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Fund Prices for 3-Feb-2012 To 3-Feb-2012: CGF Offer Rate : =N=1674.24 CGF Bid Rate : =N=1646.15 CIF Offer Rate : =N=1370.47 CIF Bid Rate : =N=1370.47
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faqs
 

What is a Discount House?

A Discount House is a financial institution devoted to trading in money market securities in the secondary market. Discount Houses intervene between the monetary authority, Central Bank of Nigeria (CBN) and the deposit money banks (DMBs) in mobilizing funds for investments in securities and take positions depending on the liquidity profile of the financial system. They do this by providing discounting/rediscounting facilities in government short-term securities.
Discount Houses play a vital role in the Nigerian Monetary System. They sit at the centre of the money market offering the safest avenues available for investments in Nigeria today. They invest mainly in Government Treasury Bills, Bonds and Commercial Bills issued by blue chip companies and accepted by credit worthy banks. Their principal specialization is in providing primary liquidity in the Nigerian financial sector through the buying and selling of securities in huge volumes, for very short periods of time - from one day up to 365 days on the average. They are allowed to do transactions up to 3 years tenor with the exception of Bonds, where they are permitted to go up to 10 years.

Most importantly, a discount house should not be misconstrued as a finance house. A discount house in Nigeria is a specialist financial institution that acts as an agent for undertaking the Open Market Operations (OMO) auctions, and as market maker in money market instruments, Discount Houses in Nigeria are subject to CBN scrutiny far more frequently and elaborately than other financial institutions.

Regulation and Scope of Operations

Discount houses are required to keep a minimum of 60% of their deposit liabilities in treasury bills and Bonds, resulting in an extremely liquid balance sheet with low risk assets.
Compliance with regulations is strictly monitored by the CBN with the discount houses making returns to the CBN on daily, weekly and monthly basis. The discount houses have a close relationship with the Central Bank resulting from their role as market maker in providing a vibrant secondary market in government securities.
The Debt Management Office (DMO) and the Securities and Exchange Commissions (SEC) also regulate the bonds trading activities of the Discount Houses.

What are the principal objectives and functions of Discount Houses in Nigeria?

The principal objectives and functions of a discount house in Nigeria include:

  • To promote rapid growth and efficiency of the money market in Nigeria.
  • Acting as banker to the banks by acting as a repository for idle funds at the end of the trading day.
  • To facilitate the issue and sale of short term government securities
  • To provide discount/re-discount facilities for treasury securities and other eligible financial instruments acquired by banks
  • To provide fund/portfolio management services
  • To provide financial advisory services
  • To accept funds for investment purposes
Other functions which may be prescribed by the CBN from time to time
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Are the operations of Discount Houses any different from those of Deposit Money Banks?

Yes. Discount Houses are not permitted by regulations to operate chequing/savings accounts nor are they allowed to engage in foreign exchange transactions like Deposit Money Banks.


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What is the customer base of a typical Discount House in Nigeria?

The customer base of a discount house is fairly diverse. Initially, the customers of discount houses tended to be limited to the deposit money banks and investment banks. This was not as a result of regulation but due to the fact that initially Treasury Bill was the main instrument that discount houses traded. As the level of trading in negotiable and discountable instruments, such as Bankers Acceptances and Commercial Papers increased, the customer base broadened to include the following: Insurance Companies, Pension Funds, Stockbrokers, Mortgage Institutions, Large/ Medium sized Multinationals, Government Parastatals and High Networth Individuals. Almost anybody can deal with a discount house.

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What instruments are actively traded by Discount Houses?

The instruments actively traded in the Nigerian market are:
Federal Government of Nigeria (FGN) Bonds
Nigerian Treasury Bills
Bankers Acceptances
Commercial Papers
Bank Promissory Notes
Any other financial instrument as may be prescribed by the CBN.

 In more developed economies, a wider range of instruments is traded. These include, Treasury Bonds, Treasury Certificates, Municipal Bonds, Local Authority Bills, Negotiable Certificates of Deposit (NCD) and Medium Term Notes.


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How is the Primary Auction for Treasury Bills conducted in Nigeria?

Every Fortnight, the Central Bank of Nigeria (CBN) on behalf of the Federal Government of Nigeria, offers through authorized discount houses and banks, 91, 182 Day Treasury Bills to the market. Once a month, 364-Day Treasury Bills are offered.
An auction notice is placed in the newspapers specifying the amount of Treasury Bills on offer and the tenor, which can be 91, 182 or 364 days. The Bids are submitted though the authorized dealers every Wednesday by 10am and the results announced by close of business same day. Allotment and settlement is done the next day i.e. one day after bids submission. The Money Market Dealers (MMDs) acts as underwriters in that the balance of the Treasury Bills not taken up by the market is held by them for possible sale in the secondary market. The Dutch auction bidding system is used, i.e. if a bidder is successful, the bidder buys at the rate he/she has indicated on the bidding document.


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What do we mean by the money market?

