FMDQ Codified Rule Book FGN Bonds

8/13/2019 FMDQ Codified Rule Book FGN Bonds

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November 2013

Codified Rule Book for FGN Bonds


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Market Making ...................................................................................................................................................................................................................... 24

Manipulative or other Fraudulent Devices ....................................................................................................................................................................... 27

False, Misleading or Deceptive Statements ..................................................................................................................................................................... 28

Operational Privileges ......................................................................................................................................................................................................... 29

Trading & Execution ................................................................................................................................................................................................................ 30

Types of Transactions ......................................................................................................................................................................................................... 30

Trading Hours ....................................................................................................................................................................................................................... 31

Trading Parameters ............................................................................................................................................................................................................. 31

Best Execution ...................................................................................................................................................................................................................... 33

Trading Halt .......................................................................................................................................................................................................................... 34

Other Trading Practices ...................................................................................................................................................................................................... 34

Performance Evaluation ...................................................................................................................................................................................................... 36

Clearing & Settlement ............................................................................................................................................................................................................. 38

Trade Reporting ................................................................................................................................................................................................................... 38

Trade Confirmation .............................................................................................................................................................................................................. 39

Trade Processing ................................................................................................................................................................................................................. 40

Trade Settlement ................................................................................................................................................................................................................. 41

Dispute Resolution ................................................................................................................................................................................................................... 42

Mediation .............................................................................................................................................................................................................................. 42

Arbitration ............................................................................................................................................................................................................................. 44

Definition of Terms ....................................................................................................................................................................................................................... 45

Key Definitions ............................................................................................................................................................................................................................... 47


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Reference ....................................................................................................................................................................................................................................... 48

Appendices ..................................................................................................................................................................................................................................... 49

Appendix One - Two-Way Dealing Systems Dispute Form ............................................................................................................................................... 49

Appendix TwoContract Letter Format for Sale of FGN Bonds ....................................................................................................................................... 51

Appendix Three - Contract Letter Format for Purchase of FGN Bonds ........................................................................................................................... 54

Appendix Four - Letter Format to CSCS Requesting Transfer of Bonds .......................................................................................................................... 56

Appendix Five - Letter Format to CSCS Requesting Transfer of Funds ........................................................................................................................... 59

Appendix SixAcceptance and Commitment Letter ......................................................................................................................................................... 62

Appendix SevenDetails of FGN Securities Sold on Repo Basis to other Parties........................................................................................................ 64

Appendix EightDetails of FGN Securities Bought on Repo Basis from other Parties................................................................................................ 64

Appendix NineHoldings of FGN Bonds by Foreign Investors ........................................................................................................................................ 64


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Introduction

These guidelines set out the market operations standards for the Federal Government of Nigeria (FGN) bond market. The

participants of this market, being the Debt Management Office (DMO)-licensed Primary Dealer/Market Makers (PDMMs)(comprised

of banks, discount houses and merchant bank)and the FMDQ-approved Market Makers (which are mostly banks) have chosen to

deal on the FMDQ OTC securities exchange.

This document contains existing regulations and rules from DMO, Securities & Exchange Commission (SEC), Central Bank of Nigeria

(CBN) and Financial Markets Dealers Association (FMDA) which are being adopted as FMDQ preliminary rules. For the purpose of

these guidelines, the DMO licenced Primary Dealer Market Makers (PDMMs) and FMDQ-approved Market Makers will be referred to

as trading members. The Exchange intends to re-work some parts of these rules after its launch.

These rules will provide a reference for market practices relevant to the Nigerian operating and regulatory environment. They shall

be binding on all FMDQ trading members who shall subscribe to them in their bond trading activities.

Control of the activities of all personnel engaged in dealing (both dealers and support staff in sales, market risk, operations,

compliance, internal control and audit functions) is the responsibility of the management of such organisations. These rules are

therefore addressed, not only to dealers, but also to the management and to relevant operational support staff. Management

should clearly set out in writing, the authorities and responsibilities within which dealing and support staff should operate. These

might include:

General dealing policy including reporting procedures Persons authorised to deal Products to be dealt in Risk management (counterparty, position and stop-loss limits etc.) and internal controls Confirmation and settlement procedures Relationships with member firms Other relevant guidelines as considered appropriate


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Management should also ensure that individual dealers are aware of their responsibilities to act professionally at all times,

understand and operate within the legal & regulatory requirements applicable to the transactions they undertake.

Currently, the FGN bonds are being traded on two-way quote basis. Whilst, rump stock bonds trade on one-way quote basis,

indicative prices are provided for illiquid FGN bonds in the Nigerian Inter-bank OTC market.

Two-Way QuoteThe two-way quote dealing system is a system where a dealer gives both binding buying (bid) and selling (offer) prices on the

same quote. This means the dealer is willing to buy at his bid and sell at his offer if the counterparty so pleases.

Benefits of the Two-Way Quote Trading System Liquidity Price Discovery Market Depth Transparency International best practices Efficient and vibrant secondary marketIndicative Price

An indicative price is provided by trading members for the rump stock and short-dated bonds.FGN bonds that have less thanN30bn in issue are regarded as rump stock bonds whilst short-dated FGN bonds have less than one year term to maturity.Although, trading members are not obligated to trade at the indicative prices, they may serve as a reasonable estimate of the priceat which trading members can start their bond trading activities.


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Codified Rule Book for FGN Bonds

Rule SectionRule

Sub-SectionRuleCode

Rule Reference Detail

GeneralStandards

PowersExercisable

4111 i. The SEC andDMO shall be responsible formonitoring the activities of PDMMsin thesecondary market for FGN Securities

DMO GRRS Sec.IIIb(1)

4112 i. The FMDQ OTC PLC (FMDQ) may suspendmembers acting in a manner contrary to theserules from dealing in the two-way quote market

ii. The suspension, which will be preceded by awritten warning, mayarise if cases of misconduct

are established against the erring party, Providedthat any member shall be suspended without awarning, if the misconduct is grievous.

iii. The period of suspension may not exceed sixcalendar months

FMDQ GTFB Sec.1.3

Committees4121 i. FMDQs Executive Regulation & Supervision

Committee and the FMDQ Board Regulation &Supervision Committee shall rule ondisputes/infractions referred to it by trading

member, customer or the Market SurveillanceUnit of FMDQ on matters relating to dealingrelationships, market standards and conduct ofthe trading members

FMDQ


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Rule SectionRule

Sub-SectionRuleCode


Rule

Interpretation

4131 i. These rules shall be read in conjunction with,and shall not be superior to any Laws, Decrees

and Enactments of the Federal Republic ofNigeria or any directive(s) of the CBN, DMO, SECand other regulatory and monetary authorities

FMDQ GTFB -Introduction

RuleApplicability

4141 i. These rules seek to establish a framework withinwhich trading members(PDMMs and other banks)can trade FGN bonds and develop a viable fixedincome market in Nigeria

FMDQ GTFB -Introduction

RuleAmendments

4151i. FMDQ shall file with and obtain approval of the

SEC, any proposed amendment, repeal of or anyaddition to its rules before any action is taken onsuch amendments, repeal or addition by itsmembers or by any governing body thereof.

