Rasak Adeboye

The Central Bank of Nigeria (CBN) has announced that from November 3rd, settlement of fixed income securities will migrate to the CBN. By December 1st, the Bank itself will run the trading platform. It is noted that secondary fixed income market platform is currently operated by FMDQ Group with the CBN as the largest shareholder (about 15% stake) seating at the leadership of its board over the last decade. 

No doubt, the CBN wanting more control of government bonds are legitimate as they are the mainstay of monetary policy. They shape interest rates, liquidity and confidence as the CBN wants complete visibility of who is buying, who is selling, and where the money is flowing to.  In my considered view, this objective can be seamlessly achieved by a simple interoperability between FMDQ and CBN’s platforms. For market transparency and stakeholders’ confidence, it is advised that the investing public deserve more information on the shortcomings of the FMDQ fixed income trading and settlement system (if any) and provide clearer details on need for the planned takeover of the operation of fixed income market in Nigeria.

Again, a regulator that also becomes an operator can be likened to a case of being the referee and player in a football setting. It is a known fact that investors prize independence and clarity. Once the CBN starts looking like an exchange and a settlement house, confidence will definitely take a hit. Moreover, the timing of this policy is also concerning because migrating an entire market in a matter of weeks is operationally risky at any rate. One system bug, one failed reconciliation, the market could freeze, liquidity could vanish and yields could spike leading to an avoidable confidence crisis.

Further, government bonds are capital market instruments hence, they are under the purview of the Securities and Exchange Commission (SEC) regulation because they are listed and supervised by the SEC. Allowing the CBN operate both the trading and the post-trade functions in our financial system undermines the statutory authority of the capital market regulator. We look to see SEC’s response in the weeks ahead. Whilst the CBN is interested in control and policy leverage, the market is propelled by trust, predictability and rules that everyone respects. If participants feel the rules can change by fiat, they will demand a risk premium. That means higher yields for the government and more expensive borrowing for everyone else. In fact, if this process is not reversed or managed seamlessly, it has the potential of scaring away portfolio investors from the Nigerian market with profound implication on investor confidence with downside implications on key macroeconomic indicators. 

Nigeria spent the last decade building an independent and vibrant market infrastructure. Thus, this latest move by the CBN risks dragging us back to the illiquidity, shallow and undiversified reality that characterized the system in pre-2014 era when the fixed income market was fully operated by the CBN. The ideal path is cooperation by strengthening oversight of FMDQ (stricter governance) and interoperability between FMDQ and the CBN platforms. Investors (local and foreign) yearn for  financial markets that they can trust, that they can predict, that everyone respects the rules, and not a controlled /ordered market.

* Mr. Adeboye, a financial and public analyst, writes from Abuja

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