The money market is a wholesale market for low risk, highly liquid, short-term debt instruments. Short-term refers to a tenor of less than one year. In Nigeria, the instruments traded in the main are Treasury Bills, Bankers Acceptances and Commercial Papers. Fixed Income securities such as FGN bonds are also traded in the Nigerian money market.

The heart of activity in the money market occurs in the dealing rooms of discount houses and banks. Each day billions of Naira is traded between operators in the money market.

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What are the main characteristics of the money market?

It is not one market but a collection of markets for several distinct and different instruments. However, these different / distinct markets are inter-related.
Though the market has a large and diverse number of participants, it is predominantly a wholesale market where trades involve large amounts of money and therefore skill is paramount.

Even though the bulk of the trades are contracted verbally via the phone, traders do not renege on commitments made given rise to the motto of the money market which is "My word is my bond".

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What are the functions of the money market?

The money market allows money available for short periods to be directed to those who can use it. The functions fulfilled by the money market are the following:

  • Provides a mechanism such that institutions in a deficit position can borrow funds temporarily and institutions in a surplus position can invest the funds temporarily.
  • The money market allows institutions to hold a proportion of their funds in liquid assets that will enable them realise cash quickly should the need arise.
  • Enables the imbalances in the supply of money between the financial system as a whole and the government to be smoothed out. Through the conduct of Open Market Operation, the Central Bank will, through MMDs, daily offer to buy/sell money market instruments to the public in order to influence the money supply level. Where the intention is to decrease money supply (i.e. mop up liquidity), the CBN will sell instruments to the market. Conversely, where one intends to increase the money supply level (provide liquidity), the CBN will offers to buy instruments from the market.

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What is a bond?

A bond is a long-term financial obligation (debt) of an entity that promises to   pay a specified sum of money at specified future dates. Bonds are fixed income securities.

What are Federal Government Bonds?

Federal Government bonds are long-term debt instruments of the Federal Government of Nigeria with tenors of up to 10 years. FGN bonds are issued by the DMO on behalf of the governments through authorized primary market dealers.
If you are an investor looking at investing money for a period longer than 1 year, or tend to have deposits or placements that have been running for more than a year, FGN bond investment will likely suit your investment appetite.

FGN bonds provide a desirable savings or investment vehicle for many reasons. They tend to be safer than stocks because if you hold bonds until the maturity date, you don't risk the principal. However if you need to sell your bond before its maturity date, you may lose or gain a bit depending on the ruling price at the point of exit. Without exiting prematurely, FGN bonds provide a regular, steady source of income (typically, interest payments are received every 6 months).

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How accessible is the FGN Bond?

Every investor has equal access to invest in the FGN bonds. There are however two avenues through which such investments can be done (Primary or Secondary Market) Notices of primary issues auction are placed a week to the auction in most of the daily newspapers, informing the public about the various tenors of bonds available for sale.

To participate in the auction, all that is needed is for you to fund your account with FSDH or any of the other 19 Primary Dealers/ Market Makers (PDMMs), and fill the bid form which can be downloaded on our website, or picked up at the offices of the various Discount Houses, Banks and Stockbroking firms. The bid can then be submitted through FSDH or any of the other PDMMs.

At the secondary market, FSDH or any of the other 19 PDMMs can be called for quotes (Bid & Offer) and once a favorable price/yield is available, deals can be sealed.


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How often can I participate at such auctions?

here is no limit to how often to participate; the auction is open at advertised times for regular participation.


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How do I determine at what rate to Bid?

At FSDH, any of our bond dealers will be willing to offer advice on market expectation and to give historical data on bonds in issue. The investor will finally make the decision regarding what rate to buy after evaluating available information.

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How long do I have to wait to know if I'm successful or not?

Usually results are communicated a day after the auction and accounts are expected to be funded on or before the settlement date (which is two days after the auction).


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When/How can I redeem the bonds?

Bonds are redeemedat maturity but can be sold at anytime through a Dealer such as FSDH.


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What is the minimum amount I can invest?

A minimum value of N10,000.00 and multiples of N1,000 thereafter can be invested. An investment of a minimum value of N1,000,000.00 is however encouraged.


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How safe is my investment in FGN bonds?

Investments in FGN bonds are classified as risk free. This is because the issues are based on the full faith of the Federal Government of Nigeria, and is charged upon the general assets of the Federal Republic of Nigeria.


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Is it possible to have my interest paid monthly?

NO. Coupon (interest) payments are semi annual for now and as such interest is paid twice yearly.


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How do I receive my interest payments and principal amount at maturity?

The Central Bank of Nigeria who is the Registrar for FGN Bond, post coupons (interest) to the address stipulated on the bid form or on the bond transfer form (where bond is bought from the secondary market). However, interest could be paid to the investor through an Authorized Dealer if that is the investor's desire. The Dealer is expected to credit the investor's account or draw a cheque in the investor's favor. Principal amount is received through the same way.


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