By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE) – The Nigerian Stock Exchange (NSE) Tuesday said it will penalise defaulters on Market Short Selling.

The NSE said this at the Market Making, Securities and Short Selling Workshop organised in Lagos Nigeria for Capital Market Stakeholders.

From a Presentation titled “Market Operations-Key Highlights” jointly made by Olumide Lala, Head, Transformation & Change and Abimbola Babalola, Head, Surveillance both at the NSE, said Primary Market Makers (PMM) and Securities Lending Agents (SLAs) who default in the laid down rules would be penalised; especially those who sold Stocks they don’t have.

“As part of their penalty, they are given T+1 period to buy back the Securities sold” the NSE said.

Also, there would be monetary fine of 10 percent (10%) on the value of transaction.

Other penalty options include suspension from performing Market Making functions for Serial Offenders (more than one in the same year).

Apart from these, there will be termination of Market Making privileges and when a Securities Lending Agent is the defaulting party, the NSE will recommend to Securities & Exchange Commission (SEC) to suspend or terminate the SLA approval to perform the lending function.

The NSE said as part of these, it may also impose its penalties on the SLA and all penalties borne by the PMM will be absorbed by the SLA.

Ade Bajomo, Executive Director (ED), Market Operations and Technology of the Nigerian Bourse in clarifying the issue with www.investadvocateng.com said they hoped that Operators who are involved will not default, “so we have designed the system in such a way that people would not have to default” he said.

He affirmed that there is processes in place whereby there are checks to confirm that the Securities to be transacted upon are available before the transaction occurs. “Only a Market Maker is allowed to bypass this process; because they are allowed to short sell provided they have cover for the Short Sell’ he said.

Bajomo further affirmed that if they PMMs Short Sell without a cover; then they would be penalised. “If they short sell without a cover, the penalities are in various forms” he said.

The ED,     Market Operations and Technology of the Nigerian Bourse said the fines ranges from paying 10% of the value of the Security.  The Ultimate penalty is to terminate the Market Makers right to function in its role” Bajomo affirmed.

The Nigeria’s Exchange Wednesday September 05 2012 said it will commence its Market Making Programme September 18 2012.

The NSE said as part of activities heralding the kick-off of the Market Making initiative, it will hold a Market-Wide Workshop on September 11 2012 to enlighten Market Stakeholders on its rules and operational guidelines.

Lala, Head, Transformation and Change of the NSE had affirmed that the workshop will bring together experts in Market Making, Securities Lending and Short Selling with other key Capital Market Participants such as Settlement Banks, Pension Fund Administrators, Insurance Companies and Companies listed on the Exchange to name a few.

“Market Makers will play a central role in the provision of two-way quotes (comprising of buy and sell prices) for the Securities that they are making Markets on. Leveraging the Securities Lending process, Market Makers will be able to borrow Securities in order to settle ‘buy order imbalances’ from customers. A ‘hybrid’ Market, allowing both Market Makers to provide two way quotes and licensed Broker/Dealers of The Exchange to submit orders as is currently done, will be operated from the commencement date of this key initiative” he said.

According to Lala, rationalising the importance of Securities Lending in the Market Making initiative would provide for lending and borrowing of Securities which in return will enable investors earn returns on their ‘Idle’ Stocks whilst contributing significantly to Market Liquidity and Price Efficiency through legitimate investment activity in covered Short Selling.

Prior to this time, the Nigerian Bourse announced the names of the Market Makers on the Trading Floor of the NSE in the Second Quarter (Q2) of year 2012 following a rigorous selection process, where the unveiling of the ten (10) Broker/Dealer Firms selected as Market Makers was described by Oscar Onyema, Chief Executive Officer (CEO) of the Nigeria’s Exchange as a major landmark in enhancing the liquidity and depth of the second largest Market in sub-Saharan Africa.

Onyema, had in his opening remarks said for Market Making to be vibrant, the Securities Lending and Short Selling structures being put in place to support the process, must to be leveraged.

“Therefore, we need all stakeholders to actively understand the mechanics for effecting Securities Lending and Borrowing, as well as Short Sale Transactions. We encourage major asset holders such as AMCON, PFAs, Insurance companies and other entities to participate and earn additional income through the process, while helping to improve liquidity in the Market” he said.

He assured all stakeholders that the introduction of Market Making should help to drive liquidity in the Marketplace to the benefit of Retail Investors, Institutional Investors, the Broker Dealer Community as well as Regulators.

“The introduction of Securities Lending should drive efficiency through the Market; and implementation of Short Selling should allow for a more symmetric Market as investors can impose more discipline on Quoted Companies. All of this should improve the price discovery process and thus reflect the true value of Companies’ the NSE CEO said.

Market Making is the process whereby a Broker-Dealer, provides continuous two-way quotes (comprising of buy and sell prices and sizes) to the Market for the Securities that they make Markets on during the trading day-one indicating the price and size he/she is willing to buy a particular Security, called the “Bid”; the other indicating the price and size he/she is willing to sell that same Security, called the “Ask” or “Offer”.

While Securities Lending refers to the lending of Securities such as Stocks and Bonds by one party to another. The Borrower provides acceptable collateral to the Lender in the form of cash or other acceptable Securities of equal but often greater value than the lent Securities in order to protect the Lender in the event of default by the Borrower.