OTC trade: Banks to commit N1bn collateral

THE Central Bank of Nigeria (CBN) has directed all Deposit Money Banks in the country to commit to a  N1 billion collateral each in order to qualify to partake in over the counter (OTC) trade deals. The collateral comes in the form of government securities.

OTC trades are usually on unlisted stocks and bonds which are conducted through dealer networks rather than central exchanges. It is  a route usually used by smaller companies and those that did not meet listing requirements.

“The Central Bank of Nigeria (CBN), in an effort to enhance efficiency in trading and post-trade activities and build confidence in the financial markets, hereby directs all Deposit Money Banks (DMBs) to pledge collateral of N1 billion (one billion naira) worth of Government/CBN securities for OTC trade settlement,” it stated in a circular signed by its Director of Financial Markets Department, Mr Alvan Ikoku.

According to the circular, the policy is aimed at ensuring enhanced efficiency in trading and post-trade activities; buil as well as ensure confidence in the sector.

The directive, which becomes effective from June 1, 2018 is compulsory to all Deposit Money Banks (DMBs) with intentions to participate in over the counter trade settlements.

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Deposit Money Banks would be disqualified/excluded from the market by the apex bank should they fail to “top-up a pledge” as at when it is required of them to do so.

Note that Deposit Money Banks, according to the CBN, are financial institutions in the country with licenses “to mobilize deposits from the surplus unit and channel the funds through loans to the deficit unit and performs other financial services activities.” Examples of DMBs are: Diamond Bank Plc, Access Bank Plc, Sterling Bank Plc, Unity Bank Plc, and Wema Bank Plc, etc.