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GROUP MEMBERS

OSUBOR JENNIFER ISIOMA & EZENWANNE KENECHUKWU ALBERT

MATRIC NUMBERS

08AG06798 & 08AG06757

DEPARTMENT

BANKING AND FINANCE

COURSE CODE

BFN 416

LECTURER

DR (MRS).BABAJIDE

ASSIGNMENT

SECURITIES MARKET MANAGEMENT IN AN EMERGING ECONOMY

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WHAT ARE SECURITIES

It is most evident today in the business world that many though invest in bonds and other
form of securities; do not actually know what securities are. Securities are instruments that
signify an ownership position in stock or a bond, or rights to ownership by an option. Secondly
securities mean certificates containing a promise to pay a specified sum of money to the holder at
a specified time in the future. After issue, they can be traded and so the holder at the time of
redemption need not be the person to whom it was originally issued. Examples of securities are;
shares, bonds, preference shares, ordinary shares, debentures and stocks.

The role of stock market development has assumed a developmental role in global economies
following the observable impact the market has exerted in corporate finance and economic
activity. Given the growing interest in the impact of stock market on economic development
several researchers have posited reasons for this growing interest. For instance, Rouseau and
Wachtel (2000) advanced four reasons for the importance of stock market on financial
institutions even when equity issuance is a relatively minor source of funds. First, an equity
market provides investors and entrepreneurs with a potential exit mechanism. According to them,
venture capital investments will be more attractive in countries where an equity market exists
than one without an adequately functioning public equity market. When the market exists, the
venture capital investor knows that it is possible to realize the gains from a successful project
when the company makes an initial public offering. The option to exit through a liquid market
mechanism makes venture capital investments more attractive and might
well increase entrepreneurial activity generally. The impact of the market will be felt well
beyond the firms that actually do use the market for raising capital (Benchivenga and Smith,
1991).Secondly, capital inflows – both foreign direct investment and portfolio investments – are
potentially important sources of investment funds for emerging
market and transition economies. International portfolio investments have grown rapidly in
recent years as portfolio managers around the world have begun to understand the importance of
international diversification. Portfolio flows tend to be larger to countries with organized and

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liquid markets. Thus, the existence of equity markets facilitates capital inflow and the ability to
finance current account deficits. Thirdly, the provision of liquidity through organized exchanges
encourages both international and domestic investors to transfer their surpluses from short term
assets to the long-term capital market, where the funds can provide access to permanent capital
for firms
to finance large, indivisible projects that enjoy substantive scale economies. Thus, given this
scenario the importance of domestic resource mobilization cannot be underestimated.
Finally, the existence of a stock market provides important information that improves the
efficiency of financial intermediation generally. For traded companies, the stock market
improves the flow of information from management to owners and quickly
produces a market evaluation of company developments. As firms increasingly link the
compensation of their managers to stock price performance, a deep equity market may also
provide managers with incentives to exert more effort in monitoring risky, high-return projects.
Furthermore, the valuation of company assets by the stock market provides benchmarks for the
value of business assets, which can be helpful to other businesses and investors, thereby
improving the depth and efficiency of company assets generally. However the role of the stock
market in improving economic growth has also faced criticism overtime. Stiglitz (1985) had
argued that stock markets had the tendency to reveal information through frequent instability and
changes in equity prices.
The management of the securities/capital market.

The development of the Nigeria Capital Market dates back to the late 1950s when the Federal
Government through its ministry of industries set up the Barback committee to advise it on ways
and mean of setting up a stock market. Prior to independence, financial operators in Nigeria
comprised mainly of foreign owned commercial banks that provided short-term commercial
trade credits for the overseas companies with offices in Nigeria (Nwankwo, 1991). Their capital
balances were invested abroad in the London stock Exchange. Thus, the Nigeria Government in
an attempt to accelerate
economic growth embarked on the development of the capital market. This is to provide local
opportunities for borrowing and lending of long-term capital by the public and private sectors as
well as an opportunity for foreign-based companies to offer their shares to the local investors and
provide avenues for the expatriate companies to invest surplus funds.