SEC SRR Sec.192(1)

4152ii. FMDQ shall notify DMO and CBN of all proposed

amendment or repeal or addition to its rules

FMDQ


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Rule SectionRule

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Authorisations

& ApprovalsforMembership

Eligibility

Criteria

4221

4222

i. Trading members shall possess a valid licenceii. A prospective applicant shall be in full

compliance with the requirements set forth by itsregulator(s) before being considered for a PDMMlicence by the DMO

iii. A prospective PDMM shall not be in violation ofany rules and regulations of its regulator

iv. Demonstrate capacity to fulfill the Reporting,Technical, Organisational and Systemic&Procedural requirements as stated in these Rules

v. Notwithstanding the minimum capitalrequirement prescribed by any regulator, theminimum required from a prospective PDMM isN3billion in Shareholders Fund, unimpaired bylosses and excluding Revaluation Surplus, as atthe last financial year-end before the date ofapplication. This requirement must be supportedby the Audited Accounts of the prospectivePDMM.

The applicant institution (Non-PDMMs) shall;

i. be registered by SEC and FMDQii. have a minimum shareholders funds

unimpaired by losses and excluding

FMDQ GTFB Sec.1.1


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revaluation reserves of N2billion as at the lastfinancial year prior to the date of application

iii. sign up to the FMDQ two-way quote agreementand be ready to be bound by all the terms andconditions therein

iv. have a settlement bank in place which shall beone of the approved Primary Dealers for bonds

v. trade directly with trading member in the two-way quote market

vi. have a minimum of 2 SEC registered dealers totrade in bonds

vii. have a Market Risk function in place with adesignated Head of market risk registered withSEC

viii. undergo an interview process before it can beadmitted as a member. The 2 SEC registereddealers and market risk officer shall be part ofthe interview.

FMDQ will undertake a site visit to the dealingrooms of the applicant institution to ensure

compliance with all requirements

4223 i. PDMMs that are appointed by the DMO are DMO GRRS Sec.


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obliged to quote in the two-way quote tradingsystem.

ii. Banks and Discount Houses who are non-PDMMs but have signed up to the FMDQ two-way quote bond trading system SeeAcceptance and Commitment Letter (containedin Appendix Six)

2c (1) & (4)

ReportingRequirements

4231 Trading members shall maintain suchaccounting and other records of theirrespective activities in the primary andsecondary markets as set forth by the DMOand their respective regulators

DMO GRRS Sec.IVA(1)

4232 Trading members shall file the reports in (a-b) belowin an electronic form, with SEC and the DMO, withinfive (5) working days following the month underreview:a. Monthly position statements for the PDMMs

trading account based on total holdings, by tradedate, of FGN Securities in the followingcategories:

i. Bonds maturing in 3 years or lessii. Bonds maturing between 3+ years and 5 yearsiii.Bonds maturing between 5+ years and 10

yearsiv.Bonds with maturities of 10+ years

DMO GRRS Sec.IVA(2)


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b. Monthly secondary market trading activities in thePDMMs trading

account with counterparts in the followingcategories:i. Purchases and Sales with other PDMMsii. Purchases and Sales with non-PDMM banks

and discount housesiii.Purchases and Sales with Pension Fundsiv.Purchases and Sales with other domestic

clients; and,v.Purchases and Sales with foreign institutions

4233 Trading members shall submit a monthly report tothe SEC and DMO of Repo transactions undertakenby them for each month within five (5) working daysof the end of each month in the format shown inappendices 8 & 9

DMO GRRS Sec.IVA(3)

4234 Trading members including those acting ascustodians for foreign investors who participate inthe domestic FGN Securities market, shall file withthe SEC and DMO, monthly bond holding positions

by foreign investors for transactions in the primaryand secondary markets within five (5) working daysof the end of each month, as shown in the appendix9

DMO GRRS Sec.IVA(4)


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management and immediately reported to theDMO by the appropriate PDMMs officer

4238 i. Failure to comply with these mandates or thedissemination of confidential information mayresult in disciplinary action by the DMO and otherappropriate authorities

DMO GRRS Sec.X(2)

TechnicalRequirements

4241 Trading members, for the purpose of trading in FGNSecurities, shall provide for the following:

i. Trading and Sales Office with designated officespace for Trading and Sales Officers (TreasuryClient Relationship Managers); and

ii.Customer Service locations

DMO GRRS Sec.IVB(1)

4242 Trading members shall have communicationsequipment consistent with maintainingcommunications with the DMO, other PDMMs andcustomers:

i. Interconnected telephone system with at leasttwo (2) lines per trader, sales officer(s) and one

(1) GSM line per dealerii.E-mailing systemsiii.Computers, printers, scanners and photocopiersiv.Financial calculators or programmes for

calculating securities prices and Yield-To-

DMO GRRS Sec.IVB(2)


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Maturity

v.Trading and data screen capabilities4243 i. Trading members shall have internal technical

capabilities for providing current and accurateinformation to Management, Traders, Salesmen,the DMO and, other regulatory authorities. Suchinformation shall include, but not limited to: Daily Inventory Position Daily Profit and Loss Daily Mark-to-Market Valuation Trading Activity Customer Activity Credit review of current open trades with

counterparties

DMO GRRS Sec.IVB(3)

4244 Trading members are under obligation to report andrecord their holdings and trading activities in FGNSecurities in a manner consistent with the provisionsof the accounting standard(s) that may be prescribedby their respective regulators from time to time

DMO GRRS Sec.IVB(4)

