Peter Adebayo Egunbiyi - Proshare

UNDERSTANDING THE OPERATIONS OF THECENTRAL SECURITIES CLEARING SYSTEM LIMITEDBYPeter Adebayo EgunbiyiGENERAL MANAGER (OPERATIONS)CENTRAL SECURITIES CLEARING SYSTEM LIMITEDBeing a Paper Presented at theJoint Market Workshop for Capital Market CorrespondentsDate: Tuesday, June 1, 2010

What is CSCS ? It is a Securities Settlement System (SSS). SSS’s are acritical component of the infrastructure of globalfinancial markets. In recent years, trading andsettlement volumes have soared, as securities marketshave become an increasingly important channel forintermediating flows of funds between borrowers andlenders and as investors have managed their securitiesportfolios more actively. In fact, the capital Market oftoday has automation project as an ongoing challenge.Perhaps in no other activity is the pace of innovation asgreat or the cost of failure so high as in capitalmarkets.CSCS is a limited liability company established in 1992as a subsidiary of the Nigerian Stock Exchange. TheStock Exchange currently owns 28% shares of CSCS Ltd.CSCS belongs to the Capital Market segment of theNigerian economy hence, it is an entity registered bySecurities & Exchange Commission (SEC).A “CSCS” is globally referred to as a CSD(CentralSecurities Depository). A CSD is an institution forholding securities that enables securities transactionsto be processed by means of book entries. Physicalsecurities may be immobilized by the depository orsecurities may be dematerialized (so that they existonly as electronic records)

CSCS governing provisions (Legal provisions)• The investments and Securities Act (ISA) of 2007 as amended• The Nigerian Stock Exchange Rules and Regulation• Rules made pursuant to the Investment & Securities Act of 1999(SEC Rules & Regulations 2006)• Companies and Allied Matters Act 1990 as amended• The Depository (CSCS) Rules and Regulations• Nigerian Investment Promotion Commission Act• Foreign Exchange (Monitoring and miscellaneous Provisions) ActFunctions:• A Central Depository for share certificates of all eligible securities• Sub-registry for all eligible securities• Issuance of International Securities Identification Number (ISIN)for all issues of securities• Clearance and Settlement of Securities on the principle of“Delivery versus Payment”• Issuer of Central Securities Identification Numbers to investorsand market participants• Issuer of all stock transactions related statements• Safekeeping of eligible instruments

Stock Market Delivery and Settlement Process Prior to CSCSIn most cases, it took between three (3) and twelve (12) monthsto receive shares Certificates as an evidence of purchases earliermade.Cancellation and frequent issuance and re-issuance of Certificatesafter sales of sharesConstant signature verificationCapital Gains were not exploitedSome Dealing Members sold what they did not have while somebought without money to pay.Numerous complaints on failed transactionsLoss of share certificatesRisk was very high – undue delay, manually operated,manipulations due to long transaction cycle, minimaltransparency, therefore general lack of confidence in the system.CSCS participants can be grouped into two namely:• Direct• Indirect

Registrars in Matters Relating to CSCSIn matters relating to Stock Market Securities Trading, theregistrars are to deal only with Stock Exchange licensedStockbroking firms, acting on behalf of investors/ shareholders.Verify/authenticate investors claims (i.e. share certificates andtransfer forms) as presented through the stockbroking firms.Compile and prepare a schedule of verified shares in soft and hardcopies for lodgement in CSCS.Send the schedules in locked bags through their authorizedrepresentatives to CSCS for processing.Dematerialised and unprocessed shares are reported to therelevant registrars within 48 hours.CSCS sends data information of the changes that have taken placethrough buying and selling of shares to the registrars in soft andhard copies.The registrars update registers with the stock movement detailssent to the registrars from CSCS.The registrars pay dividends to shareholders.