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Based on the report of the Barback Committee the Lagos Stock Exchange was set up in 1959.
With the enactment of the Lagos Stock Exchange Act 1961, it commenced business in June,
1961 and assumed the major activities of the stock market by providing facilities for the public to
trade in shares and stocks, maintaining fair prices through stock-jobbing and restricting the
business to its members. The Lagos stock exchange was renamed the Nigeria Stock Exchange in
1977, with the following objectives;
1) To provide facilities to the public in Nigeria for the purchase and sale of funds, stocks and
shares of any kind and for the investment of money.
2) To regulate the dealings of members interest and those of their clients.
3) To control the granting of a quotation on the stock exchange in respect of funds, stocks and
shares or any company, government, municipality local authority or other corporate body.
4) To promote, support, or propose legislative or other measures affecting the aforementioned
objectives.
According to its Memorandum and Articles of Association, the Exchange is incorporated as a
private non-profit organization limited by guarantee to undertake three basic functions, which
include;
1) Provide trading facilities for dealing in securities listed on it.
2) Oversee activities relating to trading in securities.
3) Enhance the flow of long-term capital into productive investment and ensuring fairness of
prices at which quoted securities are traded. Initially trading activities commenced with two
Federal Government Development Stocks, one preference share and three domestic equities. The
market grew slowly during the period with only six equities at the end of 1966 compared with
three in 1961. Government stocks comprised the bulk of the listing with 19 of such securities
quoted on the Exchange in 1966 compared with six at the end of 1961. (Nnanna, Englama and
Odoko, 2004). Prior to 1972 when the
indigenization exercise took off, activities on the Nigeria stock exchange were low. That was
true both in terms of the value and volume of transactions. For instance, the value of transactions
grew from N1.49million in 1961 to N16.6million in 1971. Similarly, the volume of transactions
grew from 334 to 634 over the same period. Though the bulk of the transactions were in
government securities, which were mainly development loan stock through which the
government raised money for the execution of its development plans. Accordingly, with the

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promulgation and implementation of the Nigeria Enterprises Promotion Decree of 1972, which
its principal objectives include; promoting capital formation, savings and investment in the
industrial and commercial activities of the country, the low level of activities in the stock market
increased as Nigerians gained the commanding heights of the economy.
However, following the criticisms that the Nigerian stock Exchange was not responsive to the
needs of local investors, especially indigenous businessmen who wished to raise capital for their
businesses, the NSE, introduced the Second-Tier Securities Markets (SSM) in 1985 to provide
the framework for the listing of small and medium-sized Nigeria companies on the Exchange.
Six companies were listed on this segment of the stock market by 1988 and by 2002 over twenty-
three companies had availed themselves of the opportunities offered by this market (Nnanna,
Englama and Odoko, 2004).
The major instruments/products available in the Nigerian capital market to date include; the
industrial equities otherwise referred to as ordinary shares; industrial loans such as debentures,
unsecured zero coupons, preference bonds/stocks, specialized project loans/infrastructural loans,
government stocks/bonds, unit trust schemes, unlisted corporate/industrial loans stock, among
others. The market is currently divided in to two broad categories, namely equities and debt
markets. The former are instruments or products that confer ownership rights on the investor,
while the later are interest-bearing obligations with fixed or floating interest-rates.

Appraisal of the Capital Market in Nigeria


The capital market has opened the floodgate to relatively inexpensive fund surpassing the
possibility of self-financing available to indigenous enterprises. Such funds are usually used for
expansion of existing businesses or to cushion the effect of inflation so that businesses may
continue as going concerns. It also afford indigenous enterprises and entrepreneurs the
opportunity to be introduced into the economy in general through entry into the securities
market. This enables shares that haven’t been privately held to be offered to the general market
or international market for inflow of foreign investment. The entering of an indigenous company
into the capital market enhance its prestige and reputation, especially its products and credit
worthiness in the eyes of the public as conferred upon it by the new status.
(Bayero, 1996). Public debt management and government securities market operations have a
direct effect on the securities markets as a whole because governments play a key role in

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supporting the development of fixed-income securities markets. Well-functioning government
securities markets give public support to private fixed income market (both cash and derivatives)
in the form of a pricing benchmark, while they also provide a tool for interest rate risk
management. For these reasons, the development of a well-functioning government bond market
will often precede, and very much facilitate, the development of a private-sector corporate bond
market. The focus on a risk-based approach to debt management, with the establishment of
interest rate-, liquidity- and currency benchmarks, has
contributed to a more prudent risk profile of the government balance sheet while it also has
helped to
improve the transparency, predictability, and liquidity of domestic fixed income debt markets
more in general. As a result, an increasing number of emerging markets countries are creating
the conditions for a more successful participation in the global financial system.

