Critical points to note about CBN’s newly introduced Financial Instruments

The Central Bank of Nigeria(CBN) has introduced two new financial instruments to aid liquidity management and deepen the financial system.

It stated this in a circular signed by the  Director, Financial Markets Department, Dr Alvan Ikoku; the apex bank revealed that it has introduced  “Funding for Liquidity Facility (FfLF)” and “Intra-day Facility (IDF)” through its window, for access by Non-Interest Financial Institutions (NIFIs) licensed by the Bank.

Funding for Liquidity Facility (FfLF)

1). CBN will provide a liquidity facility on overnight basis only and to be terminated on next business day

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2). Authorised Non-Interest Financial Institution (NIFI) to provide eligible securities to the CBN as collateral for the facility

3). The value of collateral to be a minimum of 110% of the value of the facility. For instance, if a NIFI wishes to take a FfLF of N10 billion, it would be required to provide eligible security collateral worth N11 billion (i.e. N10 billion*1.1).

4). The CBN shall specify acceptable collateral(s) from time to time. These shall include, but not limited to the following securities: CBN Safe Custody Account (CSCA) Deposit, CBN Non-Interest Note (CNIN), CBN Asset-Backed Security (CBN-ABS), Sukuk (that has received liquidity status from the CBN), Warehouse receipt(s) as provided in the CBN Act 2007, and any other collateral designated by the CBN that does not contravene the CBN guidelines for NIFI’s operations.

5). The transaction shall be at a zero per cent interest rate

6). At maturity, the transaction unwinds and the CBN receives back its funding and returns the collateral to the NIFI

7) Failure to provide adequate funding in the account for the un-winding of transaction at maturity, the Bank (CBN) shall rediscount the pledged securities at par and recover the facility amount and return the net value to the NIFI

8). The Market Support Committee (MSC) may approve an administrative charge in relation to the facility as it deems fit (in accordance with Section 4 (1) of the ‘Guidelines for the Operation of NIFI instruments by the CBN).

9). The NIFI must be either in clearing and have a temporary debt balance and /or have a liquidity problem

Intra-day Facility (IDF)

10). CBN to provide an Intra-Day Facility (IDF) for settlement same business day

11). Authorized NIFI shall provide eligibility securities as collateral for the facility

12). The value of eligibility securities shall be a minimum of 11% of the value of the intra-day facility required by the NIFI. For example, if a NIFI wishes to take an IDF of N10 billion, it would be required to provide eligibility security collateral worth N11 billion (i.e. N10*1.10)

13). The CBN shall specify acceptable collateral(s) from time to time, which shall, but not limited to CBN safe Custody Account (CSCA) Deposit, CBN Non-Interest Note (CNIN), CBN Asset-Backed Security (CBN-ABS), Sukuk (that has received regulatory treatment by the CBN), Warehouse Receipts(s) as provided in the CBN Act 2007, and any other collateral designated by the CBN that does not contravene the CBN guidelines for NIFI’s operation.

14). At termination, the transaction unwinds and the CBN receives back its funding and returns the collateral securities to the NIFI.

15). In the event of failure to repay the IDF as and when due, the CBN shall rediscount the pledged securities at par and recover the facility amount and return the net value to the NIFI

16). The Market Support Committee (MSC) may approve an administrative charge in relation to the facility as it deems fit, in accordance with the Guidelines for the operation of NIFI instrument by the CBN.