A vibrant Commercial Papers (CPs) market being redesigned to take off in this third-quarter (Q3) will help deposit money banks free short-term credits from their books.
Over the past four years, Nigeria’s Commercial Papers market has become impaired and the size has shrunk drastically from monthly outstanding volumes of about N1 trillion in December 2008 to N9.8 billion in the fourth quarter (Q4) of 2013.
“We are ready with our draft rules for Commercial Papers. We have set third-quarter 2014 target for the take-off of vibrant Commercial Papers market. Definitely, redesigned CPs market will take off this Q3,” Bola Onadele, managing director/chief executive officer, FMDQ OTC plc, confirmed to BusinessDay at the weekend.
“Investors will see Commercial Papers on our website to trace those redeemed or not. This will help ensure transparency which was lacking before in this segment of the market,” Onadele said.
He further said they were working with the CBN and issuers to see how to come up with a better CP market.
“This new market will create liquidity for issuers and less pressure on banks. Banks need long-term funds to start Basel III,” he said.
The National Pension Commission (PenCom) regulation on investment of pension fund assets had in December 2012 limited the amount of deposits that can be placed with banks by the Pension Fund Administrators (PFAs). The guidelines, however, allow investment in Commercial Papers, in line with the CBN guidelines on the issuance and treatment of Bankers Acceptances (BAs) and Commercial Papers.
A vibrant CP market, according to financial market dealers, has some positive offerings for the issuer and investors. It offers the issuer lower funding cost as it does not create any lien on asset of the company, an indication that it is suitable for liquidity and cash flow management.
Similarly, it offers an investor better returns in comparison to short-term risk-free assets, and it is tradable, and also creates alternative asset classes for PFAs and fund managers.
“When it comes to the financial market, one area we are going to add value is the information side. There is no market where some people will not try to play funny but it is left for the regulator to raise his games,” Onadele said.
“The Commercial Papers will be rated. Market transparency is the major achievement in this market not only to regulators but to the investors,” he added.
Recall that on July 23, 2009, the CBN suspended the sell-down of CPs as off-balance sheet items, which was aimed at forestalling several abuses in the use of the product.
These abuses ranged from repackaging of troubled assets into CPs, frequent rollovers beyond the allowable tenor, and using CP sales to raise liabilities in an attempt to conceal the size of deposit liabilities or inter-bank borrowings.
“The CP market existed before FMDQ kicked off. What we are doing is to ensure the market is upgraded to standard by bringing the technology that ensures transparent deals in CP market. The regulation used to exist but there was no technology to track the deals,” Onadele said.
Iheanyi Nwachukwu