Settlement BanksSettlement banks can only allow Trading Accounts to be operatedon the basis of written instructions by either Dealing Memberwho maintains the Trading Account or those contained in CSCSschedule.Settlement banks can only permit Trading Account to be used forpurposes of effecting settlement of CSCS transactions.The primary mode of settlement of CSCS transactions bysettlement banks is by means of Nigerian Inter-Bank SettlementSystem (NIBSS).Trade Guaranty Fund (TGF)Trade Guarantee Fund has been established by stockbrokingfirms. The CSCS has a Nominee Account in each of the twentyone(21) settlement banks – Diamond Bank Plc, Citibank NigeriaLtd, Guaranty Trust Bank Plc, United Bank for Africa Plc, OceanicBank International Plc, Unity Bank Plc, Spring Bank Plc,Intercontinental Bank Plc, First Bank of Nigeria Plc, Sterling BankPlc, Union Bank of Nigeria Plc Access Bank Plc, Zenith Bank Plc,Wema Bank Plc, Fidelity Bank Plc, Afribank Nigeria Plc, EcobankNigeria Plc, Bank PHB Plc, First City Monument Bank Plc. SkyeBank Plc and First Inland Bank Plc. The stockbroking firmscontributed N100,000 each to the pool at their respectivesettlement banks.

Overtrading is expected to be settled from the Guarantee FundAccount. However, recourse to the Trade Guarantee Fund (TGF)has been very rare/ minimal.T + 3 Settlement Cycle – Procedure:Day T. By 4.00p.m. of Day T (Transaction Day), CSCS sends advice ofDay T stockbroking firms net financial obligations to theirrespective settlement banks. This is an information to alert thebanks about their client’s commitment on Day T+3. (Not to beused for any update by the banks).Day T + 2 On or before 12.00 noon of Day T+2, settlement banks toalert CSCS about the possibility of any broker’s inability to meethis financial obligation on Day T+3. The alert can be by fax, e-mail, letter or telephone. Stockbroking firms are to verify fromtheir settlement banks, their ability to meet the financialobligation of their Day T transactions to be settled on Day T+3.On or before 5.00p.m. of Day T+2, CSCS sends final advice of Day Ttransactions and stockbroking firms’ net financial obligations totheir respective settlement banks for processing.Day T + 3 By 9.00a.m., Inter-bank settlement advice/instruction forDay T transaction is electronically transmitted to Nigerian Inter-Bank Settlement System (NIBSS) – a subsidiary of Central Bank ofNigeria.By 9.00a.m. stockbroking firms/custodians or any high net-worthindividual must have funded their accounts for Day T transactions.

NIBSS debit or credit settlement banks’ CBN account inaccordance with the Inter-Bank settlement instruction receivedfrom CSCS Ltd.Settlement banks debit and/or credit on Day T+3, Stocksettlement effected on Day T+3. In effect, Delivery versusPayment (DVP) assured.Some CSCS Services/Products(A)Custody/Special account Service:The creation of a window for Custodian service elicited interest inthe stock market on the part of local and foreign institutional andhigh-net worth individual investors. The CSCS has continued toreceive enquiries for information on CSCS custodial service andsettlement cycle by foreign investors.This product minimizes investors risk/exposure thereby increasinginvestors confidence in our secondary market.A custodian could act on behalf of investors in such capacity as:Share purchase and sale; dividend warrant collection; bonus issuemaintenance; stock account reconciliation; fundtransfer/remittance; Annual General Meeting (AGM), etc.Nigerian Stock Market now has a good number of both Local andInternational Custodian institutions that interface with CSCS.These Custodians have taken advantage of the growing investors

interest in the Nigerian economy thus, many foreign investorsnow buy shares on the stock market through them.The flow of funds into the country will lead to the reflation of theeconomy. Thus, companies will be able to improve on theirinstalled capacity.As a consequence, more people will be employed and thoseemployed will be empowered economically.(B)The use of Shares in CSCS Depository as Collateral for Loan FacilityNotes For Guidance1. The lender should demand from the borrower, a currentstatement of stock position issued to him/her/it by CSCS Ltd2. The lender can confirm from CSCS, the statement of shareholdingissued to a shareholder/prospective borrower by CSCS (statusreport) on payment of a fee of N100.00. The Lender must obtainfrom the borrower/shareholder a letter of authority to the effectthat the borrower/shareholder has mandated the lender tocollect the stock position on his/her/its behalf.3. (a) A memorandum jointly, signed by the parties requestingCSCS to place a lien on specific quantity of the stock(s), should beforwarded to CSCS Ltd. Also, an undated letter signed by theBorrower, authorizing the Lender to sell the stocks in the event ofdefault at the expiration of the loan due date, must be given tothe Lender upon which CSCS would act when the Lender soinstructs.