CONCEPT OF SECURITIES

In any capital market there are several securities that are traded between long-term fund
raisers and investors acting through their stockbrokers and issuing houses. These securities can
be categorized into two major classes:

1. Fixed Income Securities.


2. Variable Income Securities.

Fixed Income Securities

These are investment instruments that earn the investor a fixed and certain return throughout
the period the securities are held by the investor.

Characteristics of Fixed Income Securities

1. They offer a fixed and almost sure income to the investor irrespective of the fortunes of
the company that issued them.

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2. Interest and fixed dividends must be paid as and when they are due otherwise default
might ensure which can lead to a foreclosure on the assets of the company
3. The longer the tenure of the fixed income securities, the higher would the interest rate or
fixed income due to the associated higher risk.
4. The fixed income or dividend on a preference stock which is a percentage of the nominal
value of the stock may or may not be cumulative.
5. The higher the risk associated with a fixed income securities the higher would be the
fixed income it attracts

Factors that determine the yields on fixed income securities

1. With the level of interest rate in the economy; when interest rate falls, the price of
fixed income securities rises and the yield drops.
2. Borrowers financial position; the financial position of borrower is lower than that of
the government in terms of absolute safety of the debts and therefore investors
expects higher yields
3. Tenor of the loan; as the life expectancy maturity of the loan increases so does
investors expect a higher yield to compensate for the risk.
4. General economic outlook; if there is an expectation of economic boom, low inflation
rates and high interest rates in the economy at large investors will be attracted to
variable income securities.

Example of fixed government securities is government bond and stock.

Types of Securities

Bonds

A bond is a long-term loan issued in the form of a negotiable security by a corporation,


government, or government agency. Bonds are loans from the bondholder (buyer) to the
issuer (seller). A bond is a promise by the issuer to pay back the amount loaned to it called
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(principal) plus an agreed to amount of interest on or before a stated date. The interest may
be paid periodically during the life of the loan or all at once when the loan is paid back.
Bonds are also called fixed income instruments, because the amount of income that the bond
will generate is fixed by the stated interest rate of the bond. The date when the loan becomes
due is called the maturity date of the bond.

Bonds are also identified by the way they are owned. They could either be:

 Bearers Bond
 Registered Bonds

Bearers Bond

This kind of bonds belongs to the person who holds them and ownership is not otherwise
recorded. Eurobonds are issued in this format. While this form of ownership carries the risk of
losing the certificate, it offers the highest degree of anonymity and that is why in some countries,
the United States for example, they are no longer allowed.

Registered Bonds

Here the owner’s name is recorded with a transfer agent and interest payments are made
either by check or electronic credit. The book entry method, where no certificate is issued and
ownership is merely recorded in a ledger, grows in popularity because it reduces transfer costs,
simplifies handling, and decreases the probability of losing the certificate or having it stolen.

The reason a bond is called a debt instrument is because there are no ownership rights in a
bond. The promise to pay is what distinguishes bonds from stocks. The holder of a bond is a
creditor, the holder of a stock is an owner.
Other types of bonds are:

1. General Obligation and Revenue Bonds


2. Treasury/Government Bonds
3. Participating Bonds

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4. Convertible Bonds
5. Zero Coupon Bonds
6. High Yield (Junk) Bonds
7. Warrant Bonds or Bonds with Warrants
8. Indexed Bonds
9. Sinking Bond Funds
10. Commercial Paper
11. Mortgage backed securities
12. General obligation bonds usually refer to government bonds and are backed by the full
faith and credit of the taxing power (country, municipality, etc.) that issues them.
13. Revenue bonds are payable only from some specific source of taxes (highways tolls,
water bills, etc.) and are not subject to the general taxing power of the issuer.
14. Treasury/Government Bonds
15. A country’s long term financing needs are met by issuing bonds that mature from
anywhere after one year up to essentially as long as a country wants and to which the
public is willing to commit its money. Average lengths run to 20 or 30 years and are
called long-term bonds. These long-term bonds are watched closely by the market as an
indication of where long-term interest rates will be heading.
16. Long -term bonds may be subject to being called before they mature. Callable means that
the issuer has the right to pay off the bond sooner than the maturity date. If a bond is
subject to being called before it matures, both dates are mentioned in its listing. Thus a
bond that pays 5% and matures in June 2010, but is callable after June of 2005 is referred
to as the 5% of June 2005-2010. Treasury’s usually issue split-date callable bonds during
periods of high interest rates in order to have the opportunity to pay them off sooner if
interest rates drop. The government would then issue new bonds at a lower rate.
17. Treasury/Government Notes
18. Notes usually have a maturity of from 2 to 10 years and are known as intermediate term
investment instruments. Notes are not callable before their maturity date. Notes usually
pay interest semiannually.
19. Treasury/Government Bills