4245 i. Trading members shall make their books open tothe SEC and DMO who shall periodically embarkon on-site inspections to trading members officesto ascertain compliance with the stated criteria

DMO GRRS Sec.IVB(5)


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ii. The DMO may employ the services of a third-party such as the CBN, to conduct on-site

inspections on its behalfiii. Trading members shall be given fourteen (14)

days within which to rectify any violation in thissection, and if found unsatisfactory, the DMOmay invoke the actions stated in Rule 4472

CustomerRequirements

4251 Trading members primary contact with a customershall be through a Sales Officer. Trading membersshall have full responsibility for the actions of itsSales Officers

DMO GRRS Sec.VI(1)

4252 Trading members shall not refuse a request to bid atan auction or give a quote for FGN Securities fromcustomers, provided such customers meet theircustomer selection or acceptance criteria includingdue diligence requirements

DMO GRRS Sec.VI(2)

4253 Trading members shall comply with the following rulesfor customer activities:

i.All information concerning customer activity isconfidential and should not be provided to anyparty outside the individual trading member withthe exception of fulfilling the appropriatereporting requirements or demands of regulators

DMO GRRS Sec.VI(2)


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and/or a court of law

ii.For secondary market trades where the customeris not part of the two-way quote market, salesofficers shall make requests for customers bidsand/or offers to the appropriate traders. They arerequired to relay the prices given by the tradersto the customer and immediately provide thecustomer's response back to the trader

iii.The flow of prices and information shall bewithout delay. The sales officer represents thecustomer for this purpose and must accuratelyreflect all requests and responses to the traders

in a timely fashion

iv.A sales officer is not allowed to bid at an auctionon behalf of a customer or trade for a customer'saccount without proper authorisation by thecustomer

v.Standing orders may be placed by the customerand be subsequently filled by the trader, but thecompletion of the trade must be reportedimmediately to the customer and the transactiondetails confirmed within twenty four (24) hoursby a means mutually accepted by the tradingmember and the customer

vi.A trading member may decline a customersrequest where the customer has not complied


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with the trading members internal policies orprocedures such as Know Your Customer (KYC)

policy or where no limit (cash or credit) has beenestablished for the customer or the request willlead to an excess in the customers limit

vii. A refusal to bid for or trade with a customershould be made only after the deadline to bid ortrade with the customer has been approved bythe trading members management and thereason(s) should be disclosed to the customer

OrganisationRequirements

4261 At the beginning of each calendar year, trading

members shall provide the SEC and DMO with anorganisational chart of its Bond Trading Department(Group or Division as may be applicable) and thenames of individuals with management responsibilitiesfor bond investments and trading activities. This listshall include the following:

i.All individuals with oversight responsibilities forinvestment and trading activities related to FGNSecurities

ii.All individuals with authority to trade (buy or sell)FGN securities, including the manager of therelevant department; and

iii.The manager for clearing and settlementoperations

DMO GRRS Sec.

VI A(1)


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Sub-SectionRuleCode


4262 Organisation StructureTrading members shall report any changes in the

organisational chart and personnel to the SEC andDMO, within seven (7) working days of assumptionof duty by such staff

DMO GRRS Sec.VI A(2)

4263 Trading members shall not employ any individualwho has been sanctioned in activities relating to theFGN securities market, or barred from securitiesinvesting or trading activities by any regulatoryauthority including those regulators listed in Rule4221 (i)

DMO GRRS Sec.VI A(3)

4264 Ownership and BoardA trading member shall advise the DMO in writing ofmaterial changes in its ownership and Board within14 days of their occurrence

DMO GRRS Sec.VI C


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4265 Systems and Proceduresi.A trading member shall have policies and

procedures for creating limits and monitoringsame for self, customers and its FGN securitiestraders. These include:

a.Credit policy that describes procedures forestablishing limits with customers includinglimits on repurchase agreements on a per

customer or counter-party basis

b.Risk Policy procedures for establishinginstitutional position limits in FGN Securities,and

c.Risk Policy procedures for establishingindividual traders position limits in FGNSecurities

ii.Policy on documentation and other proceduresrequired for bidding for and trading withcounterparties

iii.Compliance policy that establishes a system ofmonitoring institutional and individual complianceto guidelines or circulars on investment andtrading in FGN Securities by their respective

regulatory authorities, as well as in-house policiesand procedures

DMO GRRS Sec.VI B(1-3)


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Sub-SectionRuleCode


ApplicationProcess

4271 i. Eligible institutions who wish to become PDMMsin FGN securities may apply to the DMO or in the

cases where the DMO invites applications frominterested parties, respond to such invitations inthe prescribed format

ii. Applicants shall meet the following criteria andothers that may be prescribed by the DMO fromtime to time:

a. be rated a minimum of B+ (or its equivalent)by any of the recognised international ratingagencies (Standard and Poors, Fitch orMoodys) or any other rating agency

recognised by SECb. Participation in the primary and secondary

markets for FGN Securities including the two-way quote market would be an advantage

iii. The acceptance of an application and theissuance of a PDMM licence for FGN Securities isat the sole discretion of the DMO

DMO GRRS Sec.XI A(1)

4272 i. An applicant for membership or authorisation toperform one or more services shall apply to theFMDQ in the form and manner prescribed by theFMDQ

ii. The application shall be accompanied by anapplication fee prescribed by the FMDQ an

FMDQ IIMMA Sec.2.7


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approved by SEC.

iii. Where FMDQ requires the applicant toprovide further information it may forward arequest to the applicant to supply theinformation.

iv. The request may include that one or morerepresentatives of the applicant be interviewedby the FMDQ

v. FMDQ has the sole discretion to accept or rejectthe application, or to accept an applicationsubject to certain conditions being met

vi.

FMDQ shall notify the applicant in writing of itsdecision and of any conditions that are requiredto be met

vii. An institution aggrieved by a decision of theFMDQ to reject an application to be admitted as amember may appeal to the Board of FMDQ .

Termination ofmembership(Suspension

and Revocationof Licence)

4281 Without prejudice to the provisions contained in thisRule, the DMO may suspend or revoke the licence of aPDMM for any of the following reasons:

i. Where the PDMM is classified as financiallydistressed or having poor corporate governanceby its regulator

ii.An intervention by a regulator or regulators in thePDMM due to adverse developments in the PDMM

DMO GRRS Sec.XI B(1)


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institution

iii.For the avoidance of doubt, a PDMMs licence isautomatically revoked, suspended or withdrawn,once the licence issued by one or more of itsregulators is revoked, suspended or withdrawn.

