What are Nigerian Treasury Bills (NTBs)?

Article
authored by Olayinka Alao, Managing
Partner of Renaissance Practice.

Nigerian Treasury Bills
(NTBs) are short-term debt instruments issued by the
Federal Government of Nigeria (FGN)
through the Central Bank of Nigeria (CBN) to raise funds
from the general public not only for the purpose of financing government expenditures, but also as a tool
for implementing monetary policy. In
Nigeria, NTBs are
guaranteed with the full faith and
credit of the FGN.

NTBs are
issued for determinable periods,
usually 91-day (3 months), 182-day (6 months) and 364-day (one year) tenors in
the primary market. The rates on NTBs are
quoted annually,
meaning that an investor gets the
full rate only if the tenor is up to 364 days. However, in the secondary market, NTBs can be
bought at irregular tenors ranging from 1-363 days from the issue date.

NTBs are risk-free assets in the hands of the holder,
and thus serve as eligible securities in a host of derivative transactions,
like sale and repurchase transactions (Repos) as well as for use as security in
plain vanilla and structured loan transactions. This Article highlights a
few of the different uses for NTBs in commercial
transactions.

Investing in NTBs

An investor who desires to purchase NTBs may do so
either at the Primary Market or Secondary Market. The Primary Market provides a
platform where investors through their authorized dealers (i.e banks, discount
houses, and stockbrokers) can purchase NTBs directly from the CBN. NTBs are
sold at the Primary Market via a bi-weekly auction announced and conducted by
the CBN, whereby intending investors are requested to quote bids following
which the average minimum bid is selected. Successful subscribers at the
auction are allotted NTBs applying the Dutch multiple price auction system.
Under the system, successful applicants pay for their allotment at the price
quoted by them and allotment letters and investment notes are issued to
successful tenders while payment in full for the amount of the successful
tender must be made to the CBN not later than 1.30 p.m on the issue date. The
accounts of the authorized dealers which must be funded are debited with the
cost. Before now, the minimum purchase value of NTBs was N10,000 (Ten Thousand Naira only); however, with effect from 6 March
2017, the minimum purchase value was increased to N50,000,001 (Fifty Million, One Naira only).

On the other hand, the Secondary Market also called
the over the counter (OTC) market is where NTBs previously issued and sold in
the primary market are transacted. Thus, an intending investor whose Bid was
declined at the Primary Market still has an opportunity of acquiring NTBs at
the Secondary Market. This acquisition could be either from brokers who acquire
NTBs in bulk from the Primary Market with the intent of selling in smaller
units to prospective buyers at the Secondary Market; or from investors who
having acquired NTBs at the Primary Market are in need of cash and can’t wait
till the maturation date of the NTBs. An advantage of buying NTBs at the
Primary Market is that the Buyer may not be charged custodian fees, translating
to lower transaction costs compared to buying at the Primary Market. However,
NTBs purchased at the Secondary Market is typically at a lower interest rate
especially when purchased from a broker, as most brokers will retain a portion
of the interest rate as their profit margin for the transaction. The FMDQ OTC
Securities Exchange is a reputable Secondary Market where NTBs can be
transacted.

A distinctive feature of acquiring NTBs at the
Secondary Market is the fact that the respective beneficial owners of the NTBs
may not have their ownership reflected in the CBN’s registrar record nor in the
S4 account records. This is because the CBN only recognizes holders of NTBs who
were allotted NTBs pursuant to a successful bid for same. It is also not uncommon
to find that persons who may not be able to afford the minimum bid value for
NTBs may pool resources together with a common broker, who then bids for NTBs in
his name on behalf of all the individual contributors. Surely there will be
concerns about the fool proof and efficacy of such arrangement; however, it
suffices to mention that Section 40 of the Investment and Securities Act
prohibits a capital market operator including a broker, from wrongfully dealing
with client’s accounts and prescribes stringent penalties for defaulters.