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20. T-bills, or bills, are the shortest term Treasury security and usually mature in 3, 6, 9 or 12
months. T-bills carry no coupon rate of interest but are sold at a discount from par. Par is
the face amount of the bond. This means that the price paid for a T-bill is less than its
value at maturity. Thus a 12 month T-bill yielding 5% would be sold at a 5% discount
from the face value of the bond.
21. Participating Bonds
22. These bonds not only bear a fixed rate of interest, but also have a profit-sharing feature.
23. The bondholder is entitled to participate along with shareholders in earnings of the
corporation to the extent described in the bond contract. These are used widely in Europe
and are usually issued by weak companies as an added inducement to attract buyers.
24. Convertible Bonds
25. Usually all that the bondholder is promised is the principal and interest. There is an
exception to this rule and it is called a convertible bond. This is a bond that at its
maturity, or some other stated date, may be converted to a stated number of common
shares in a corporation. A new corporation without much money or track record for
paying off bonds or a corporation with a low credit rating might offer convertible bonds
because the borrowing costs of straight bonds would be prohibitive. Convertible bonds
rank below conventional bonds but ahead of any equity in their claim on the assets of a
company.
26. Zero Coupon Bonds
27. Zeros, as they are frequently referred to, are issued at a discount from their par value.
Unlike a conventional bond, zeros pay no interest between issuance and redemption but
only at maturity. Although the bondholder forfeits immediate income from the zero, the
yield to maturity is computed on the assumption that the coupon interest is reinvested at
the prevailing rate when received. Consequently, as interest rates fall the reinvestment is
presumed to be at the lower rate, reducing the yield but increasing the price of the bond.
Likewise, if interest rates rise, the bond’s price will fall, but the coupons are reinvested at
the higher rate, raising the yield to maturity. With no cash flow from coupon payments to
act as a cushion, zero prices swing rapidly up and down in response to even minor
changes in the interest rate. In times of high interest rates, zeros are very popular in order
to lock in those high rates.

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28. High Yield (Junk) Bonds
29. The top four rankings of any rating service are usually known as investment grades.
Bonds in these categories may generally be bought for fiduciary accounts unless
specifically restricted. Fiduciary accounts include pension plans and some bank trust
accounts. Any bond below investment grade is referred to as a “ junk” bond. but, in the
terms of the market, it is called a high-yield bond. It is called junk, because it describes
the quality of the bond. Brokers and dealers prefer the term high yield because it
30. sounds better and also because it describes the yield. The yield is how much a bond
31. pays, or the interest rate. The bond must pay a high level of interest because of its low
32. rating. The risk of the issuer not being able to pay off the bonds is high, so the potential
33. return to the investor must also be high in order to justify taking the risk. The low rating
is
34. a result of the rating service determining that the issuer is not in sound financial shape
35. and may not be able to honor its commitment to pay off the bonds.
36. Warrant Bonds or Bonds with Warrants
37. These bonds contain the right (warrants) to purchase shares of common stock at a
38. specified price. Usually the warrant price is higher than the current market price.
39. Indexed Bonds
40. These bonds are used in periods of high inflation. The interest payments are indexed to
41. the inflation rate.
42. Sinking Bond Funds
43. This is not technically a separate category of bonds. Any bond issue may have a
44. “sinking” feature. With this feature, the issuer agrees to set aside a certain amount of
45. money each and every year for the eventual retirement of the bond issue. A bond issue
46. is retired when it is fully paid. After a specified period, redemptions may begin and
47. bonds may be called. This results in the shortening of the life of the issue so that even if
48. an issue was originally offered with a 20-year maturity, the bonds might be called after
49. 10 or 15 years. Because the sinking fund deposits are to be used only for the retirement
50. of a specific outstanding issue, the existence of a “sinker” increases the bond’s safety
51. and marketability. Payments by the issuer to a sinking fund are mandatory and the
52. failure to make them in a timely manner could threaten the issuer with default.