Notice toMembers

4291 i. FMDQ shall file with the SEC before issuing totrading members a copy of any notice, circular,list, bulletin etc.

ii. Such notices, circulars, lists, bulletins etc. shall beaddressed to Director-General and delivered atSECs head office

iii. Where SEC does not respond to the said materialwithin 5 working days of the receipt thereof,FMDQ may issue it to its trading members

A facsimile or other electronic copy of such notice maybe sufficient provided that there is evidence of receipt

SEC SRR Sec.186(1-4)


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Rule SectionRule

Sub-SectionRuleCode


Obligations&Rights

Market Making4311

i. PDMMs shall make markets in FGN securities onrequest, following the "Secondary Market MakingRules" (two-way quote Market) as establishedby the DMO in consultation with the PDMMs

ii.PDMMs shall make on demand, and in allconditions, continuous and effective two-wayquote prices to all PDMMs and non-PDMMs

iii.However, PDMMs are not obligated to quoteprices to customers for whom they have notcompleted due diligence

iv.Only PDMMs and any other financial institutionswhile operating in the two-way quote market forFGN securities may trade through duly registered"Intermediaries" (Inter-Dealer Brokers)

v.A PDMM shall maintain a minimum level ofsecondary market activity (excluding Repos)measured in terms of the Total Nominal Value ofsecurities traded and the Total Number of Trades

vi. Each PDMMs activity shall equal at least60% of its proportional share of these two

parameters, over a rolling six month periodvii. A PDMM shall publish representative price

quotes on its corporate website or otherpublic place on a daily basis

DMO GRRS Sec.IIIb (2 - 12)


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viii. A PDMM is expected to sign-up and beconnected to duly registered trading

infrastructure and platforms that may beintroduced from time to time for the buyingand selling of securities

ix. A PDMM is encouraged but not underobligation to give two-way quote in FGNSecurities that have been designated asrump or illiquid

x. A PDMM is allowed to vary his Bid and/orAsk for prices where the request is for atransaction outside the standard parameters

(such as size and settlement date) specifiedin the Secondary Market Making Rules asestablished by the DMO in consultation withthe PDMMs

xi. PDMMs shall comply with the following:a.No commission or fee shall be received by or

paid to a PDMM or customer(s) for activities inthe secondary market except Inter-DealerBrokers

b.FGN securities shall be traded on the Over-the-Counter (OTC) Market. However, where thesecurities are listed on the Nigerian StockExchange (NSE), transactions on the NSE arepermitted


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Trading shall be amongst the PDMMs and betweenthemselves and non-PDMM institutions or individuals

4312 Quoting trading members shall:i. give two-way quote on FGN bonds for standard

amount, without undue delay, during tradinghours

ii. refrain from quoting for amounts lower than thestandard amount

iii.state the amount it is willing to quote for if thecalling party request a quote for an amounthigher than the standard amount

iv.deal, for at least the standard amount, if callingparty finds one of its quotes attractive

v.give two-way quote for all FGN bonds issuedfrom July 2006 except rump stocks declared bythe DMO

FMDQ GTFB Sec.1.4.1

4313 Calling trading members shall:i. decide promptly what to do on the quote

supplied by the quoting party, during tradinghours

ii.deal with a quoting trading member as many

FMDQ GTFB Sec.1.4.2


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times as it desires during trading hours

iii.close one deal (sell or buy) per quote, if it findsone of the quoting trading members ratesattractive

iv.reserve the right not to deal if it finds the quotesunattractive

v.not be obliged to give quotes to quoting tradingmembers at that instance. However, if it shalloblige and quote, it must deal if quoting tradingmembers finds its quote attractive

Manipulative orotherFraudulentDevices

4321 i.

Customer Inducements - PDMMs personnel areforbidden from giving or receiving any form ofcompensation, monetary or otherwise, asinducement to bid at auctions or complete atrade for a customer

ii.Manipulation - PDMMs shall not engage inactivities, which are intended to manipulatemarket prices or obstruct the efficient functioningof the market

iii.Personal Trading - The PDMMs Bond Traders arerestricted from any personal trading orinvestment activity in FGN Securities in thesecondary market without prior notice beinggiven to and approval received from the TradersCompliance Officer. Ownership interests in

DMO GRRS Sec.XI (1 & 2)


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equities, bonds, mutual funds or other financialinstruments shall be reported to the Trader's

Compliance Officeriv.Collusive Activities - Traders and Sales Officers

are strictly prohibited from activities with otherPDMMs, customers, and individuals within theFGN Securities market resulting in transactionsthat do not reflect proper market practices

4322 i. All persons engaging in activities whichjeopardise the efficiency of the marketplace shallbe proceeded against in accordance with the

provisions of the Investments and Securities Act(ISA), 2007 (The Act), as may be amended fromtime to time, and other applicable laws. Inaddition, the DMO may bar the individual fromparticipating in the market for FGN securities.Where it is the corporate body, its PDMM licensemay be revoked

DMO GRRS Sec.XI (3)

False,Misleading orDeceptiveStatements

4331 i. Trading members and their personnel areprohibited from making any statements or

engaging in any activity, which could negativelyimpact the FGN Securities market

ii.Market Misrepresentation - Trading memberspersonnel shall not disseminate rumours or false

DMO GRRS Sec.XI (1 & 2)


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information about the market, price levels ormarket participants

OperationalPrivileges

4341 i. PDMMs shall be the preferred counterparty forDMOs secondary market activities, the DMOshall only deal with PDMMs in the FGN securitiessecondary market

DMO GRRS Sec.XII A (5)

4342 i. Trading members shall automatically, subject tosigning the required agreements with an Inter-Dealer Broker (IDB), have trading and viewingaccess to the services of duly registered IDBfirms which will enable them to unwind oracquire positions with each other and otherinstitutions who are part of the two-way quoteSystem

DMO GRRS Sec.XII B (1)

4343 i. PDMMs are automatically invited to send arepresentative to the DMOs periodic consultationmeetings on the FGN Securities market once

appointed


4344 i. The DMO may regularly schedule meetings withPDMMs for the purpose of receiving inputs into



