Sensitization workshop for operators in Laogs conducted for the Nigeria Securities and Exchange Commission by Applied Logic

1. The Margin List
‘An Introduction for
Market Operators’
An Applied Logic Workshop Adapted for the Securities and
Exchange Commission

2. Aspects of Guidelines Needing
Application

3. Market Situation
• Market peaked in 2008 at N 12.640 trillion. Subsequently collapsed to the
current N8.612 trillion (cushioned by DCE[N2.0t])
• 2010 was the first positive change in the ASI at +18.9% since then
• Market collapse partially caused by excessive/unregulated use of margin
loans
• AMCON recently disclosed that margin loans represent 40% of toxic assets
amounting to as much as N414 billion in its first phase of asset repair
• Became clear that systems and understanding of margin activity was
inadequate from an operator, financier and regulator perspective
• SEC/CBN introduced Margin Guidelines in 2010 to address this. The
guidelines are a set of 27 rules to address various aspects of margin
transactions
• Rules 22A/B introduce a margin list which is meant to be at the heart of
margin activity. The rule also mandates SEC to produce the list

4. What is the Margin List
• A set of listed companies that meet the criteria in rule 22 of the
guidelines
• These companies would be used to determine “margin credit”
• Determination of “margin credit” being different from “trading on
margin”
• Based on principle that only the most liquid companies should be
allowed to be used to determine margin credit provided the
company is not on the exclusion list
• Prior to the issuance of Margin Guidelines all securities irrespective
of liquidity/trading history were allowed to be used in determining
margin credit
• Margin list to be provided by SEC and published jointly by SEC/CBN

5. Margin Guidelines Data
Requirements – Rule 22
Criteria and Calculation
Criteria Mode of Storage Calculation
3 month average Daily trading volume Average of volume
trading volume going back at least for three months from
3 months present day
10 day average Feed of Above Average of volume
trading volume for 10 days from
present day
Market Capitalization Shares oustanding Shares outstanding
and Daily market price X Market Price
Trading more than 12 Daily trading history If trading is > 12
months for each company going months include in selection
back at least 12 months pool
Sector Each company stored Banking Sector Excluded
and sorted by sector from selection pool
Market Price Store daily price against Feed from market price
each company field

6. Margin Guidelines Data
Requirements – Rule 22
Required Data, Sources and Associated Criteria
Data Source Affected Criteria
Daily Volumes Official List (Nigeria 3 month and 10 day
Stock Exchange) average trading volume
Shares outstanding Annual reports Market Capitalization
(Registrars, brokers,
Companies, etc)
Market Price Official List (Nigeria Daily Market Price
Stock Exchange) Market Capitalization
Trading History Official List (Nigeria Evidence trading more
Stock Exchange) than 12 months
Sector 1. Official List (Nigeria Exclusion of Banks
Stock Exchange)
2. Annual reports
(Registrars, brokers,
Companies, etc)

7. Nature of the List

8. Summary
• Rotates between 30-40 companies depending
on market trading profile
• Three categories of companies; 1) Stable
trading profile so always in the list; 2)
Fluctuating trading profile within the list –
always in list but profile changes relative to
peers; and 3) Fluctuates in and out of the list
determined by price, volume or other
parameters

9. Managing the List
• Inclusion would require monitoring by the
Commission
• New additions to the list would need to maintain
position in the list for at least 3 months before
inclusion
• Companies to be excluded would be allowed 3
weeks to be effective to allow for portfolio
adjustments
• Multiple movements in and out of the list would
require exceptional arrangements at the
discretion of SEC

10. Sample List

11. Uses of the List

12. Margin Guidelines (List)
• Rule 8 - For margin loans and margin lending,
the margin requirement shall be 50% of the
total purchase price of the securities or group
of securities or as may be adjusted by the
Central Bank of Nigeria from time to time.
• Implications: Margin Credit/Loan in an
account is capped at the value of the
marginable securities in that account

13. Illustration 1 – Margin Credit
Portfolio of Marginable Securities
Stock Shares Price (13/04/2011) Value Credit
Oando 25,000.00 67.80 1,695,000 847,500
Transnational 15,000.00 1.66 24,900 12,450
PZN 11,000.00 27.28 300,080 150,040
Total 2,019,980 1,009,990

