25% of the Long Market Value (LMV) of the margin account. This means that equity must not fall below 25% of the current market value of the securities in the account. If the account equity falls below 25% of the LMV then the account owner will be issued a maintenance call. The maintenance call will be issued for the difference between the approved maintenance equity level and the current equity level. Internal guide lines of Banks and Broker/ Dealers can increase the maintenance level for equity in a margin account but they cannot reduce it. When a maintenance call is made the call must be met immediately. It can be met by depositing cash or fully paid up marginable securities. D. Initial Requirement for purchases in a Margin account shall not be less than One million naira. If the customer starts with a lower amount then that first deposit will not qualify for margin lending and it will be treated as a cash transaction. E. Brokerage firms and Banks may increase the initial deposit requirement but cannot reduce it. Initial requirements set by internal rules of broker/ dealers or Banks shall not exceed ten million naira Rule 20. MARGIN REQUIREMENTS FOR EXEMPT SECURITIES A. NIGERIAN GOVERNMENT BONDS The CBN in consultation with the DMO shall determine the margin requirement for each issuance of Nigerian Government Bonds at the time of issuance. 19

20 B. STATE GOVERNMENT, LOCAL GOVERNMENT AND OTHER GOVERNMENT AGENCY BONDS The CBN in consultation with SEC shall determine the margin requirement for State, Local Government and other Government agencies Bonds. Rule 21. MARGINABLE SECURITIES Marginable securities are securities that have been approved by CBN and SEC to be traded on margin in consonance with these Rules and Regulations. The CBN and SEC shall determine, approve, and SEC shall publish the approved list of marginable securities, The Margin List, every month. The Compliance officers of a Securities Exchange, Banking institutions and Broker/Dealers shall ensure that securities that are traded in a margin account for which a margin facility has been extended are securities that are contained on the approved margin list. Rule 22. CRITERIA FOR DETERMINING MARGINABLE SECURITIES A. The criteria for determining marginable securities shall include: i. The Average three month trading volume, which shall demonstrate active trading in the security in relation to float. A security not traded for two months straight out of the last three months shall not be approved as a marginable security, even if there is heavy trading in the third and last month. ii. iii. iv. The average last ten days trading volume, shall demonstrate an active demand for the security over the last ten days not determined by release of quarterly results. Only companies that have been trading for at least 12 months shall be included in the margin list iv. Market capitalization as well as the share price of the securities shall be used by CBN and SEC in determining Marginable securities. 20

21 B. Exclusion from the List of Marginable Securities The following are excluded from the list of marginable securities i. Securities offered through private placements whether for a private company or by a public company prior to a listing by introduction; ii. iii. iv. All publicly traded banking securities Securities where the average trading volume of the company s shares on a Securities Exchange over a 3 month period demonstrates low active demand for those securities; Securities that have not traded actively for three months straight; v. Securities of unlisted Companies; v. Securities of Companies that have been listed on a securities exchange for less than 12 months; vi. vii. viii. Initial Public Offerings and shares of newly listed companies; Bonds issued by Public companies that are not listed. Securities of a company that have ceased to exist or filed for bankruptcy; x. Securities of a company that no longer meets the criteria for determining marginable securities. Provided that SEC in consultation with CBN may add to, omit or remove from the margin list securities or companies if in its judgment such action is necessary or appropriate. Rule 23. INVESTOR ELIGIBILITY Trading on margin and operating a margin account require a minimum level of sophistication on the part of the investor. In this regard and due to the level of understanding required by the investor for owning and operating a margin account, these accounts will be restricted to only knowledgeable investors. 21