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its debt management plans and strategiesregarding future debt issuance, new products

and general operations of the FGN SecuritiesMarket

4345 i. A PDMM automatically becomes a member of theTrade Group Primary Dealer Market MakersAssociation (PDMMA), a self-governing body thatrepresents the PDMM communitys interests inthe wider market place and with other regulators

Comment: the trading members are now governed by

FMDQ, a SEC-registered Self-Regulatory (SRO)


Trading &Execution

Types ofTransactions

4411 Outright Purchase/Sale TransactionThe purchase (or sale) of a bond (Governmentsecurities) in exchange for cash on settlement dates

FMDQ GTFB Sec.2.1

4412 Repo (Repurchase Agreement)i.A repurchase agreement is an agreement in

which the bond is sold and later bought back atan agreed or predetermined price

ii.A repo is a borrowing or funding transactionwhereby the first party borrows money from thesecond party, using the asset as collateral

iii.At the end of the agreed period the first partyrepays the second party, the repo interest and

FMDQ GTFB Sec.2.2


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repurchases the asset

iv.Repo tenor can be any number of days and thebond term to maturity does not necessarily needto conform to the tenor of the repo but thebonds outstanding tenor shall be longer than therepo tenor

v.The tenor of the repo transaction shall becalculated from the value date

Trading Hours4421 Trading hours shall be between 9.00am - 4.00p.m.

(current practice is 10.00am 2.00pm)every working

day

FMDQ GTFB Sec.1.11

TradingParameters

4431 Standard Amounti. N50m shall represent the standard amount

trading members must be ready to deal eachtime a quote is given (current practice is thatstandard amount for the trading of FGN bondswith volume greater than N30bn is N100m)

ii.Where amounts required are not specified up-front, quotes will be assumed to be for thestandard amount and confirmed as such

iii.However, the standard amount may be revisedby FMDQ as the market evolves

FMDQ GTFB Sec.3.1


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4432 Specified Amounti. Where the calling party requests for a quote for

an amount larger than the standard amount, thecalling party shall state the exact amount up-front

ii.The quoting party may decline to quote for suchan amount and shall specify the amount it iswilling to quote, for which must be the standardamount or higher

FMDQ GTFB Sec.3.2

4433 Rump stock & short- dated bondsi. Trading members may quote indicative prices for

bonds with amount less than N30bn in issueotherwise known as rump stock bond

ii. Trading members may quote indicative prices forbonds with less than one year term to maturityotherwise known as short-dated bonds

MarketPractice

4434 Spreadi. The maximum spread between the bid and offer

rates for outright transactions will be as follows:

c. Up to 3 years = 25bps (current practice=15bps)

d. 3yr to 5yrs = 25bps (currentpractice=30bps)

e. 5yrs to 7yrs = 25bps (current

FMDQ GTFB Sec.3.4


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practice=30bps)f. 7yrs to 10yrs = 25bps (current practice =

30bps)g. 10yrs to 20yrs =(current practice = 30bps)

Quotes shall be obliged to market participants onprices with two decimal places. e.g. 99.50/99.80 (bidand offer respectively)

4435 The maximum spread for rump stock and short-datedbonds shall be as follows:

Rump stock bonds:

i. 3yrs = 50bpsii.5yrs20yrs = 100bps

Short-dated bonds:

i.


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Trading Halt4451 FMDQ may declare a trading halt in circumstances

where trading activity:

i. is being or could be undertaken by personspossessing unpublished price-sensitiveinformation that relates to that security

ii. is being influenced by a manipulative ordeceptive trading practice; or

iii.may otherwise give rise to an artificial price forthat security

iv.where the bond market becomes illiquid due tosome external event

FMDQ IIMMA Sec.4.5

Other TradingPractices

4461 Mode of CommunicationDealing shall be done on the telephone or throughany on-line screen-based dealing system approved byFMDQ

FMDQ GTFB Sec.1.5

4462 Concluding a Deal -i. Dealing in the two-way quote system will be on

the basis of Clean Price

ii.Dealers shall regard themselves as bound to adeal once the price and volume have beenagreed

iii.A deal is consummated when the requestingtrading member confirms buying or selling thestandard amount or any other amount quoted for

FMDQ GTFB Sec.1.6


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Rule SectionRule

Sub-SectionRuleCode


at the bid or offer rate indicated by the quotingparty

iv.After quoting a rate, a quoting trading membercannot refuse to deal if the requesting tradingmember decides to buy or sell at either of therates quoted

v.To reduce the incidence of disputes, dealers areadvised to reconfirm transaction details

vi.If no amount is stated before the quote is given,then the quote shall be assumed as given for thestandard amount

vii. If a trading member requests quote for anamount higher than the standard amount andthis amount is stated ahead of the quoting partygiving the quote, it shall be assumed that thequote was given for the amount stated and thequoting party is obliged to deal

4463 Voice Recording Facilityi. To expedite conflict resolution, the use of voice

recording facilities in the trading offices of allparties is compulsory

ii. It is mandatory that all conversations shall berecorded

iii.Tapes shall be kept for at least two months after

FMDQ GTFB Sec.1.9


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Rule SectionRule

Sub-SectionRuleCode


the settlement dates of the contracts

iv.Tapes containing disputed transactions shall beretained until the problem has been resolved

PerformanceEvaluation

4471 i. The DMO shall review the primary and secondarymarket activities of the PDMMs semi-annually, orat other intervals that the DMO may decide, anddetermine if individual PDMMs are fulfilling their

primary and secondary market obligations

DMO GRRS Sec.IIIC


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Rule SectionRule

Sub-SectionRuleCode


4472 The performance evaluation shall be the primary basisfor the recognition of excellence or sanctions as

detailed in the following sectionsi. Sanctions: Non-compliance may result in the

following actions

ii.Caution Notice: A PDMM shall be given a 30-daynotice within which to explain any violations oftheir market obligations, and another 30 dayswithin which to rectify same. If the explanation isunsatisfactory or rectification is not done withinthe specified period, the DMO may suspend orrevoke the PDMMs license

iii.Suspension of PDMM Status: The period ofsuspension shall be determined by the DMO andshall not be rescinded without formal renewedcommitment to fulfilling the primary andsecondary requirements by the suspended PDMM

iv.Revocation of PDMM Status: The PDMM statusmay be revoked and, re- issuance of the PDMMlicence may be permitted after twelve (12)calendar months or such other period that theDMO may determine after a formal application

would have been made by the affected PDMMv.The reinstatement of the licence is solely at the

discretion of the DMO

DMO GRRS Sec.IIIC (a-b)