(b)(c)(d)(e)(f)(g)It is essential that the Joint Memorandum be registered at theStamp Duties Office or sworn to before a Commissioner for Oathsin any Court of Law. Note that the Joint Memorandum must havebeen completed on the front and reverse sides as directedthereon and explicit therefrom, before same is stamped or swornto by Authorised Signatories of the Lender (and /or the Borrower).It is in the interest of the lender not to disburse funds until aletter advising lien placement has been received from CSCS Ltd.The Lender, the Borrower and the Stock-broking firm(s) may berequired to confirm and/or consent to the lien agreement. Thestock broking firm(s) in particular is required to expresslyascertain/confirm in writing that the Shareholder is the genuineowner of the stated stock(s) and that they therefore have noobjection on Lien being placed on the stated stock(s) by CSCS Ltd.The stock broking firm (s) must write the letter (referred to inparagraph (d) above and addressed to CSCS of which same isexpected to accompany the Joint Memorandum when forwardedto CSCS Ltd.Any insertion/alteration on the Joint Memorandum may be aground for rejection of the application.The draw down date and duration of the lien agreement must bespecifically stated (filled out) in the Joint Memorandum.4. Upon the receipt of the executed Joint Memorandum referred toin Paragraph 3 (three) above and after the lien processing at CSCShave been completed, the shareholding of the shareholder wouldbe 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 removethe lien placed on stocks en bloc when the Borrower hasdischarged his/her/its obligation under the contract. The stock(s),which should be listed on the letter of instructions from theLender, 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/itsobligation under the contract, the Lender at the expiration of theloan due-date shall:(a)(b)(c)(d)Inform CSCS of the default by the Borrower and advise CSCS toremove the lien to enable sale to be effected.With a copy of the undated letter written by the Borrower to theLender further give instructions/directives to CSCS for the purposeof the release and sale of the totality of the holdings through amandated or named stock-broking firm, which is a member of TheNigerian Stock Exchange.CSCS, if satisfied that the procedure has been complied with, willbe obliged to remove the lien on the stock(s) upon suchinformation/instructions from the Lender after the expiration ofthe loan due-date without recourse to the Borrower, moresowhen evidence of Notice of Default from Lender to Borrower isreceived/sighted by CSCS Ltd.If the Debtor/Shareholder refuses to acknowledge receipt of theNotice of Default mentioned in Paragraph ‘‘c” above, write a

letter to CSCS affirming such position/situation which may sufficefor CSCS to release the stock(s) without recourse to theDebtor/Shareholder.7. Please note that the Lender (and/or Borrower) is expected,henceforth and for every transaction, to forward to the CSCSLimited the list of the Authorised Signatories that have thecapacity to sign the relevant joint memorandum and ancillarydocuments for and on behalf of the Lender (and/or theBorrower).Note further that lien is placed on shares whose owners are thedirect Borrowers and not third party to the contract, which factthe Lender must attest to, expressly or by implication.Lien Service – Schedule of ChargesAmount given as loan (consideration) chargesN1 - N1,000,000 = 0.5 % of considerationN1,000,001 - N20,000,000 = N20,000N20,000,001 - N50,000,000 = N30,000N50,000,001 - N100,000,000 = N60,000Over =N=100,000,000 = N100,000Plus N100.00 per Security© TRADE ALERT

Trade Alert is a Mechanism by which stock investors are alertedvia GSM number on transactions that occurred in their stockaccounts in CSCS system made on the floors of The Nigerian StockExchange (NSE) detailing the time and date of transaction,security, quantity, unit price and the stockbroking firm thattransacted.How can an investor be registered in the Trade Alert System?Investors should request and insist on completing Trade AlertForms and provide the following information:-- Investor’s name, investor’s act number, Clearing House Number,GSM number and e-mail address (if available), stockbroking firmname and member code to be submitted through theirstockbroking firms to CSCS for activation.Why Trade Alert?- Trade Alert is a transparent electronic device for investor thatreveals every transaction effected in a client’s stock account tohis/her mobile phone.- with this information, the shareholder can report the transactionif he/she did not authorize it by immediately contacting TheNigerian Stock Exchange (NSE) and/or CSCS Limited for furtheraction. It is a risk minimizing scheme, hence the Nigerian CapitalMarket operators have resolved that all investors should betriggered once there are transactions on their shares and anagreed rate is charged to the transaction for the service.- This is a stock monitoring and protection device.

