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The Scripless Securities Settlement System Business Rules and Guidelines

Proshare

Thursday, March 23, 2017/ 10:45 AM /CBN

Introduction
In furtherance of the principal objects of the Central Bank of Nigeria (CBN or the Bank) to ensure monetary and price stability, to promote a sound financial system and pursuant to the provisions of the CBN Act 2007 and the Banks and Other Financial Institutions Act (BOFIA) LFN 2010, the CBN hereby issues the following guidelines for the operation of Scripless Securities Settlement System (S4.)

The S4 as one of the pillars of global financial markets infrastructure is a system that holds securities in dematerialised form and enables book entry transfer of securities. In some cases, the system also carries out centralised comparison, and transaction processing such as clearing and settlement of securities.

The physical securities shall be immobilized or dematerialised so that they exist only as electronic records and maintains the definitive record of legal ownership.

The System holds securities accounts and enables securities to be transferred and settled by book entries according to predetermined multilateral rules. Such system allows for the transfer of securities either free of payment - where the transfer of securities does not involve funds, or against payment - where delivery of the securities occurs simultaneously with funds.

The S4 also provides central safekeeping and asset servicing, which may include the administration of corporate actions and redemptions, and plays an important role in ensuring the integrity of securities issues (securities are not accidentally or fraudulently created or destroyed or their details changed). It also holds securities in dematerialized form (electronic records).

The S4 is set to assume a critical role to guarantee a safe and efficient transfer of securities that exist to a large extent in book entry form only and has become a central point of reference for financial markets. Furthermore, it records all the settlement failures occurring during the settlement period.

It is therefore a key element in instilling settlement discipline. Given the systemic importance of the system and its strategic position at the end of the post-trading process, there is a strong need for an appropriate regulatory framework.

The modalities for the operations of the System shall be regulated by these Business Rules and Guidelines.

Functions
The functions of the Scripless Securities Settlement System shall include:
1.       Safekeeping: Securities would be warehoused in dematerialised or electronic form.
2.      Deposit and Transfers: It provides functionality for deposit and transfer of securities. It also covers the underwriting process or listing of new issues in a market.
3.      Interest and principal processing.
4.      Pledging of securities.
5.      Issuance of the Government and CBN Securities in electronic form.
6.      Auction processing.
7.      Maintenance of all records for authorised transactions.
8.     Settlement of various transactions based on DvP or FoP principles.
9.      Automatic payment of interest and maturity proceeds on due dates.
10.  Maintain a central register of securities on the accounts of all Participants in the system.
11.   Assign and cancel identification for investment instruments according to laid down rules and regulations.
12.  Notify the issuers and holders of securities about the position of their accounts.
13.  Keep separate records for each Participant.
14.  Manage records of Participants account, including personal data in case of third party.
15.   Settle the liabilities arising from the transactions with securities.
16.  Provide data to comply with the disclosure duty in line with the CBN Reporting Standard.
17.   Perform other services that may arise from the ownership and transactions with securities and its operations.
18.  Other services: The system supports additional services aside from those considered as core services. These services include Securities Lending and Borrowing, Repo Settlement and information dissemination.

Classes of Securities Managed

The classes of securities covered include FGN Bonds, NTBs, FGN Treasury bonds, CBN Securities and any other securities as may be approved by the Regulatory Authority.

Scope
The scope of these guidelines covers:
1.       Operational aspect: This part of the Business Rules and Guidelines (hereinafter called the “Rules” or “Guidelines”) regulates the operations of the system.
2.      Settlement aspect: This covers settlement of Government, CBN and any other securities as may be approved by the Regulatory Authority for trading.

Operations
The Business Rules and Guidelines shall regulate issues relating to all the functions and services performed by the S4. These include:
1.       The rights and obligations of the Regulatory Authority in the performance of its functions.
2.      The rights and obligations of the Participants in the operations of the S4.
3.      Recording of the securities issued in dematerialized form
4.      Recording of the rights and ownership of such securities.
5.      Opening securities accounts, recording and changing of ownership, settlement of the transactions in securities, notification of the issuers and holders of securities, methods for protection against errors in the performance of the functions of the System.
6.      Manner of establishing and functioning of the System.
7.      Other issues within the scope of operations as well as rendering additional services as may be required by the Regulatory Authority.

Access
Only Direct Participants shall have access to the System.

Mode of Connection
The System provides Direct Participants with the following options for connection:
1.       Graphical User Interface (GUI).
2.      Batch Adapter (BA)

Both options shall provide the same capabilities to the Participants in their interaction with the System for operations and/or information queries.

These options shall be made available to Participants at the prevailing cost as may be fixed by the Regulatory Authority.

The connection mode shall be accessible to the Participants subject to the availability of the relevant infrastructure to be provided by the Participants.

Security of Connections
The connection modes in 5.1 will be accessible through the CBN’s approved Secured Network. A Public Key Infrastructure (PKI) and token will also be deployed to ensure that all transactions on the System are digitally signed by authorized Participants only.

Participation
Participants are parties having access to the functionality of the System directly or indirectly. These include: dealers, banks, discount houses, system administrators and other Participants as may be approved by the Regulatory Authority.

Conditions for Participation
A Participant shall either be a Direct or Indirect Participant:
1.       Direct Participant shall be an authorized dealer, bank, discount house or any other financial institution as may be approved by the Regulatory Authority.
2.      Indirect Participants shall have an account (sub-account) with the Direct Participants

The System shall maintain a record of registered Participants. A Participant must have a settlement agent (another Participant, usually a bank) in NISS to support the settlement of securities operations performed on DvP basis. There are defined funds settlement agents for the Participants who do not have funds accounts on NISS.

Participants
Participants shall include:
1.       Deposits Money Banks (DMBs)
2.      Discount Houses (DHs)
3.      CBN
4.      Authorized Dealers
5.      Custodians
6.      Debt Management Office (DMO)
7.      Investors (Beneficial Owners – Individual and Corporate)
8.     Non Interest Financial Institutions (NIFIs)
9.      Other Financial Institutions, government agencies and other institutions as may be approved by the Regulatory Authority.

Roles of Participants

The under listed are the different roles that could be performed by Participants (Direct or Indirect)



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