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53. Bondholders should not assume that a sinking fund absolutely protects them from loss,
54. although it may help increase the level of confidence that the bonds will be fully paid
55. Commercial Paper
56. Commercial paper is short- term debt issued by a corporation. Commercial paper has a
57. maturity date of less than one year, sometimes just a few months. It is an unsecured
58. promissory note and may be issued at a discount to the par value. Interest on
59. commercial paper is usually paid only at the maturity date.
60. Mortgage backed securities
61. Mortgages are a conveyance of title to property that is given as security for the payment
62. of a debt. When a person obtains a mortgage on a house he or she actually signs two
63. instruments. The first is the note that is a simple promise to pay, like any other note.
64. The mortgage document is the document that transfers title of the house to the name of
65. the institution or person lending the money as security for the note. The house is put up
66. as security in order that the lender will have an asset behind the note in case the debtor
67. defaults on the payments. If the debtor does default, the lender has the right to sell the
68. house in order to cover the debt.
69. Mortgages are combined with other mortgages to create what is called mortgage backed
70. securities. These securities are backed by the mortgages attached. The payments are
71. passed through from the debtor to the investor. These mortgages can then be sold in
72. the open market and do not have to be held until the entire debt is paid off. The process
73. of converting assets into a negotiable security for resale in the financial markets is
74. known as securitizing the asset. Mortgage backed securities may be sold with the
75. principal and interest, principal only, or interest only being passed through to the buyer.

EQUITIES

This market trades in shares of common stocks issued by corporations.

They are of various types:

Common Stock
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Common stock represents the chief ownership of a corporation and usually is the only issue
that has a vote in managing the corporation. Should a company go bankrupt, holders of senior
securities like bonds and preferred stock, will be paid first. Common stock owners, therefore,
may receive nothing for their shares in the event the corporation becomes bankrupt or is forced
into liquidation. Common stock is also usually the only stock that can vote for the members of
the board of directors of a corporation, although there are exceptions, such as some issues of
preferred stock.

Preferred Stock

The term preferred stock is almost a misnomer. This type of stock usually does not have any
voting rights and is often retired after a certain period of time, usually about 10 years. The
“preference” comes in that these shares are entitled to dividend payments or claims on assets in
the case of bankruptcy before any payment to the common stock holders, but still only after all
bondholders have been paid. Dividends are usually, but not always, cumulative.

Derivatives
These securities are direct obligations or investments. Everything else is derived from one of
these instruments. Financial products that were once called “hedging instruments” are now called
derivatives but are still widely used for the purpose of hedging. The most common derivatives
are futures, options, warrants, swaps and repurchase agreements.

Futures

Futures are contracts that create an obligation to buy or sell another security on or before a
specified future date. For example, you may hold a futures contract to buy or sell a specified
stock, bond or commodity. Futures markets in particular and derivatives markets in general, are
more for the sophisticated investor or trader.

Options

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Options are contracts that give the owner the right, but not the obligation, to buy or sell a
specified asset (the underlying asset or underlying) at a specified price on or before a specified
date. The holder of an option is not obligated to buy or sell the financial instrument that is the
subject of the option. Options for the purchase of a security are known as call options or calls.
Options for the sale of a security are known as put options or puts. The price at which the option
can be exercised is known as the strike price or strike. The price paid for the option is known as
the premium. If an option is not exercised by the due date it is said to lapse

Warrants

Warrants are standardized options but typically with a more distant expiration date. There
are various kinds of warrants, they are; warrants on bonds, equities, commodities, and currencies.
Warrants are frequently issued as part of a bond. These bonds act much like a convertible bond
and to a large degree the price of the bond reflects the performance of the underlying equity. The
warrants allow for the bondholder to purchase a certain stated amount of common stock.

Swaps
Swaps are contracts whereby two parties agree to make periodic payments to each other.
For example, an interest rate swap would involve one party paying interest at a fixed rate, while
the other party to the contract would pay interest at a floating rate (such as the prime rate in
effect at the payment date). In a currency swap, one party agrees to pay a certain amount in a
stated currency and the other party makes its payment in a different currency.