14. Illustration 2 – Margin Credit
Portfolio of Non-Marginable Securities
Stock Shares Price (13/04/2011) Value Credit
Afribank 10,000 1.75 17,500 -
UBA 20,000 8.09 161,800 -
GTBank 50,000 15.20 760,000 -
Total Value 939,300 -

15. Illustration 3 – Margin Credit
Portfolio of Marginable and Non-Marginable Securities
Stock Shares Price (13/04/2011) Value Credit
Oando 25,000 67.80 1,695,000 847,500
Transnational 15,000 1.66 24,900 12,450
UBA 20,000 8.09 161,800 -
GTBank 50,000 15.20 760,000 -
Total Value 2,641,700 859,950

16. Rule 9 B
• Only marginable securities shall be used
to meet a “Reg C” call
• This suggests only companies on the
margin list to be used to meet a margin
call
• However there are companies not on the
list with enough volume to meet a
margin call
• Example of Such Companies: UBA, Zenith
Bank, Japaul, etc

17. Rule 13
• To determine the excess equity in a margin
account, subtract the Reg C requirement
(based on the current market value of the
securities) from the equity in the account.

18. Calculation of Excess Equity
Portfolio of Marginable and Non-Marginable Securities
Stock Shares Price (13/04/2011) Value Credit
Oando 25,000 67.80 1,695,000 847,500
Transnational 15,000 1.66 24,900 12,450
UBA 20,000 8.09 161,800 -
GTBank 50,000 15.20 760,000 -
Total Value 2,641,700 859,950

19. Calculating Excess Equity
Portfolio of Marginable and Non-Marginable Securities Purchase on Credit
Stock Shares Price (13/04/2011) Value Credit Shares Total Value Credit Used New Credit
Oando 25,000 67.80 1,695,000 847,500 3,687 1,945,000 250,000 972,500
Transnational 15,000 1.66 24,900 12,450 150,602 274,900 250,000 137,450
UBA 20,000 8.09 161,800 - 30,902 411,800 250,000 -
GTBank 50,000 15.20 760,000 - 16,447 1,010,000 250,000 -
Total Value 2,641,700 859,950 3,641,700 1,000,000 1,109,950

20. Rule 19 c – Minimum Equity
• Customers must maintain a minimum equity of 25% of the
Long Market Value (LMV) of the margin account. This
means that equity must not fall below 25% of the current
market value of the securities in the account. If the
account equity falls below 25% of the LMV then the
account owner will be issued a “maintenance call”. The
maintenance call will be issued for the difference between
the approved maintenance equity level and the current
equity level. Internal guide lines of Banks and Broker/
Dealers can increase the maintenance level for equity in a
margin account but they cannot reduce it. When a
maintenance call is made the call must be met
immediately. It can be met by depositing cash or fully paid
up marginable securities.

21. Rule 19c – Tracking Minimum Equity
Portfolio of Marginable and Non-Marginable Securities Purchase on Credit
Stock Shares Price (13/04/2011) Value Credit Shares Total Value Credit Used New Credit
Oando 25,000 11.00 275,000 137,500 22,727 525,000 250,000 262,500
Transnational 15,000 1.66 24,900 12,450 150,602 274,900 250,000 137,450
UBA 20,000 1.00 20,000 - 250,000 270,000 250,000 -
GTBank 50,000 1.00 50,000 - 250,000 300,000 250,000 -
Total Value 369,900 149,950 1,369,900 1,000,000 399,950
Equity Value 369,900
Equity 27%

22. Rule 21 – Marginable Securities
• Marginable securities are securities that have
been approved by CBN and SEC to be traded
on margin in consonance with these Rules and
Regulations. The CBN and SEC shall determine,
approve, and SEC shall publish the approved
list of marginable securities, “The Margin List”,
every month.

