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SEC Issues Infrastructure Link Framework For Securities Depositories

Management of the Securities and Exchange Commission, on Sunday, said it has issued an Interoperability/Financial Markets Infrastructure Link Framework among Central Securities Depositories to enhance the efficiency of trading and settlement functions, besides aligning the market with international best practices.

Interoperability is the technical and/or legal compatibility that allows a system or mechanism to be used in conjunction with other systems or mechanisms.

According to the SEC, the Nigerian capital market has witnessed remarkable growth in the last few years in terms of size, market participants and tradable instruments, which has impacted market structure in terms of composition and interconnectedness.

In the secondary market particularly, there are currently multiple trading platforms and Financial Market Infrastructures (FMIs) providing comparative services in depository, trading, clearing and settlement activities.  

The commission’s statement explained: “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,” the statement added.

It is in this regard and the need to ensure the efficiency of the market and the protection of investors, the SEC continued, that the framework is being issued, stressing that “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 as well as reduction of potential systemic risks in trading, clearing and settlement ecosystem.”

In this regard, the Commission explained that all Securities Exchanges and Central Securities Depositories (CSDs) are required to put in place requisite infrastructure and systems for implementation of the framework, including any amendments to the relevant rules and regulations.

They must also bring to the attention of their members and participants the provisions of this framework, publish the same on their websites;  while notifying the commission about 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 must 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 participants (membership) rules; allow for fair and open access to their services based on reasonable risk related requirements; and have adequate reconciliation procedures to ensure that their respective records are accurate and current;

The commission said the interoperable arrangement shall allow investors and participants settle fixed income securities on a beneficial ownership basis through any CSD in which they maintain CSD account(s) irrespective of the Issuer CSD in which the securities are domiciled and/or the investor CSD account of the counterparty;  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 provided that the fixed income securities are listed on the respective multiple Exchanges. Consolidation of any CSD account(s) shall be subject to relevant Know-Your-Customer due diligence requirements and on the basis of beneficial owner authorization.

Also, participants shall have the choice to maintain any CSD account(s)/membership in a single CSD of their choice or maintain any CSD account(s)/membership in multiple CSDs of their choice or consolidate any existing CSD account(s)/membership on the basis of beneficial ownership into a single CSD of their choice and execute a trade across multiple Exchanges under the interoperable arrangement provided that the fixed income securities are listed on the respective multiple Exchanges; while investors and Participants shall under the interoperable arrangement settle their trades successfully irrespective of the Securities Exchange where the trade is executed provided that the fixed income securities are listed on the respective multiple Exchanges; 

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; even as all complaints and disputes shall be handled in line with the rules and regulations of the SEC on complaint management and all new charges associated with the interoperable arrangement against Participants shall be subject to approval of the commission. 

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