22 A. Individual Investors: An individual investor shall satisfy the following conditions before he/she will be eligible to operate a margin account: i. Shall not have been convicted of a Financial Crime or not have filed for Bankruptcy. ii. iii. Shall open his/her margin accounts at a Brokerage firm provided that a Sophisticated Investor shall be eligible to open a margin account at a Bank Shall declare if there is a third party relationship in the ownership of the margin account. (Margin Accounts opened for Minors or in cases where there is a Trustee relationship, the Trustee or Custodian shall meet the rules for eligibility), Provided that a bank which accepts securities as asset collateral in a normal loan in the normal course of business with an individual customer has not engaged in margin lending. B. Corporate investors:(eligibility to operate Margin Accounts) i. Asset managers, investment Advisers, Broker/Dealers, Banks, Investment Houses, Financial Advisers, Corporation Treasury Departments, etc shall upon satisfying the requirements prescribed in these rules be eligible to operate a margin account. ii. All Pension Fund Administrators (PFA) are excluded from owning and operating Margin accounts. Assets of Pension Fund Administrators shall not be pledged, hypothecated or re-hypothecated for the purpose of securing credit to operate a margin account or to carry out purchase of securities on margin. iii. Banks and Broker/Dealers acting on behalf of PFAs are not permitted to Hypothecate securities belonging to a PFA whether separately or in a combined arrangement. iv. other Corporate investors operating under the Companies and Allied Matters Act are permitted to own and operate margin accounts. v. A Board resolution giving authority to the Management to open such an account is required.the board resolution shall contain the name of the individual or individuals authorized to make investment decisions 22

23 regarding the account including monetary and investment limits, where necessary. vi. Any Corporate Body opening a Margin account directly with a Bank shall be registered with SEC vii. Margin trading carried out by a brokerage firm on behalf of customers shall be handled by a firm: (a) (b) (c) viii. with a valid registration with the SEC in good standing and a valid membership with a Securities Exchange, which shall fulfill such other conditions as may be prescribed by the SEC from time to time, Margin Trading carried out by any Stockbrokerage firm, Investment Adviser, Asset Manager or Bank for its own account only shall: (a) Meet all the conditions prescribed in these Rules and regulations (b) Meet other conditions of the CBN and other regulatory agencies. C. Training/Certification of Market Operators Personnel in Margin Lending and Trading. i. All investor representatives, Advisers, Asset Managers, Account Managers, Lawyers, Accountants, Financial Consultants, and any other individual that is responsible, licensed or authorized by law to advise individual or corporate investors on investment strategy, Securities Trading or investment in general shall be educated on Margin lending and trading and the Risks associated with it. ii. iii. If the market operator is a Bank, then its shall get a certification from a CBN approved institution for Margin finance If the market operator is a Broker / Dealer then it shall get a certification from a SEC approved institution for Trading in margin 23

24 D. Technology for Margin Trading/financing i. All market operators that meet the set down criteria for eligibility for trading in margin must equally meet a minimum requirement for having the right technology ii. iv. The Technology shall be able to assist the Market Operator with the necessary regulatory reports as well as all standard requirements for client reporting and notification such as account statements and trading confirmation etc. If the Market operator is a Bank then the CBN shall certify that adequate technology is in place at the Bank to justify its margin financing as a lender. All institutions operating under the Bank and Other Financial Institutions Act shall obtain their Technology certification from the CBN. v. If the market operator is a Broker / Dealer then the SEC shall certify that adequate technology is in place to justify its trading in margin whether for its own account or on behalf of others. All other market operators operating under the Investments and Securities Act shall get their Technology certification from the SEC. vi. Market operators who will not be managing margin accounts for others or third parties but wish to trade only for their own accounts and have been exempted from certain rules for eligibility notwithstanding the exemption, are required to have the adequate technology to engage in margin trading even though they are only trading for their own account. Rule 24. MARGIN TRANSACTION REPORTING A. Margin Transactions carried out at all Banks shall be reported to the CBN by the Bank lending on margin. Any transaction that qualifies and comes under the Regulation C requirement of the CBN shall be reported quarterly to the CBN. The reporting requirement shall include the following information: i. The market operator that engaged in margin borrowing ii. iii. iv. The securities that were hypothecated The securities purchased on the margin facility The margin limit. 24