Amongst the benefits of investing in NTBs are:

·        They
are risk-free as they are guaranteed by the full faith and credit of the
Federal Government;

·        They
are tax-free by virtue of Section 1(i) of the Companies Income Tax (Exemption
of Bonds and Short-Term Securities) Order 2011;

·        They
are very liquid and can be converted to cash easily;

·        They
can be used as a collateral;

·        They
are bearer securities and negotiable.

The Scripless Securities Settlement System (S4)

The S4 is a settlement platform inaugurated and
administered by the CBN to facilitate a safe and efficient acquisition and
transfer of government securities, and plays a role similar to the role played
by the Central Securities Clearing System (CSCS) in respect of corporate
securities traded on the Nigerian Stock Exchange.

How the S4 works

As earlier stated, Investors who wish to bid for NTBs
at the primary market can only do so through their authorized dealers who also
double as custodian of the NTBs. Thus, upon successful acceptance of the bid
and subsequent allotment of NTBs to the investor by the CBN, the investor’s
authorized dealer receives the NTBs investment notes as proof of the allotment
on behalf of the investor and thereafter delivers same to the investor after
registering the investment notes with the registrars of the NTB issue.

In the same vein, the S4 requires that authorized
dealers maintain accounts with S4 either for their own use. The S4 also
provides for the opening of sub-accounts for clients of authorized dealers who
are the beneficial owners of the NTBs (the investors). This account, which is
typically in an electronic form lodged with the CBN as the administrator of the
S4, serves to facilitate the dematerialization of NTBs for the purpose of
subsequent trading and transfer. Accordingly, an investor who has acquired NTBs
from the primary market may trade those NTBs by first dematerializing the NTBs
sought to be traded into his or his authorized dealer’s account opened under
the S4.

Dematerialization, also known as electronic securities, is
typically achieved when the Investor delivers the investment notes of the NTBs
sought to be traded to his authorized dealer who then deposits the investment
notes to the S4 for conversion of the interests evinced in the NTBs into an
electronic form to be evidenced by a credit of the value of the NTBs to the
authorized dealer or investor’s account created under the S4. Once this is
done, the investor or authorized dealer (interested seller) may then proceed
with negotiations for disposal of the dematerialized NTBs with interested
buyers using the FMDQ over the counter market.

Typically, the interested buyer will request for the
S4 account information of the investor/authorized dealer who intends to sell so
as to confirm that the investor/authorized dealer truly owns and have
dematerialized the NTBs sought to be sold. After this is done and the buyer
satisfied, an instrument of transfer is executed by the Interested Seller to
the interested buyer over the NTBs sought to be sold upon receipt of the agreed
consideration, and gives a mandate to S4 for the transfer of the dematerialized
securities in his S4 account to the S4 account of the interested buyer/interested
buyer’s authorized dealer.  

It is also worthy of mention that the S4 provides for
two modes of effecting a transfer of dematerialized NTBs. First is the Delivery
versus Payment (DvP) method which applies to the transfer of NTBs for valuable
consideration from the Seller’s account to the Buyer’s account. Second is the
Delivery Free of Payment (FoP) method which governs transfer of NTBs devoid of
consideration, usually from the owner’s sub-account with his erstwhile
authorized dealer to another sub-account a newly appointed authorized dealer of
the same owner.

Use of NTBs in REPO Transactions

The Nigerian Master Repurchase
Agreement (NMRA) regulates repurchase agreements generally. The NMRA defines
repurchase agreements as an agreement to sell securities at an agreed price,
and buy them back at a future date at an agreed price. In similar vein, Section
315 of the Investment and Securities Act defines securities lending as:

“The
temporary exchange of securities, generally for cash or other securities of at
least an equivalent value, with an obligation to redeliver a like quantity of
the same securities on a future date and includes securities loans, repurchase
agreements (repos) and self buy-back agreements.”[emphasis ours]

The CBN Guidelines for the conduct of Repurchase
Transactions under CBN Standing Facilities dated 2nd April, 2012 empowers the
CBN to enter into repurchase agreements over NTBs with banks and discount
houses for the purpose of providing Naira liquidity to any of these
institutions that are unable to access funds at the inter-bank market, and to
set an upper limit on rates.

