SEC and CBN set to re-modify rules on margin lending

The Securities and Exchange Commission (SEC) is working in collaboration with the Central Bank of Nigeria (CBN) to change the guidelines on margin lending. The two regulators also intend to start issuing margin loans in accordance with the new rules they would set

They intend to add banking shares – The Acting Director of SEC, Ms Mary Uduk, disclosed this in Lagos while speaking during the first quarter post-Capital Market Committee, (CMC) media briefing. She also disclosed that they intend to re-include banking shares in the margin list.

Reason for the amendment

Uduk explained that the rules guiding margin lending had to change, especially after zero activity was recorded in the sector since the rules were created in 2010.

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“After the meltdown, in 2010, the SEC and CBN came together to come up with rules on margin loan but after the issuance of that rules, we found out that there was zero activity in respect of margin loan and that is why the market suggested that it appears the rules on margin loan is very stringent.

“In coming up with that rule, probably due to the experience of the past, we excluded banking shares from margin list. We found out from other jurisdictions that you can be given loans to buy banking shares, so, because of that, we started engaging CBN.”

What is a margin loan?

A margin loan is a type of loan that allows you to borrow money to invest, by using your existing shares, managed funds and/or cash as security. It is a type of gearing, which is borrowing money to invest.

How does it work?

A margin loan uses existing shares, managed funds and cash as security. These existing assets are used to calculate your Loan to Value Ratio (LVR), which determines how much you can borrow.

Once your borrowing limit is established, you can use available funds to purchase further approved investments (shares, managed funds etc). Your new and existing investments are combined to form your total portfolio.

Interest on a margin loan is calculated daily, but how it is paid will depend on the loan. Some margin loans allow interest to be paid in advance.

What is the LVR – The Loan to Value Ratio (LVR), is the amount of your loan divided by the value of the shares or managed funds being used as security.