- The shareholder is able to have independent source ofinformation on the shares actual buying/selling price, because theexact purchase or selling prices are revealed by the device.- Before payment is made for the purchase of shares, the deviceprovides accurate unit of shares purchased by the stockbroker forthe shareholder for accounting purpose.- It is pertinent to note that those who are yet to be triggered arethose who have not submitted their completed forms to CSCS.The form can be downloaded from CSCS websitewww.cscsnigerialtd.com.(D)CSCS Online Services* CSCS online services are the service lines designed to reach out tothe stakeholders and researchers in the market. These aredeliveries through corporate web portal.* It serves all categories of CSCS customers which includeStockbroking firms, investors, Settlement Banks, Registrars, etc. Itis designed to provide these customers with online capabilitiesthat enable them view portfolio, evaluate portfolio, gettransactions histories and details on prices that stocks werebought and sold. Up to date market information can also bedelivered through the web portal.* Other value added services range from stock transfer and stockdeposit details, stock account reconciliations and market reportswith different advices for different categories of users.

* The CSCS web portal has become a robust channel for dataexchange to the players in the market. Requests that wereordinarily done by physical presence at CSCS can now be doneonline via the web portal.* The web portal has become the feedback interface for investors inthe Nigerian Capital Market as well as to the operators andregulators.(E)CSCS DIGITAL CENTREServices:1 Paper ConversionBenefits : * Maximize the Use of Filing Space* Reduce Your Administrative Cost2 Digital Document Storage and RetrievalOur Document Management Software enables you to search,access, and view your complete digital documents. Using yourpassword, protected log-in, and an elaborate choice ofpermissions that can be assigned to each document, you can thenaccess your account request specific documents, or search forgroups of documents. You may administer your digital data, Viewprint, e-mail documents, generate reports online and print outrecords in your digital archive, including history and trafficreports.

You are in total control of the information you need, when youneed it, 24/7, from anywhere there is communication link to ournetwork.3 Off Site Back-Up and Disaster RecoveryCSCS Digital Storage and Retrieval Centre has Disaster Recoveryfacilities which provide a complete storage redundant system,hosting facility and infrastructure that can host any system forhigh availability service to customers in any part of the world. OurOff-Site Back-up and Disaster Recovery Services ensures businesscontinuity. Our professionally deployed storage facility is platformindependent.4 Application HostingCSCS Digital Storage and Retrieval Centre’s Application hostingmodel hosts a central application for different organizations withsimilar/same business processes to remotely access and conducttheir business online real-time. This stimulates a virtual officeenvironment and enables staff from any of the subscribedorganizations to conduct business; attends to clients andgenerates reports irrespective of location.International Rating for CSCSThe Central Securities Clearing System (CSCS) Limited has beenrated ‘A-’ by Thomas Murray.Thomas Murray is a company established in 1994. The Companyprovides Ratings, information and data on Central Securities

Depositories, Custodian Banks, and Capital Market Systems.Thomas Murray rates, reviews and monitors the risks andoperational effectiveness of over 100 Capital Marketinfrastructures and 150 Central Securities Depositories worldwide.CSCS Membership of International Associations(a)(b)(c)The CSCS was admitted and registered as a member of Africa andMiddle East Depository Association (AMEDA) on April 20, 2006 atMarrakech – Morocco.The CSCS was also, admitted as a member of the Association ofnational Numbering Agencies (ANNA) at a meeting held in HongKong in 2008. ANNA members assign International SecuritiesIdentification Numbers (ISIN) within their respective areas ofjurisdiction.The CSCS also, became a member of the African Stock ExchangesAssociation (ASEA) in 2008 with an observer status.CSCS Future Outlook• DematerializationThe CSCS infrastructure is configured to function in a fullydematerialized stock market. Thus, CSCS is waiting for the marketto agree on the commencement of a fully dematerialized stockmarket.• Bench marking the CSD(CSCS) infrastructure.