Under the Guidelines, repurchase transactions could be
conducted either by Standing Lending Facility (SLF) or Term Repurchase Facility
(TRF). The SLF is an overnight facility available on all banking days between
the hours of 2pm and 3.30pm at a pricing rate determined by the monetary policy
committee of the CBN. On the other hand, a Term Repurchase Facility (TRF) is a
term facility available on all banking days between the hours of 2pm and 3.30pm
at a pricing rate determined by the monetary policy committee of the CBN.
Pursuant to the Guidelines, the minimum transaction value for either the SLF or
TRF is N100,000,000 (One Hundred
Million Naira) each, and thereafter in multiples of N1,000,000 (One Million Naira).

It is also pertinent to note that by virtue of Rules
389 of the Securities and Exchange
Commission (SEC) Rules and Regulations, 2013 (SEC Rules), the obligation on the Buyer in repos is to reconvey
equivalent number of securities of the same type and class borrowed, sold and
not necessarily the actual securities bought to the seller upon maturity,
meaning that a Buyer may choose to dispose or otherwise deal with the
securities bought as he so pleases.

From a practical standpoint, a repo transaction is conducted
when the seller executes a repo agreement and transfer the NTBs to the buyer by
dematerializing the investment notes in respect of those NTBs with the S4. Once
dematerialized, the seller can then transfer the NTBs in their dematerialized
to the S4 account of the Buyer or the Buyer’s authorized dealer. Upon maturity
of the option to repurchase, the Seller pays the Buyer the agreed sum inclusive
of interest, and likewise executes an instrument of transfer after which the
dematerialized NTBs are re-conveyed to the Seller or the Seller’s authorized
dealer.

Should the Seller fail to repurchase the NTBs at the
maturity date, the SEC Rules and the CBN Guidelines provide for different
enforcement procedures available to the Buyer. Under the SEC Rules, the Buyer is
empowered to liquidate the NTBs; under the CBN Guidelines, a new repo will be
deemed to have been entered into between the Banks as the Seller, and the CBN
as the Buyer such that the Repurchase Price becomes the new Purchase Price and
the new Pricing Rate is set at the rate applicable on the Standing Lending
Facility plus five percentage points.

Use of NTBs as Security in Nigeria

Under Nigerian law, security interest may generally be
created over all classes of property whether tangible or intangible, and NTBs
being choses in action can be used as security for the repayment of a debt or
performance of other outstanding obligations. 

There are two classifications of holders that can
create security interests over NTBs – direct participants and indirect
participants.

·        Direct
participants include banks, discount houses, custodians or any other financial
institution as may be approved by the CBN (these would typically be financial
institutions who are regulated by the CBN).

·        Indirect
participants comprise of participants that are not directly regulated by the
CBN and can only trade their NTBs at the over the counter (OTC) exchange i.e.
private individuals and non-regulated companies.

Pledge over NTBs

Under the Scripless Securities Settlement System
Business Rules Guidelines, 2017 issued by the Central Bank of Nigeria (S4 Guidelines), direct participants may
pledge NTBs owned and registered in their names.  Pledged NTBs shall have a maturity of not
less than 10 days. Where the maturity of an already pledged NTBs becomes less
than 10 days, the Pledgor is required to substitute the NTBs with other
eligible NTBs or pay a fine. 

Reaffirming the typical incidence of a pledge under
Nigerian law and pledge documentation, the S4 Guidelines provide that:

·        NTBs
pledged shall be deposited and registered in the Pledgor’s name, and the
Pledgor shall retain all the rights pertaining to his ownership in addition to
all financial interests and entitlements accruable to the pledged NTBs. Should
the Pledgor become bankrupt, title of the pledged securities shall be changed
to the Pledgee;

·        The
Pledgor grants an irrevocable power of attorney to the Pledgee to allow the
Pledgee execute all documents required to perfect or enforce the Pledge; and

·        The
pledge is released, terminated or waived based on the Pledgee’s written
Instructions to the Administrator (CBN). 