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Rule SectionRule

Sub-SectionRuleCode


Clearing &Settlement

TradeReporting

4511 i. Trading members shall open accounts with theFGN bond depository i.e. Central Securities

Clearing System (CSCS)ii. Trading members shall submit settlement

instructions to the CSCS before 12 noon onsettlement day (current practice is that Post-Trade Module (PTM) ensures straight-throughprocessing by capturing and sending tradesinformation to CSCS for settlement.However, thetrades are not being reported in a timely manner)

iii. The standard settlement date is T+2, i.e. 2 daysafter trade date. However trading members may

settle on the trade date (T+0) or any daymutually agreed

iv. The instruction shall be signed according to themandate of the trading member and contain thefollowing details:

- Security

- Bond Maturity Date

- Coupon

- Bond Seller

- Bond Buyer- Trade Date

- Settlement Date

- Number of Units of the bond

FMDQ GTFB Sec.3.5


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Rule SectionRule

Sub-SectionRuleCode


- Face Value

- Dealers References

- Clean Price

- Notional

- Full/Dirty Price

- Amount Payable

TradeConfirmation

4521 i.Verbal agreements shall be binding. Subsequentwritten confirmation is regarded as evidence ofthe deal, but should not override terms agreed

verballyii.Confirmations (whether mailed, telexed or sent

by other electronic means) provide anopportunity for dealing errors to be identified andrectified with minimum delay and possible cost.Standard confirmation letters shall be exchangedwithin 24 hours

iii.Upon receipt, all confirmations shall immediatelybe thoroughly checked and appropriate actiontaken to rectify any differences

iv.If the confirmation is considered incorrect, thetrading members shall be informed immediatelyand an amended confirmation shall be providedby the trading member whose original

FMDQ GTFB Sec.1.8


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Rule SectionRule

Sub-SectionRuleCode


confirmation was incorrect

v.Any trading member that fails to receive aconfirmation shall query the matter with thecounterparty as soon as possible.

vi.CSCS shall check that the bonds to be sold are inthe bond position of the seller

(Current practice is that trade confirmation isdone via telephone or electronic platform ontrade day. Trading members upload tradedetails from their blotters into PTM thatensures straight-through processing to CSCS.CSCS advises CBN after trades have been

matched successfully)

TradeProcessing

4531 i. Where bonds are confirmed to be in the sellersbond position, they shall be transferred to thebuyers bond position. The charge payable toCSCS for this function is N1 per 1million

ii. Following this, a copy of the sellers settlementletter shall be forwarded to the Registry &Depository Office (formerly Issues Office) of theCBN with confirmation that the bonds transferwas successful. The deadline by which the CSCSforwards settlement letters to the CBN is 2.30pmon T+1

FMDQ GTFB Sec.3.5


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Rule SectionRule

Sub-SectionRuleCode


TradeSettlement

4541 i. The CBN shall transfer the amount payable inconsideration of the bonds from the CBN

operating account of the buyer to the CBNoperating account of the seller. The chargepayable to CBN for this function is N500 pertransaction

ii. Where bonds transfer was unsuccessful, CSCSshall still forward settlement letters to the CBNby 2.30pm but confirming that the bondstransfer was not completed

iii. For unsuccessful trades, the CBN will nottransfer the amount payable in consideration of

the bonds from the CBN operating account ofthe buyer to the CBN operating account of theseller. In this instance, no charges are payableto CSCS and CBN.

iv. If by the End of the Day (EOD) the buyers CBNoperating account is not funded to cover theamount payable in consideration of bondspurchased, the CBN will rediscount the buyersauto-mandate Treasury bills. CSCS will send abill of charges to participants, monthly

FMDQ GTFB Sec.3.5

4542 i. All trading members shall have 'auto rediscountmandate' which gives the CBN authority torediscount their treasury bills for cash to coverany overdraft in a trading members CBN

FMDQ GTFB Sec.3.5


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Rule SectionRule

Sub-SectionRuleCode


operating account at the close of business eachday.

ii. Each trading member is required to re-activate its'auto rediscount mandate' with the CBN

iii. The CBN is the custodian of all dematerialisedholdings of Treasury bills in its Discount Office

DisputeResolution

Mediation4611 Initiation

A trading member shall file a request to mediate toFMDQ. FMDQ shall contact the other tradingmember to confirm if they agree to mediate orarbitrate the dispute

FMDQ

4612 Selectioni. FMDQ shall assist in the selection of a mediator

(a financial markets expert) by providing thetrading members a list of mediators to choosefrom along with a disclosure report for eachmediator

ii. The trading members shall select a mediatorthat they all agree to work with

FMDQ

4613 Sessionsi. The trading members, their representatives and

the mediator shall sign FMDQs MediationSubmission Agreement before the mediation

FMDQ
http://www.finra.org/ArbitrationAndMediation/Mediation/Process/InitiateaMediation/http://www.finra.org/ArbitrationAndMediation/Mediation/Process/MediatorSelectionhttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/MediationSessionshttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/MediationSessionshttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/MediatorSelectionhttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/InitiateaMediation/


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Rule SectionRule

Sub-SectionRuleCode


can take placeii. FMDQ shall schedule and communicate the

mediation date and locationiii. The trading members shall discuss all the

issues with the mediators guidance

4614 SettlementIf the trading members agree to settle, FMDQ shall

draft an enforceable agreement for both trading

members to sign

FMDQ

4615 ImpasseIf the trading members do not reach a settlement,

an arbitration case can be filed, or, if one was

previously filed, request can be made to continue

the case

FMDQ

4616 FeesTrading members shall be required to pay

administrative fees for mediating through FMDQ

and are responsible for the mediator's fee andattendant expenses

FMDQ
http://www.finra.org/ArbitrationAndMediation/Mediation/Process/Settlementhttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/Impassehttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/Impassehttp://www.finra.org/ArbitrationAndMediation/Mediation/Process/Settlement


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Rule SectionRule

Sub-SectionRuleCode


Arbitration4621

Where the trading members do not reach a

settlement, the matter may be referred for arbitrationin accordance with the Arbitration and Conciliation ActLFN, 2004.