25 v. The maintenance requirement communicated to the Margin account holder. vi. vii. viii. ix. Whether the transaction was a combined transaction for on lending to customers or whether the transaction was for the account of the market operator. The value of the transaction The total shares traded on margin Whether the Margin facility needed Re-hypothecation. B. Margin Transactions carried out at the Broker/Dealer level shall be reported to the SEC. The reporting requirement shall include the following: i. The name of the investor ii. iii. iv. The securities that were hypothecated The securities purchased on Margin The Margin Limit v. The Maintenance requirement communicated to the Margin Account Holder vii. viii. ix. ix. Whether the account is a discretionary account or whether the investor is acting in full authority. The type of Margin Account whether it is a third party account such as Custodian Account, Trustee or fully owned by the investor making the decisions. The value of the transaction The total shares traded x. Whether the Margin facility needed Re-hypothecation C. If the CBN is of the opinion that a Bank has over extended margin facilities to a Single Client or to a combination of Clients, it shall direct the Bank to: 25

26 i. Reduce the outstanding position of the client or combination of Clients; ii. iii. Prohibit the Bank from further margin financing; take any other action as CBN may deem fit. D. If SEC is of the opinion that a Broker/Dealer has over extended margin to a Single Client or to a combination of client, it shall: i. Direct the operator to reduce the outstanding position of the client or combination of Clients. ii. iii. Prohibit the operator from further trading on margin take any other action as it may deem fit E. The CSCS must submit to SEC on a monthly basis a comprehensive list of hypothecated securities as well as securities placed on lien. The list must be separated by Brokerage house, customer and location of securities such as account numbers etc. F. Full Disclosure; Where a Bank or broker/dealer extends margin facilities to:- (iii) (iv) Any of its partners, directors, agents or employees; Any firm in which any of its partners, agents or employees is interested as a partner, agent, employee or guarantor; Any company in which any of its directors, agents or employees is interested as director, agent, employee or guarantor; Any company in which any of its directors, agents or employees hold shares, The lender shall provide full disclosure, which shall be included in its quarterly returns to the CBN and SEC. Rule 25. A. APPOINTMENT OF COMPLIANCE OFFICER Every Market Operator that owns or operates a Margin account or manages a margin account on behalf of investors or has a margin 26

27 account in its system, shall appoint a Margin Compliance Officer for the purposes of monitoring full and strict compliance with all the rules governing Margin Lending and Margin Trading in Nigeria; (iii) (iii) (iv) The Compliance Officer shall be well trained in the Rules and Guidelines on Margin lending and shall attend regular training sessions as organized or supported by the CBN or SEC to maintain a minimum Knowledge requirement in the personnel of the Market Operator; The officer shall be certified by the CBN as a Margin Compliance Officer if the Institution is a Bank; The officer shall be certified by SEC as a Margin Compliance Officer if the Institution is a Broker/ Dealer. Exemption: All Asset managers or Investment Advisers that operate their margin accounts in the house of other market operators such as a Broker/Dealer are exempted from appointing Margin compliance officer. B. The Duties of the Margin Compliance Officer The Margin compliance officer shall be responsible for:.. (iii). (iv). approving Margin accounts of investors whether in the Banks, or with the Broker/Dealer all CBN reporting requirements, if it is a Bank all SEC reporting requirements, if it is a Broker/Dealer all the Securities Exchange or Capital Trade Point reporting Requirements (v). recommending and maintaining an Internal Margin Maintenance guide lines for investors within its system. (vi). educating the other personnel within the system of the Bank or the Broker/Dealer of the Rules of Margin as well as periodic updates and adjustments as may be made by the CBN or SEC from time to time. (vii). educating the investors of the risks of margin trading. 27

28 C. All Securities Exchanges registered with SEC shall maintain Principal Margin Compliance Officers and such officers shall inspect the operations of all Brokers from time to time to ensure that they are in full compliance with the terms and the spirit of these Rules and Regulations. All infractions and violations shall be reported to the CBN if it involves a Bank and to SEC if it involves a Brokerage Firm. Such reports are mandatory irrespective of whether the Securities Exchange is handling the infraction or violation. Rule 26: Valuation of Securities used for Collateral in Margin Accounts. A. The collateral that a client may deposit into his margin account and the method of valuation thereof shall be limited: To the value based on the last price of the securities on the preceding market day at the Exchange for securities quoted on the Securities Exchange,. To the value based on the last done price on the preceding day for Government Securities. 28