SECURITIES MANAGEMENT IN NIGERIA


There are various kinds of participants in the management and dealings of securities that play
a various kinds of roles. Also we look at the various benefits associated in managing securities
Market participants in the managing of securities are:
 Issuing Houses
 Stock Brokers
 Investment Advisors

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 Portfolio Managers
 Registrars
 Trustees
 Receiving Agents
 Reporting Accountants
 Solicitors
These participants play a very key role in the management of securities

BUYING & SELLING OF SHARES

There are two major avenues through which investors can buy and sell shares; they are the
primary and the secondary markets. The primary market provides for only buying of shares or
other capital market instruments directly from the issuing company which could be through
initial public offer (IPO), offer for subscription, rights Issue, and private placement etc.
The price at which shares are bought in this segment of the market is usually lower than that
of the secondary market. This means that potential investors can buy shares of company xxx
through a receiving agent, when its shares are being flouted in the market.
On the other hand, the secondary market enables investors to trade in securities which had
earlier been issued in the primary market symbolized by the stock exchange. Thus, this market
provides a mechanism which enables investors to buy and sell existing securities. The investors
can therefore buy and sell shares through a Stockbroker who trades on these shares on the floor
of
The Nigerian Stock Exchange with the provision of market facilities by the Exchange.

Benefits of Investing in Securities

The primary aim of any investor is to get a good return on his or she investment. Investing
in the capital market goes with a lot of benefits and prospects, if investment decision is wisely
taken putting into consideration the viability of the company which an investor wishes to invest,
critically analysis of its fundamentals, past financial performance, management structure,
business environment, market competitiveness, economic environment and political environment

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The benefits therefore which investors derive from investing in the capital market cannot be
overemphasis, such include;
 Capital Appreciation: It entails the difference between the price at which a share of a
company is bought and the price at which it is sold.
 Dividend Payment: Shareholders are entitled to dividends, if declared. It is a sum of
money agreed upon by the directors of a company to be paid to its shareholders from the
company’s profit in a given financial year. Dividend is proportionally based on per share
which means as much shares an investor has, more dividends are expected. In the case of
investment in Bond however, interest payment is made to the bond holder on monthly
basis as the case might be while the principal will be paid back to the investor on the
expiration of the bond tenor.
 Bonus Issue: Shareholders are also entitled to bonus issue, if declared. Depending on the
rate declared, it enables a shareholder to acquire additional shares from the company
where he invested in, without necessarily paying for these shares.
 Participate In Rights Issue: shareholders are opportune to participate in Rights Issue of
the company where they invested. Although Rights Issues are paid for by the investors
but the price is usually lower than the prevailing market price.
 Participate In Decision Making: shareholders have the right to attend Annual general
meeting (AGM) of the company which they invested in, participate in its decision making
and exercise voting right.
 Collateral for Obtaining Loan from the Bank: It will interest investors that they can use
their share certificates as collateral to obtain bank loans for individual use or business
development.
 Preparation towards Personal Pension Plan: Buying of stocks could be used as individual
preparation towards personal pension plan. This, in the sense that an investor who is
opportune to invest considerably in the stock market during his earlier age, could
completely rely on his investment as a means of income at old age (when he becomes
unproductive).

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PROBLEM OF SECURITES THAT COULD HAMPER THE MARKET

One major problem that can hamper the growth of the market and as a result have an adverse
effect on the economy is SECURITY LENDING.

What is Securities Lending?


Securities lending occurs when investors lend stocks, bonds and other securities in their
portfolios to other market participants. By far, the biggest lenders are institutional investors such
as mutual funds, exchange-traded funds (ETFs), and pension funds. They are harvesting billions
of dollars in profits.
They use the borrowed securities to make short sales (the securities are sold on the expectation
they can be bought back at lower prices to turn a profit). Borrowers are required to put up
collateral at least equal in value to the securities
Other aspects include:

 Collateral is marked to market on a daily basis to ensure adequate coverage of loans.


 Cash collateral is invested and earns interest that is split in varying degrees between
lenders and borrowers.
 Dividends and coupons from loaned securities are, in most cases, passed on to the lenders
(beneficial owners).
 Securities lending may be a self-administered program of the institutional investor or
facilitated by intermediaries such as custodian banks and prime brokers.

PROBLEMS OF SECURITY LENDING

1. Potentially lower investment returns - security lending seems at odds with the fiduciary
duties of institutional investors. There is an expectation, that their focus should be on
optimizing the value of their clients' holdings, yet this practice has side effects that appear to
go against this duty. Specifically, institutional investors are:

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 Making it easier for short sellers to bet against the securities owned by their clients,
which may create downward pressures on their prices and contribute to the severity of
market declines.
 Limiting their capacity to actively campaign for shareholder value since voting interests
in shares are relinquished when stocks are lent out.