23. Rule 21 – Marginable Securities
• The Compliance officers of a Securities Exchange,
Banking institutions and Broker/Dealers shall
ensure that securities that are traded in a margin
account for which a margin facility has been
extended are securities that are contained on the
approved margin list
• Differentiating between securities to be used to
determine margin credit and securities traded in
a margin account

24. CBN Use of the Margin List

25. Implied Bank Margin Profile
Bank NET LOANS
N'M
1 ACCESS BANK PLC. 494,432.00
2 DIAMOND BANK PLC 355,952.00
3 ECOBANK NIGERIA PLC 237,107.00
4 FIRST CITY MONUMENT BANK PLC. 318,169.00
5 FIDELITY BANK PLC 281,079.00
6 FIRST BANK OF NIG. PLC 1,133,490.00
7 GUARANTY TRUST BANK PLC. 681,757.00
8 STANBIC IBTC BANK PLC 255,585.00
9 SKYE BANK PLC 494,452.00
10 STERLING BANK PLC. 163,540.00
11 U B A PLC 596,457.00
12 UNION BANK NIG.PLC 183,490.00
13 UNITY BANK PLC 121,975.00
14 WEMA BANK PLC 46,253.00
15 ZENITH BANK PLC 816,793.00
NET LOANS TOTAL 6,180,531.00
NET LOANS TOTAL*10% 618,053.10
Excludes Citibank, Standard Chartered

26. Implied Margin Capacity
NSE Baskets and Cap %
Margin Cap/Total Cap Daily Traded Value(3 months) Volume(3 Month) Volume(10 Day )
A 93.76 Chidozie 411,064,090 8,275,122.43 3,956,555.40
B 9.61 Chidozie 17,450,540 6,098,381.76 6,612,799.80
C 8.60 Emma 26,423,740 27,224,743.23 19,806,434.10
D 7.10 Emma 7,043,768 1,067,249.10 1,864,362.70
E 91.00 Emma 110,610,693 2,445,381.38 1,671,908.80
F 65.12 ? 80,614,709 160,912.00 212,289.90
G 81.53 ? 105,260,195 8,615,271.90 7,705,674.90
H 49.28 ? 74,655,551 5,322,860.40 4,866,212.70
I 35.97 ? 31,446,223 951,615.95 1,642,801.70
J 97.22 ? 48,366,618 2,255,551.80 3,041,192.10
Total 912,936,127 62,417,089.95 51,380,232.10
54,776,167,620
12 weeks

27. Summary Conclusions
• Margin list defines the size of the market for
margin transactions
• Derives from daily market activity reflecting
markets absorptive capacity
• Provides direction for CBN oversight
• Provides basis for evaluation of the 10% cap
on bank exposure to margin activity
• Could build bank and trader confidence in
market participation

28. NSE for Market Makers

29. Basket A

30. Marginable Basket A
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
National Salt Co. Nig. Plc 16,162 5,069,172.65
Nigerian Breweries Plc 1,058,779 266,469,845.60
Okomu Palm Plc 17,552 12,777,095.79
Ihs Plc 10,296 87,619.19
Honeywell Flour Mill Plc 16,812 1,234,656.56
Total 1,119,600 285,638,389.80

31. Basket B

32. Marginable Basket B
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Nigerian Aviation Handling Co. Plc 8,741 4,270,570.72
Cadbury Nigeria Plc 70,814 29,378,001.46
Total 79,555 33,648,572.18

33. Basket C

34. Marginable Basket C
Daily Trading Value
Companie s on the Margin Lis t Market Cap(N'M) (Avg 3mts)
UACN Plc 69,215 21,471,880.95
Transnational Corporation Of Nigeria Plc 26,072 20,339,691.20
Total 95,287 41,811,572.15

35. Basket D

36. Marginable Basket D
Daily Trading Value
Companie s on the Margin List Market Cap(N'M) (Avg 3mts)
Ashaka Cement Plc 30,860 14,618,746.16
Total 30,860 14,618,746.16

37. Basket E

38. Marginable Basket E
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Guiness Nigeria Plc 383,481 64,168,041.60
Julius Berger Nigeria Plc 34,560 4,244,528.74
Mobil Oil Nigeria Plc 41,468 5,938,626.45
Dangote Flourmill Nigeria Plc 38,550 13,211,853.15
Betaglass Company Plc 4,765 380,487.16
Total 502,824 87,943,537.09

