CBN moves towards easing downtime in market operations

Recently, the Central Bank of Nigeria’s (CBN) recent released new rules which classified banks in the country into settlement and non-settlement banks.
The development has been lauded by many stakeholders in the nation’s economy, as a measure in financial circle to help ease hiccups in settlement which usually occur in the money market interbank transactions.

Daily Times Nigeria recalls that against general believe in many quarters that the CBN has been responsible for downtime usually recorded in money market trading platform, the banks are really culpable irrespective of sanctions attached to failure to meet obligations.

The Special Adviser to the Central Bank of Nigeria (CBN) Governor on Financial Markets, Mr. Emmanuel Ukeje, at a recent function in Lagos, accused some banks of causing system breakdown in operations based on their inability to meet obligations.

A development which may have informed the recent classification of banks in the country into settlement and receiving banks categories, Ukeje said that banks in the bid to participate in every auction in the market place bids without back up funds “even without back up capital”

The CBN governor’s special adviser on financial markets, said that the apex bank has world class trading platform, efficient to locate when and where every default is coming from, adding that once there is default in meeting up with allocations, it disrupts trades and creates tension in foreign investors.

According to him, against general believe in many quarters that the CBN was responsible for market downtime, the banks are solely responsible as the apex bank may soon begin another regime of fines on market defaulting banks. He had said:

“banks are responsible for gridlock because all of them without making adequate provisions, want to buy CBN treasury bills and when settlement time comes , they will be found wanting, this is what causes gridlock in the market” Ukeje said. Share this:
Cause of such unstable market, it has been gathered could be attributable to the inability of some banks to fund their settlement accounts as well s lack of substantial Treasury Bills collateral to close yearning gaps anytime they arise, and also the immediacy of replacing any collateral deployed to balance a transaction.

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It was in realization of the challenges posed by default in interbank settlement, that the CBN, last week, reviewed the settlement banking arrangements for banks and merchant banks. The CBN’s Monetary, Credit, Foreign Trade and Exchange new guideline says it can only maintain a Settlement Account for a commercial bank that provides clearing collateral of not less than N15 billion worth of treasury bills.

The apex bank said achieving the benchmark gives a bank the right to engage in clearing and settlements operations in the country.
CBN Director, Banking and Payments System Department, Dipo Fatoku, communicating the development to banks and the Nigerian Interbank Settlement Systems (NIBSS) through a memo, said that it had become imperative for banks to extend settlement banking arrangement to all the clearing sessions, with effect from January 1, 2018.

According to him, settlement of net clearing obligations from Central Securities Clearing System (CSCS), cheques, cards Automated Clearing House (ACH), NIBSS Instant Payment (NIP), National Electronic Funds Transfer (NEFT) and other clearing instruments shall be executed through the account of settlement banks only.

Besides, such a Settlement Bank will have the ability to offer agency facilities to other banks and settle on their behalf, nationwide. It will equally have a branch network in all the CBN locations. The guidelines will be reviewed from time to time. It said that banks that meet the specified criteria will continue to be designated as “Settlement Banks.”

This implies that banks will be categorized into two, settlement banks and none settlement banks. Ostensibly, first tire banks with high capital base may fall into settlement bank category, while other lowly capitalized banks fall under none settlement bank

This implies that non-settlement banks, called “Clearing Banks” will continue to carry out clearing operations through the settlement banks under agency arrangement. In the circular titled: Extension of Settlement Banking Arrangement to all Clearing Sessions’, Fatokun recalled that the CBN introduced settlement banking framework on April 1, 2014.

According to the CBN, a bank will be suspended from participating in clearing activities, if fails to replace within two days, the amount of the clearing collateral for cases where the settlement account is not adequately funded.

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It further stated: “Where the collateral so discounted is insufficient the bank shall be suspended forthwith and further measures shall be taken in accordance with the settlement guideline,” adding that the same sanction will apply when a bank overdraws its settlement account maintained with the CBN for three consecutive working days.

The regulator also proposed a similar sanction for a non-settlement bank that persistently overdraws its account with its settlement bank especially where the latter has communicated its intention to stop settling for such a non-settlement bank to the CBN and the Nigerian Interbank Settlement System (NIBSS).

According to the CBN, every suspension will last until it approves that the affected bank should be reinstated.
“The framework categorised deposit money banks into settlement and non-settlement banks. The settlement banks settle their net settlement obligations and that of their non-settlement banks arising from cheque clearing and other instruments during sessions 1 and 2.” He said non-settlement banks should going forward, enter into agency agreement with settlement banks and pledge appropriate collateral accordingly.

“The aforementioned framework has been working well and contributed to the relative stability in the net settlement operations for settlement of clearing sessions 1 and 2 on the Real-time Gross Settlement System (RTGS),” he said.

“In view of this, it has become imperative for the bank to extend the settlement banking arrangement to all the clearing sessions, with effect from January 1, 2018. Specifically, the settlement of net clearing obligations from CSCS, cheques, cards ACH, NIP, NEFT and other clearing instruments shall be through the account of settlement banks only.”

The CBN advised settlement banks to update the agency agreements with their non-settlement banks. “Merchant banks that do not have settlement banks should appoint a settlement bank and inform the CBN on or before December 15,” it said.

It is therefore imperative to know that the new rule will not only enhance operations of the Nigerian financial system, but also propel the envisaged private sector participation and uninterrupted execution of the government’s N7.6trn 2018 budget of which infrastructural development will gulp N2.42 trillion.

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Bonny Amadi