Provided that the trading member shall appeal to theCommission in the event of dissatisfaction with thedecision of the arbitration.

FMDQ


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Definition of Terms

Arbitration- refers to a formal dispute resolution process in which disputing parties allow an arbitrator, to listen to the arguments

set forth by the parties, study the testimonial and/or documentary evidence, and render a decision on the matter

Bond- A certificate of debt, generally long-term, under the terms of which an issuer contracts to pay the holder a fixed principalamount on a stated future date (the maturity date) and usually a series of interest payments during its life

Clean Pricerefers to the price of the bond excluding the accrued interest. Bond prices are normally quoted clean prices

Federal Government of Nigeria Securities (FGN Securities) refers to securities whose principal and/or interest is

guaranteed by the Federal Government of Nigeria

Inter-Dealer Broker (IDB) refers to an intermediary between dealers in securities who matches best bids with the best

offers to arrive at the right price

KYC Documentation - The documentation required to be produced by a trading counterparty to ensure that Know Your Client

or Know Your Customer (KYC) or Anti-Money Laundering (AML) requirements are adequately fulfilled

Market Maker -A dealer who is prepared to create a two-way market by quoting simultaneous bid and offer prices

Mediation refers to a process in which a mediator facilitates negotiations between disputing parties, helping them to find a

mutually acceptable resolution.

Primary Dealer Market Maker (PDMM) System - A system whereby some institutions are given exclusive right to

purchase/underwrite all Federal Government securities issued for their own holding and/or for resale

Primary Marketrefers to the market in which new securities are issued by Governments, corporations, etc., in order to raise

capital


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Repurchase Agreement (Repo) - A fixed income transaction used for short-term financing involving the sale of an asset to

another party with a simultaneous agreement to buy the asset back at a later date at a pre-agreed forward price. The counterparty

selling the asset sees the transaction as a repo. The counterparty purchasing the asset sees the same trade as a reverse repo

Rump Stock - Federal Government of Nigerian bonds that are not trading because their volume is not up to the standard volume

to qualify for trading on two-way quote

Secondary Market - This is a market for trading previously issued instruments such as stocks, bonds, options and futures

Short-dated Bond- refers to any FGN bond whose Term-to-Maturity is 12 calendar months or less

Trading Member refers to a Debt Management Office (DMO) licenced Primary Dealer Market Makers (PDMM) and FMDQ-

approved Market Maker

Two-Way Quote - This is a binding market practice whereby a dealer simultaneously provides both the bid and ask quote of a

security


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Key Definitions

Acronym Description

AFS Available For Sale

BPS Basis Pointsis equivalent to a 1/100thof a percentage

CBN The Central Bank of Nigeria

CSCS Central Securities Clearing System

DH Discount House

DMB Deposit Money Bank

DMO Debt Management Office

FGN Federal Government of Nigeria

FMDQ Financial Markets Dealers Quotations

HTM Held-To-Maturity

IPHC Initial Pre-Hearing ConferenceMTM Market-To-Market

MMD Money Market Dealer

MSA Mediation Submission Agreement

NMRA Nigerian Master Repo Agreement

PDMM Primary Dealer Market Maker

PTM Post-Trade Module

Repo Repurchase Agreement

RPT Riskless Principal Transaction

RTGS Real Time Gross SettlementSEC Securities and Exchange Commission

TDC Treasury Dealership Certificate


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Reference

S/N Acronym Description

1 GOBN A Guide To Operations For The Debt Management Office, Nigeria In The FederalGovernment of Nigeria Bond Market2012

2 GRRS General Rules and Regulations Governing the Primary Dealer Market Maker (PDMM)System In Federal Government of Nigeria (FGN) Securities by the Debt ManagementOffice (DM) NigeriaDecember 2012

3 GTTB Guidelines for Two Way Quote Trading in FGN Bonds by Financial Markets DealersAssociation

4 IIMMA Inspection and Instruction Manual of FMDQ OTC Members Activities - November 20115 SRR Securities and Exchange Commission Rules & Regulations - 2013


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Appendices

Appendix One - Two-Way Dealing Systems Dispute Form

TO: Chairman

(FMDQ EXCO)

Subject to the terms and conditions in our acceptance of and commitment to the Guidelines of the 2-way Quote Dealing system,

we hereby notify the FMDQ EXCO of a dispute arising from a bond transaction between us and ABC and seek prompt resolution.

The details of the disputed transaction are as follows:Buyer's Dealer:

Seller's Dealer:Amount:Price:Yield:Transaction Date:Value Date:Coupon:Maturity Date:Bond Name:Amount due to us:

Mode of Receipt:

Amount Due to:Counter-partyMode of Payment:


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Nature of the dispute:

Required compensation:

..

Justification for compensation:

Steps already taken in resolution of the dispute:

Find attached copies of the following (please tick where applicable):

1. Contract letter2. Evidence of occurrence of the dispute3. Justification for claims4. Evidence of steps taken to resolve the dispute5. Others (specify)

Kindly advise us as we look forward to prompt resolution of the dispute


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Authorised Signatory Authorised Signatory

Appendix Two Contract Letter Format for Sale of FGN Bonds

June 26, 2008

XXX Bank

AAA Street

Victoria Island

Lagos

RE: SALE OF FGN BONDS TO XXXXXX BANK

We write to confirm the sale of FGN Bonds by AAA Banks Ltd to XXXX Bank Plc.


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The details of the FGN Bonds are:

Security Name:

Maturity date:

Units:

Seller:

Buyer:

Trade Date:

Settlement Date:

Coupon:

Yield:

Clean Price:

Accrued Interest:

Dirty Price:

Notional:

Amount Payable:

Please note that the responsibilities and obligations of the parties herein are subject to applicable laws and regulations in Nigeria.

Kindly indicate against two authorized signatures your acceptance of this offer.

Thank you for your anticipated cooperation.

Yours faithfully,


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For: AAAAAAA BANK LIMITED

__________________ __________________


For: XXXXXX BANK LIMITED

__________________ __________________



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Appendix Three - Contract Letter Format for Purchase of FGN Bonds

June 26, 2006

XXX Bank

AAA Street

Victoria Island

Lagos

RE: PURCHASE OF FGN BONDS TO XXXXXX BANK

We write to confirm the purchase of FGN Bonds by AAA Banks Ltd from XXXX Bank Plc.

