UNDERSTANDING BONDS IN INSURANCE (3)
By Yinka Bolarinwa
Enabling legislation on bonds The Debt Management Office (Establishment) Act 2004 (CAP D12, LFN), the Pension Reform Act 2004 and the Fiscal Responsibility Act 2008 are the principal legislations that provide support to the Nigerian bond market.
The Debt Management Office Act (2004) vests power in the DMO to prepareand implement a plan for the efficient management of Nigeria's external and domestic debt obligations at sustainable levels economic activities for growth and development; and to also advise the FGNon the re-structuring and re-financing of all debt obligations.
To achieve its objectives, the DMO has boosted liquidity in the bond market through the continuous issuance of FGN bonds. In the last two years, DMO issued different series of FGN bonds worth N826.5bn.
The Pension Reform of 2004 has been a major contributor to the growth of the Nigerian bond market. Revised PENCOM guidelines of 2008 now allows Pension Fund Administrators (PFAs) to invest as much as 100% of their portfolios in FGN bonds, up to 30.0% in state government bonds and up to 30.0% in corporate bonds.
This has increased activities in the bond market as PFAs with a combined total Assets Under Management (AUM) in excess of N1.5tn as at December 2009 are now able to provide more than 25.0% of market liquidity. The Pension Act has also contributed to increased government participation in the bond market through the issuance of retirement benefit bonds to current employees in the federal public service as well as the federal capital territory as their respective pension schemes were unfunded. These bonds recognize government indebtedness to these workers as they mature upon retirement of such employees.
The Fiscal Responsibility Act of 2007 which is a replica of the USA fiscal responsibility act of 1982, seeks to improve inter-governmental fiscal coordination, promote fiscal macro-economic stability, promote fiscal prudence and sound financial management, ensure transparency and strengthen accountability, and provide a conducive environment for generating growth and reducing poverty.
Regulators and government agencies in bond operations
Debt Management Office (DMO): DMO is the Agency authorized by statute to issue FGN Bonds on behalf of the Federal Government. The DMO also regulates the activities of the bond market and the Primary Dealer/Market Makers.
Central Bank of Nigeria (CBN): The Central Bank of Nigeria acts as the issuing House and the Registrars for FGN Bonds.
The Nigerian Stock Exchange (NSE): FGN bonds are listed and traded on the floors of the NSE.
lCentral Securities Clearing Systems Ltd (CSCS): Acts as the depository of the bonds listed on the Nigerian Stock Exchange. Investors who opted for physical certificates at the issue must have their certificates deposited in CSCS before transactions on them on the floors of the Nigerian Stock Exchange.
Security and Exchange Commission (SEC): The apex regulator in the capital market; it regulates the activities of all operators as far as operations and their transactions in the market is concerned.