Indirect participants are permitted under Rule 355
of the Securities and Exchange Commission (SEC) Rules and Regulations, 2013 (SEC Rules) to pledge their securities
(which include NTBs) as collateral by registering the Pledge with the registrar
of the securities (which in this case may be the custodian of the NTBs) along
with the following documentations:

·        documentary
evidence of the indebtedness for which the securities are pledged as
collateral;

·        a
letter addressed to the registrar for the security and jointly signed by the
pledgor and pledgee stating the securities and amount of the securities
pledged; and waiving any right to be notified of subsequent transfer by the
registrar;

·        duly
executed transfer forms.

Mortgage over NTBs

A mortgage may be created over NTBs in favour of a
third party as collateral for loans and advances by transferring legal title in
the NTBs to the Mortgagee as collateral for the loan/credit facility subject to
a condition for re-conveyance of the NTBs on redemption. A legal mortgage over
NTBs is typically effected by an agreement by deed stating the terms of the
loan and a proviso for re-conveyance of the NTBs when the loan is repaid. The
implication of a legal mortgage of NTBs is that all legal rights and title over
the NTBs is vested in the Mortgagee and in the event of default by the
Mortgagor to repay the loan, the Mortgagee is able to sell and give good title
to any subsequent purchaser without recourse to court.

Perfection of Security over NTBs

Generally, perfection of security is usually achieved
by possession, control, registration of the underlying assets that constitutes
the security or a combination of these options. Accordingly, for direct participants,
security created over NTBs are perfected when security interests in respect
thereof are registered against their S4 accounts held with the CBN as
operator/regulator of the S4 system. Equally, indirect participants who have
created security interests over the NTBs need to register the interest created
against their S4 sub-account held with their authorized dealers under the S4
system. Essentially, what this implies is that for security interests created
over NTBs to be perfected, the borrower (whether direct or indirect
participant) need to first dematerialize their NTBs which is sought to be used
as security so that the interest of the lender may be registered against those
dematerialized NTBs in the respective S4 accounts of the Borrower.

Furthermore, Section 197(1) of the Companies and
Allied Matters Act (CAMA) provides for the registration of specified
charges created over a company’s assets within 90 days from the date of
creation. The charges to which that section relates are enumerated in Section
197(2) of CAMA and include:

·        A
charge for the purpose of securing any issue of debentures;

·        A
charge on uncalled share capital of the company;

·        A
charge created or evidenced by an instrument which if executed by an individual
would require registration as a bill of sale;

·        A
charge on land, wherever situate, or any interest therein, but not including a
charge on rent or other periodical sum issuing out of land;

·        A
charge on book debts of the company;

·        A
floating charge on the undertaking or property of the company;

·        A
charge on calls made but not paid;

·        A
charge on a ship or an aircraft or any share in a ship;

·        A
charge on goodwill, on a patent or a licence under a patent, on trademark or on
a copyright or a licence under a copyright.

Clearly, the above-listed charges do not pertain to
charges created over NTBs. However, it
may be necessary to provide further analysis on why charges on NTBs do not
qualify as charges created by an instrument which if executed by an individual
would registration as a bill of sale.

Notably, Section 4 of the Bills of Sale Act 1878
& 1882, which has been re-enacted in all the States of the Federation,
expressly excludes choses in action from the definition of personal chattels,
and invariably from the operation of the Act.

Stamping of Instruments created over NTBs

Section 22(4) of the Stamp Duties Act (SDA) provides that:

“Except as aforesaid and subject to
the provisions of section 90 (3) of this Act, an instrument executed in Nigeria, or relating, wheresoever
executed, to any property situate or to any matter or thing done or to be done
in Nigeria, shall not, except in criminal proceedings be given in evidence, or
be available for any purpose whatever, unless it is duly stamped in accordance
with the law in force in Nigeria at the time when it was first executed.”
(Emphasis ours).