The details of the FGN Bonds are:

Security Name:

Maturity date:

Units:

Seller:


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Buyer:

Trade Date:

Settlement Date:

Coupon:

Yield:

Clean Price:

Accrued Interest:

Dirty Price:

Notional:

Amount Payable:

Please note that the responsibilities and obligations of the parties herein are subject to applicable laws and regulations in Nigeria.

Kindly indicate against two authorized signatures your acceptance of this offer.

Thank you for your anticipated cooperation.

Yours faithfully,

For: AAAAAAAA LIMITED

__________________ __________________


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For: XXXXXXXXX LIMITED

__________________ __________________


Appendix Four - Letter Format to CSCS Requesting Transfer of Bonds

June 26, 2006

The Central Securities and Clearing Services2-4, Customs StreetFirst Floor, Stock Exchange HouseMarina Lagos

Dear Sir,

Attention: (NAME & DESIGNATION)

TRANSFER OF BONDS Ref: AAA/XXX/0606/00001

By the close of business today, please transfer Government Bonds as specified below:


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BANK INSTRUMENT UNITS FACE VALUE CSCS CODE/ACCOUNTNO

From: XXX 2ndFGN Bond 2008 Series 7 1,000,000 NGN1,000,000,000.00 DAAA/123456789

To: AAA 2ndFGN Bond 2008 Series 7 1,000,000 NGN1,000,000,000.00 DBBB/987654321

Amount in

words :

ONE BILLION NAIRA ONLY

We confirm that the consideration of NGN----------------------------------------------------------------------------is due to us by transfer

through your office today, in respect of the deal below.

Deal Reference

Trade Date

Instrument

Coupon

Buyer

Seller

Face Value

Clean Price

AccruedInterest


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Full Price

Amount Payable

..


For Official Use Only

CSCSCBN

Received by: Received by:

Processed by: Processed by:

Remarks: Remarks:


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Appendix Five - Letter Format to CSCS Requesting Transfer of Funds

June 26, 2006

The Central Securities and Clearing Services

2-4, Customs Street

First Floor, Stock Exchange House

Marina Lagos

Dear Sir,

Attention: (NAME & DESIGNATION)

TRANSFER OF FUNDS Ref.: SCB/GTB/0606/00001

Please by the close of business today, effect transfer of funds as follows:-

BANK ACCOUNT NO. AMOUNT CSCS CODE/ACCOUNT NO

Dr. AAA 40007101-33 N 108,400,000.00 BDAAA/123456789

Cr. xxx 40104501-45 N 108,400,000.00 BDBBB/987654321


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Amount in

Words:

One Hundred And Eight Million, Four Hundred Thousand Naira

Only.

The above represents payment for the purchase of bonds as detailed below

Deal Reference

Trade Date

Instrument

Coupon

Buyer

SellerFace Value

Clean Price

Accrued

Interest

Full Price

Amount Payable

Settlement Date


For Official Use Only


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CSCS CBN

Received by: Received by:

Processed by: Processed by:

Remarks: Remarks:


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Appendix Six Acceptance and Commitment Letter

DATE:

The CEO,

FMDQ

Dear Sir,

RE: TWO-WAY QUOTE BOND TRADING SYSTEM - ACCEPTANCE AND COMMITMENT LETTER

We write on behalf of XYZ Member Limited in respect of the GUIDELINES FOR BOND TRADING ACTIVITIES IN THE 2-WAYQUOTE MARKET.

We have carefully studied the documents in detail and affirm that we fully understand all the issues contained therein. Accordingly,we wish to confirm our acceptance of the guidelines and willingness to participate in the bond trading market.

We agree that as a committed participant, we are bound by and undertake to abide by the laid-down rules and regulationsgoverning the operations of the market as contained in the guidelines and as may from time to time, be amended or added to (so

far as such amendments/additions are pre-advised and agreed upon).

We agree to accept decisions of the FMDQ EXCO and the Arbitration Committee in inter-member disputes. We agree that decisionsare subject to existing arbitration laws of the Federal Government of Nigeria.

We accept that CBN/DMO may apply sanctions, which will be monetary and/or recommend expulsion from the Two-Way Quotemarket, where necessary.

We shall be liable/responsible for all actions of our Dealers listed in the FMDQ Bond Dealers Directory (FBDD) or as otherwise

advised by us in writing.

For and on behalf of:


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(Name of Institution)

.... ....

(TREASURER/HEAD OF TRADING/CHIEF DEALER) (MANAGING DIRECTOR/CEO)


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Appendix Seven Details of FGN Securities Sold on Repo Basis to other Parties

Counterparty Nominal Value (Nm)

PDMMs

Non PDMMs ( Banks and Discount Houses)

Pension Fund Administrators

Other Local Institutions

Foreign Institutions

Appendix Eight Details of FGN Securities Bought on Repo Basis from other Parties

Counterparty Nominal Value (Nm)

PDMMsNon PDMMs ( Banks and Discount Houses)

Pension Fund Administrators

Other Local Institutions

Foreign Institutions

Appendix Nine Holdings of FGN Bonds by Foreign Investors

Name Country of Origin Nominal Value (Nm)


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LIST OF TRADING MEMBERS

S/N INSTITUTIONS

1 ACCESS BANK PLC

2 ASSOCIATED DISCOUNT HOUSE LTD

3 CONSOLIDATED DISCOUNTS LTD

4 CITIBANK NIGERIA LTD5 DIAMOND BANK PLC

6 ECOBANK NIGERIA LTD

7 ENTERPRISE BANK LTD

8 FIRSTBANK OF NIGERIA LTD

9 FIDELITY BANK PLC

10 FIRST CITY MONUMENT BANK PLC

11 FSDH MERCHANT BANK LTD

12 GUARANTY TRUST BANK PLC

13 STANBIC IBTC BANK PLC14 KAKAWA DISCOUNT HOUSE LTD

15 KEYSTONE BANK LTD

16 MAINSTREET BANK LTD

17 STANDARD CHARTERED BANK NIGERIA LTD

18 SKYE BANK PLC

19 STERLING BANK PLC

20 UNITED BANK FOR AFRICA PLC

21 UNION BANK OF NIGERIA PLC

22 UNITY BANK PLC

23 WEMA BANK PLC

24 ZENITH BANK PLC

FMDQ Codified Rule Book FGN Bonds

Documents

Transcript of FMDQ Codified Rule Book FGN Bonds