39. Basket F

40. Marginable Basket F
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Nestle Nigeria Plc. 459,741 82,082,661.40
Total 459,741 82,082,661.40

41. Basket G

42. Marginable Basket G
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Flour Mills Nig Plc 158,578 29,196,426.05
Unilever Nigeria Plc 145,695 36,413,608.41
Total Nigeria Plc 44,138 28,967,733.60
Dangote Sugar Refinery Plc 58,800 22,189,446.11
Forte Oil Plc 11,883 1,233,995.62
Total 419,094 118,001,209.79

43. Basket H

44. Marginable Basket H
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
PZ Cussons Nigeria Plc 98,825 21,335,872.52
Oando Plc 31,292 34,717,084.20
7-up Bottling Comp. Plc 24,983 2,517,637.20
Nigerian Bags Manufacturing Co.
Plc 11,995 5,409,178.11
Presco Plc 15,450 7,529,569.71
Total 182,545 71,509,341.74

45. Basket I

46. Marginable Basket I
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Lafarge Wapco Plc 165,058 24,398,045.69
MRS Oil Nigeria Plc 8,201 267,994.41
Glaxo smithkline Consumer Nig Plc 34,441 24,888,198.24
Total 207,701 49,554,238.33

47. Basket J

48. Marginable Basket J
Daily Trading Value
Companies on the Margin List Market Cap(N'M) (Avg 3mts)
Dangote Cement Plc 1,981,129 38,884,771.85
Conoil Plc 14,351 2,424,790.18
UACN Property Development Co.
Ltd 69,215 21,471,880.95
Custodian and Allied Insurance Plc 6,682 2,439,127.87
Mansard Plc 19,400 4,270,685.58
Total 2,090,778 69,491,256.43

49. Market Maker Pilot – Sept 18
Market Maker Basket Company Selected Higher Vol. Company (3months)
Vetiva Capital A Nigerian Breweries Plc* Nil
FBN Securities B Zenith Bank Plc Nil
Greenwich Securities B DN Meyer Plc Cadbury Plc, Nigerian Aviation Handling Co.
WSTC C UACN Plc* / GTB Plc Nil
Ess/Dunn Loren Merrifield E Fidson / Redstar Express Dangote Flour Mills
Stanbic IBTC Stockbrokers F Diamond Bank Plc / FCMB Plc Nil
Rencap Securities G Fidelity Bank Plc Nil
Oando is higher than Presco/PZ Cussons but less than
Capital Bancorp LTD H Presco Plc*/ PZ Cussons Plc*/ Nigerian Bag Mfg Plc* Nigerian Bag Manufacturing Plc
GlaxoSmithKline is higher than Lafarge WAPCO but
CSL Stock Brokers I Lafarge WAPCO Plc* / International Breweries Plc* less than International Breweries Plc
Future View Securities J Sterling Bank Plc Nil
Notes:
*On the Margin List
7 out of 16 are on the list.
5 out of 16 are banks
No company was selected from Basket D

50. Pilot Observations
• Basket D exclusion, are there implications?
• Are baskets exclusive or inclusive?
• Composition of baskets – volume, volume value,
marginability, banks, penny stocks, capitalization
• Bank inclusion (market making), Exclusion
(marginability)
• 4 market makers pick exclusively companies on the
list
• WSTC selected combination bank and marginable
security (only market maker to do so)

51. Importance of Analytics

52. 52 week high and low

53. Dividend History

54. Historical Prices

55. Volumes

56. Price Trends

58. The Oversight Architecture

59. Summary Conclusions
• NSE may need to take a periodic look at the composition
of its baskets’ of securities
• Market makers need to build specialist skills in individual
securities
• Liquidity requirements need to be based on absorptive
capacity
• Internal rules on exposure to margin loans would need
to be developed – intra or inter day
• Back office arrangements for administration of margin
accounts needs coordination – CSCS?

60. FAQs
eagama@sec.gov.ng