SEC releases framework for efficient service by central securities depositories

The Securities and Exchange Commission (SEC) has issued an Interoperability/Financial Markets Infrastructure Link Framework among Central Securities Depositories (CSD).
The Commission disclosed this in a statement on Sunday in Lagos that the framework was to enhance the efficiency of trading and settlement functions as well as align the market with international best practices.
Interoperability is the technical or legal compatibility that enables a system or mechanism to be used in conjunction with other systems or mechanisms.
SEC noted in the statement that the Nigerian capital market had witnessed remarkable growth in the last few years in terms of size, market participation and tradable instruments.
The commission said that this had impacted on the market structure in terms of composition and interconnectedness.
‘’ In the secondary market particularly, there are currently multiple trading platforms and Financial Market Infrastructures (FMIs) which provided comparative services in depository, trading, clearing and settlement activities.
“Consequently, Interoperability arrangement has become necessary in order to enhance the efficiency of trading and settlement functions as well as align the market with international best practices.
“According to the Committee on Payments & Market Infrastructures and International Organization of Securities Commissions (CPMI-IOSCO), principles on FMIs, FMI link is a set of contractual and operational arrangements between two or more FMIs that connect the FMIs directly or through an intermediary.
“The Interoperability arrangement will potentially liberalize trading and settlement activities, enhance efficient deployment of capital as well as cost effectiveness in the market,” it said.
SEC stressed that it was in this regard and the need to ensure the efficiency of the market and the protection of investors that the framework was being issued.
“In the Interoperability arrangement, as recommended by the CPMI-IOSCO Principles for FMIs, relevant provisions have been made for identification, monitoring and management of interlink risks by the respective CSDs with the overall objective of reduction in systemic risks.
“This framework is being issued in line with the mandate of the Commission to regulate the capital market with the objective of ensuring protection of investors, maintaining fair and efficient market also, reduction of potential systemic risks in trading, clearing and settlement ecosystem,” the statement added.
The Commission stated that all Securities Exchanges and CSDs were required to comply with the following; take necessary steps to put in place requisite infrastructure and systems for implementation of the framework, including any amendment to the relevant rules and regulations.
“Bring to the attention of their members and Participants, the provisions of this framework as well as publish the same on their websites.
“As well as communicate to the Commission, the status of implementation of the provisions of this framework within three months of the date of issuance of the framework.
“As part of the interoperability Requirements CSDs shall; establish a peer-to-peer link to facilitate Interoperability with each other and put in place the required infrastructure, systems, processes and risk management, for the effective operation of the interoperable arrangement and not subject each other to normal Participation (membership) rules.
“Allow for fair and access to their services based on reasonable risk related access requirements and have adequate reconciliation procedures to ensure that their respective records are accurate and current,” it noted.
The Commission said that the interoperable arrangement should allow investors and Participants settle fixed income securities on a beneficial ownership basis through any CSD.
‘’ Investors shall have the option to maintain any CSD account(s) in a single CSD of their choice or maintain any CSD account(s) in multiple CSDs of their choice or consolidate any existing CSD account(s) into a single CSD of their choice and execute a trade across multiple Exchanges under the interoperable arrangement.
‘’ The framework further stipulates that risk management requirements between CSDs shall be based on a mutually agreed arrangement and shall take into consideration the relevant risks issues among others, ‘’ the statement added.