Thus, for an instrument to be liable to stamping, it
must either be executed in Nigeria or where not executed in Nigeria, it must
either relate to property situate in Nigeria or relate to a thing or matter
done or to be done in Nigeria. 

In the same vein, the Schedule to the SDA has
enumerated documents which are required to be stamped and include:

·        An
assignment by way of security, or of security;

·        Conveyance,
or transfer on sale of any property;

·        Marketable
securities;

·        Agreement
or any memorandum of an agreement under hand only.

Based on the above list, repos are required to be
stamped since they represent a conveyance, or transfer on sale of property;
equally, mortgages denotes an assignment by way of security and thus are
subject to be stamped, ditto pledges over NTBs since NTBs qualify as marketable
securities.

It is also useful to note that by virtue of Section
23(1) & (3) of the SDA, instruments that require stamping are generally to
be stamped within 40 days of execution, except for instruments chargeable with
ad valorem duty which are to be stamped within 30 days of execution. Where the
instruments are executed outside Nigeria, section 23(3)(a) & 23(4) provides
that they will become due for stamping within thirty days after they are first
received in Nigeria.

However, failure to stamp instruments does not render
the instrument unenforceable, rather, such instrument shall not, except in criminal
proceedings, be admissible in evidence or be available for any purpose
whatever, unless it is duly stamped. Where the instrument is one that requires registration, however, such
instrument must be stamped before it can be presented for registration and
stamping thus becomes critical for documents of this type.

Implications of Using NTBs as Security

The creation of securities over NTBs acts to curtail
the rights of the owner/borrower to deal with those NTBs. This is owing to the
fact that the NTB becomes encumbered once the security instrument is executed
and registered in the respective S4 accounts of the Borrower, in order to
protect the interests of the Lender. Thus, a Pledgor of NTBs for example cannot
trade those NTBs during the subsistence of the pledge. Likewise, a Mortgagor of
NTBs may not be able to sell to a third party the NTBs that form the
subject-matter of the mortgage transaction.

Enforcement of Security over NTBs

A distinguishing feature of all security instruments
is the reservation of the right of the creditor to make the property answerable
for the debt. With respect to securities created over NTBs, the creditor
possesses an array of remedies sanctioned under the law such as power of sale,
foreclosure, etc. depending on the security created, which he may exercise as
the case may be. For example, the CBN 2017 Scripless Securities Settlement
System guidelines restates the powers of a Pledgee to appropriate title of the
pledged securities as beneficial owner in the event the Pledgor is declared
bankrupt or fails to fulfill its obligations to the Pledgee. Equally, the buyer
in a repo may sell the NTBs in the event the seller defaults in buying-back the
NTBs at the agreed repurchase date. The sale will be conducted at the FMDQ in
accordance with its rules of trading.

Proposal for Reforms

There is no doubt that NTBs being intangible property
can be used as collateral to secure a debt/loan, and it is commendable that the
Nigerian regulatory agencies have introduced some rules to guide the manner and
procedures for conducting same. Nevertheless, it appears that there are less
elaborate provisions on security transaction involving indirect participants
under the SEC Rules compared to the CBN guidelines for direct participants. A
case in point is the fact that there are no explicit rules on the enforcement
of security instruments in the event of default by the Pledgor in the SEC
rules. It is therefore suggested that detailed rules be made to plug this
lacuna. Furthermore, it appears that the rules seem not to appreciate the fine
distinctions between pledges, mortgages, and hypothecation and may have
ostensibly deemed and lumped them all as pledges thereby limiting the scope of
security transactions that could be executed in respect of NTBs or perhaps
excluding other forms of security from its regulatory ambit. To this end, it is
recommended that the rules be expanded to incorporate these other forms of
securities as well as regulate their use in relation to NTBs.