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BAs value up N330bn in 2014 on investors’ appetite

By BusinessNews Staff on May 14, 2015

Investors in 2014 executed N330 billion worth of transactions in banker’s acceptances (BA), BusinessDay investigations have shown. The BA accounted for 72 percent of the N457 billion which was the combined monetary value of the short term investments executed through the BA and commercial papers (CP) from January through December 2014.

The data on both financial instruments from the monthly economic publications of the Central Bank of Nigeria (CBN) were analysed to gauge the extent of patronage both financial instruments received in fiscal year 2014. The CBN data show that an average monthly investment worth about N10 billion was carried out in CP, as against about N27 billion worth of investment in BA.

In addition, the highest monthly investment in CP took place in February, when investors staked N10.81 billion in the financial instrument, as against N36.7 billion, which was the highest monthly investment in BA that took place in November of that year.

“Bankers’ acceptances are presently more available in the market than commercial papers and that should explain why investors traded more in the former than the latter”, an industry analyst who did not want his name in print said. “In addition, banks create more awareness on BA, added to the fact that it has higher yields than TBs”, the analyst added.

According to Investopedia, “ BA is a short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker’s acceptances are issued by firms as part of a commercial transaction.

These instruments are similar to T-Bills and are frequently used in money market funds. Banker’s acceptances are traded at a discount from face value on the secondary market, which can be an advantage because the banker’s acceptance does not need to be held until maturity. Banker’s acceptances are regularly used financial instruments in international trade.”

On the other hand, “ a CP is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.”

Stakeholders in the financial sector have made frantic efforts in recent times to deepen the depth of the financial industry so as to accommodate high-end transactions that will meet the taste of sophisticated investors within and outside the country.

Against this backdrop, FMDQ OTC Plc has come up with rules and regulations that will enhance trading in money market instruments, inclusive of BA and CP. “These rules, which have been adopted from the guidelines and other international regulations relating to the issuance of CPs, aim to aid price formation in the money market and foster the emergence of a corporate interest rate benchmark to be called FMDQ Short-Term Corporate Debt Index”, FMDQ notes said.

The CPs have to be registered with FMDQ, issued option-free, as call or put options are not permitted and are redeemable at maturity, which means that they cannot be pre-liquidated. In addition, the CPs shall be issued between a minimum of 15 days and a maximum of 270 days, inclusive of rollover from the date of issue just as the minimum size of the CP issue shall be N100 million and in multiples of N50 million thereafter.

The rules introduced by the CBN in 2009 caused a significant drop in the value of the commercial paper from N190 billion to N2 billion. It is expected that higher patronage in CP will be recorded immediately the FMDQ platform fully comes on board when many CPs are listed on it.

[Business Day]

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