Introduction
The Central Securities Clearing System, CSCS, has become a major operator in the Nigerian stock market, as stock transactions cannot be completed without interfacing with the CSCS. The Central Securities Clearing System's depository, clearing, settlement and delivery functions ensure the speedy and transparent conduct of share transactions on the Nigerian Stock Exchange. For a shareholder, a CSCS account has become a pre-requisite for share transfers, whether buying or selling shares.
The Central Securities Clearing System is a subsidiary of the Nigerian Stock Exchange and is licensed by the Securities and Exchange Commission, Nigeria, as a capital market agent to handle central depository, clearing and settlement services for transactions in the Nigerian stock market. It began operations in April 1997.
By its depository function, the Central Securities Clearing System has created a central depository for the shares of the quoted companies on the Nigerian Stock Exchange. What that means is that shareholding certificates of individual shareholders are captured into the depository, which maintains a record of them. By dematerializing the shareholdings into electronic records, share transactions are expedited. Now, a shareholder can have all his shareholdings in electronic information, domiciled in his CSCS account, a statement of which can easily be obtained. In several respects, that eases the processing of transactions, giving the shareholder better opportunity to respond quickly to market action and take advantage of market trends.
The Central Securities Clearing System controls the clearing process of the share transactions on the Nigerian stock Exchange. Information on the day's transactions is forwarded to the CSCS by the Stock Exchange, enabling the latter to process them for settlement. Settlement is the process whereby the stockbrokers' accounts are charged or given value for the shares they've bought and sold respectively. The Central Securities Clearing System has appointed Clearing Banks, which work with it to complete the clearing process.
Transactionary Processes at CSCS
A stockbroker is required to have a settlement account with at least a clearing bank. Such account is expected to be funded for any share purchase the stockbroker would undertake on a given day.
The stockbroker's account is debited for such trades through the settlement process, while the selling stockbroker's account is credited. Through its settlement procedures and rules, the Central Securities Clearing System ensures the smooth conduct of those
transactions and that parties meet their obligations. In effect, it is not expected that a shareholder, whose shares have been sold by his stockbroker, will fail to receive the proceeds and in good time. The clearing and settlement process is designed to ensure that value is transferred within the stipulated time frame.
Part of that process is the delivery of stocks to a buyer. The CSCS, as an integral part of the clearing and settlement process, ensures delivery of stocks to the party that bought. That is guaranteed by the requirement that shares be deposited in the CSCS depository, prior to the trade. In effect, a stockbroker is not permitted to sell without the availability of the stocks meant for the sale. This protects the buyer as the shares are in the CSCS depository and are transferred to his account as payment settlement is done. By that, there is convergence of payment and delivery. That process is required to be concluded on the fourth day, that is "T + 3" (transaction day plus 3).
Before CSCS, there was the difficulty associated with the transfer of shares and the production of certificates for traded securities between stockbrokers and the registrars. It usually takes several months to conclude, but with the advent of CSCS Plc, transaction circle is now T+3 (Three working days after transactions). The CSCS system operates a T+3 settlement circle for transactions on The Nigerian Stock Exchange floors in conformity with the practice in emerging markets. The T+3 settlement circle is facilitated by the immobilization of share certificates in a central location, which in turn
enables trades to be processed in an electronic book-entry form. In effect, physical delivery of share certificates to fulfill settlement obligations has been replaced by electronic credits and debits to shareholders stock position.
Procedures for using shares in CSCS depository as collateral for loan
In recent years, trading and settlement volumes especially withthe Securities Settlement System (SSS) have soared, as securities markets have become an increasingly important channel for intermediating flows of funds between bor and lenders and as investors have managed their securities port more actively.
Before the global financial crisis eroded the value of stocks on the nations bourse, one of the collateral for assessing loans from financial institutions ishares in the Central Securities Clearing System (CSCS). T currently this trend seems to have fallen but the CSCS still believe investors need to understand how they can use such shares in depository as collateral for loan facility.
1.The first step is for the lender to demand from the borrower, a current statement of stock position issued to him/her/it by CSCS Limited.
2. The lender can confirm from CSCS, the statement of shareholding issued to a shareholder/prospective borrower by CSCS (status report) on payment of a fee of N100.00kobo. The lender must obtain from the borrower/shareholder a letter of authority to the effect that the borrower/shareholder has mandated the lender to collect the stock position on his/her/its behalf.
3.(a) Thirdly, a memorandum jointly, signed by the parties requesting CSCS to place a lien on specific quantity of the stock(s), should be forwarded to CSCS Limited.
Also, an undated letter signed by the borrower, authorising the lender to sell the stocks in the event of default at the expiration of the loan due date, must be given to the lender upon which CSCS would act when the lender so instructs.
(b) It is essential that the Joint Memorandum be registered at the Stamp Duties Office or sworn to before a Commissioner for Oaths in any Court of Law. Note that the Joint Memorandum must have been completed on the front and reverse sides as directed thereon and explicit therefrom, before same is stamped or sworn to by Authorised Signatories of the Lender (and /or the Borrower).
(c) It is in the interest of the lender not to disburse funds until a letter advising lien placement has been received from CSCS Limited.
(d) The lender, the borrower and the stock-broking firm (s) may be required to confirm and/ or consent to the lien agreement. The stock broking firm(s) in particular is required to expressly ascertain/ confirm in writing that the Shareholder is the genuine owner of the stated stock(s) and that they therefore have no objection on Lien being placed on the stated stock(s) by CSCS Limited.
Furthermore, The stock broking firm (s) must write the letter as earlier referred and addressed to CSCS of which same is expected to accompany the Joint Memorandum when forwarded to CSCS limited. Any insertion/alteration on the Joint Memorandum may be a ground for rejection of the application. The draw down date and duration of the lien agreement must be specifically stated (filled out) in the Joint Memorandum.
4. Upon the receipt of the executed Joint Memorandum and after the lien processing at CSCS have been completed, the shareholding of the shareholder would be moved into a CSCS Reserved Lien Account with the interest of the lender noted. This will be communicated to the parties, thereafter.
5. The lender (and no other party) should advise CSCS to remove the lien placed on stocks en bloc when the Borrower has discharged his/her/its obligation under the contract.
The stock(s), which should be listed on the letter of instructions from the Lender, is/are moved back to the original stock-broking firm(s) from where the stock(s) was taken.
6. When the borrower defaults and/or fails to discharge his/her/its obligation under the contract, the Lender at the expiration of the loan due-date shall:
(i) Inform the borrower of his /her default and this will put the borrower on notice that the lender can exercise his option to sell the stocks to realize the benefit of the contract.
(ii) Inform CSCS of the default by the Borrower and advise CSCS to remove the lien to enable sale to be effected. With a copy of the undated letter written by the borrower to the lender further give instructions/directives to CSCS for the purpose of the release and sale of the totality of the holdings through a mandated or named stock-broking firm, which is a member of The Nigerian Stock Exchange. CSCS, if satisfied that the procedure has been complied with, will be obliged to remove the lien on the stock(s) upon such information/ instructions from the Lender after the expiration of the loan due-date without recourse to the Borrower, moreso when evidence of Notice of Default from Lender to Borrower is received/sighted by CSCS Limited. If the Debtor/Shareholder refuses to acknowledge receipt of the Notice of Default, write a letter to CSCS affirming such position/situation which may suffice for CSCS to release the stock(s) without recourse to the Debtor/Shareholder.
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