2. Inequitable division of loan revenues - not all institutional investors pass on the full amount
of lending revenues (after costs) to their clients. Many keep large portions, or even all, of the
fees for themselves. Yet the securities belong to their clients and it is not obvious they would
consent to such a generous division of the spoils if allowed a say in the matter.

Some observers have asserted that funds taking a large revenue share have greater incentives
to maximize those revenues. And even after taking their cut they can pass on more revenues
to unit holders than companies who just seek to cover costs. Two counterarguments are:

 Incentives greater than 20% of total fees appear to be excessive considering the costs of
lending programs are much.
 When lending agents are allowed to take a sizable cut of generated revenues, there is a
risk they may push the envelope too far and trigger consequences – some potentially
catastrophic – borne disproportionately by unit holders.

3. Heightened risk - borrowers may not be able to meet margin calls on their collateral or return
borrowed securities upon request. The borrower's collateral can be seized and/or sold but this
may at times yield less than the value of the loaned-out securities – especially when
collateral of lesser quality has been accepted and market conditions make it difficult to sell at
good prices.

Cash collateral can be invested in places where the risk of losing return and principal is

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high, as the financial crisis of 2008 brought to light. For example, some funds had collateral
invested in mortgage-backed securities when demand for such instruments evaporated.

4. Lack of transparency - securities lending occurs "over the counter," between financial
institutions, not through a centralized exchange. Also, disclosure by institutional investors to
their clients is not the greatest. Within such an opaque environment, the potential for
questionable arrangements and excessive risk taking is high. Some examples:

 Investing and charging a management fee on collateral put into an affiliated fund not
registered with SEC.
 Assigning the contract for security lending to an affiliated company.

Securities of an Emerging Market


Bonds and other securities issued by emerging market economies are attractive because of
reasons which include the fact that returns are historically higher than bonds issued by the
advanced economies for reasons of risk. The margin between the returns on bonds of emerging
economies and those of the advanced countries have widened due to monetary policy actions of
the United States of America and Eurozone to stimulate growth.
In Africa for instance, South Africa, Morocco and Egypt are the countries considered as
emerging economies while Nigeria has been included in the list of “Next 11” compiled by
Goldman Sachs.
Trend from the committee on Global Financial System (GFS) shows that although foreign
investors account for a small share of total holdings of emerging markets public and private
domestic bonds, the share has been increasing over the past six years.
Other factors noted to make bonds and other securities in emerging markets attractive include
the weakening of the financial conditions of countries in Europe (Greece, Ireland, Iceland,
Portugal and Spain), which shifted focus to Emerging Economies. Investors now consider
diversification to be important.

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Emerging economies have become significant to the world economy and may become even
more relevant in future. Securities issued by emerging economies will continue to offer superior
returns due to their higher risk levels. The margins may narrow as some of the countries in this
category become stronger and demand for securities from emerging economies increase.

REFERENCES

Aigbokan, Ben K. (1995): ‘Financial Development and Economic Growth: A Test of Hypotheses
on Supply-Leading and Demand-Following Finance, with Evidence on Nigeria”. Nigerian
Economic and Financial Review (N. E. F. R.) December 1995 Vol. 1 2: 1-10

Akamiokhor, George (1984): ‘The Securities and Exchange Commission and the Nigerian
Capital Market” Central Bank of Nigeria Bullion volume II pp 70-77.

Malivaud, Edmond (1979): Economic Growth and Resources (Volume One): The Major Issues.
Proceedings of the 5th World Congress of the International Economic Association held in
Tokyo, Japan 1977. Macmillan Press Limited London

Ely House, London W. I. Samuel, Cherian (1996): “Stock Market and Investment: The
Governance Role of the Market” The World Bank Review Volume 10 Number 2.

Campbell, J.Y., A.W. Lo, and A. Craig MacKinley. 1997, The Econometrics of Financial
Markets, Princeton: Princeton University Press.

Chan, K.C., B.E. Gup, and Ming-Shiun Pan, 1992, 'An Empirical Analysis of Stock Prices in
Major Asian Markets and the United States', The Financial Review, Vol.27, No.2, pp.289-307.

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