SEC urged to manage investment risks through counterparty clearing

The Securities and Exchange Commission (SEC), has been urged to adopt a central counterparty (CCP) ecosystem to manage investment risks in Nigeria’s capital market.

Central counterparty clearing is a financial instrument that takes on counterparty credit risk between parties to a transaction, and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts.

It also introduces efficiency and stability into various financial markets.

The Managing Director, Equity Research Desk, Argentina, Bernardo Mariano, who gave the advice at the 2019 FMDQ Nigerian Capital Market Conference, in Lagos at the weekend, stressed the need for regulators to create a robust regulatory framework around the instrument as a navigator of risks.

He pointed out that the new mode of risk management has been in existence for a long time, adding that a few professionals from the Central Bank had travelled to Argentina, to broaden their knowledge on this subject from renowned finance experts.

Mariano noted that the CCP would greatly boost the capital market, as it does not rely on political trends in a country.

“No matter the political party in power, the CCP is very efficient, not only for the capital market, but also for the economy because it significantly reviews the systematic risk of capital market and the economy.

“In 2008, there were many financial institutions that went bankrupt, but not a single CCP went bankrupt. This tells you a lot about how this CCP can be used to transform the capital market and attract investors.”

He advised SEC to learn from countries with developed capital markets like Argentina and Brazil, to enable it handle investors the right way.

“They are great places to learn from because they are old capital markets that have great infrastructure, and they have gone through a lot of crises similar to what many countries in Africa are going through.

“So, I think learning from them will help to build a more robust infrastructure and processes and to handle crisis better.”

The Deputy Director/Head, Registration, Exchanges, Market Infrastructure and Innovation Department, SEC, Emomotimi Agama, said the regulator is willing to accept the CCP ecosystem in Nigeria’s capital market.

He also noted that the process would meet international standards, adding that participants in CCP must work together in agreement to give confidence to clients that counterparty is in line with global best practice.

According to him, the Nigerian financial system must identify various elements that would help attract participants and funds into the nation’s CCP.

“CCP is a very important market infrastructure; we are working to create regulation that is robust. CCP is a navigator of risks, so it must be made to be more resilient and market friendly.”