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All About FSDH
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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 and the
deposit money banks (DMBs) in mobilising 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 and to a lesser extent, in 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 90 days on the average.
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
banks, and also enjoy special CBN accommodation privileges that banks do not qualify for.
Regulation and Scope of Operations
Discount houses are required to keep a minimum of 60% of their deposit liabilities in treasury
bills, 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 discount houses are entitled to special accommodation from the CBN which is unlimited
against treasury bills held. There is also provision for accommodation at the Central Bank
against eligible commercial bills held as well. All these serve to ensure that discount houses are always
assured of liquidity.
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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.
- To act as an intermediary between the Central Bank of Nigeria and the licensed banks in Open Market Operations (OMO) transactions.
- 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 short-term wholesale deposits
- 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 Commercial and Merchant Banks?
Yes. Discount Houses are not permitted by regulations to operate
chequing/savings accounts nor are they allowed to engage in foreign exchange transactions or other ancillary services like the merchant and commercial banks.
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How many Discount Houses are currently operating in the country?
There are five discount houses currently operating in Nigeria. First Securities Discount House
Limited is the oldest discount house and commenced operations in March 1993.
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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 commercial and merchant banks. This was not as a result of regulation but due to the fact that initially the treasury bill was the main instrument that discount houses traded. As the level of trading in Commercial Bills, such as Bankers Acceptances and Commercial Paper increased, the customer base broadened to include the following: Insurance Companies, Pension Funds, Stockbrokers, Mortgage Institutions, Large & Medium sized Multinationals, Government Parastatals & High Networth Individuals. In short, 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, Nigerian Treasury Bills, Bankers Acceptances, Commercial Papers and Bank Promissory Notes. 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?
Each week, the Central Bank of Nigeria
(CBN) on behalf of the Federal Government of Nigeria, offers 91 Day Treasury Bills to the market. Basically, Bills are auctioned to the authorised dealers, i.e. licensed discount houses, commercial banks, merchant banks and stockbrokers.
An auction notice is placed in the newspapers specifying the amount of Treasury Bills put on offer and the tenor, which is always 91 days. The Bids are submitted on a Tuesday and results are announced the following Thursday, i.e. two days after bids submission. The CBN also acts as an underwriter in that the balance of the Treasury Bills not taken up by the market is held by the CBN 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 is Open Market Operations
(OMO)?
Open Market Operations (OMO) is an indirect monetary policy technique that is used to control the level of money supply. It involves the sale / purchase of money market instruments in the open market. In Nigeria the money market instrument used for OMO auctions is the Treasury Bill. Discount houses are the exclusive agents in the conduct of
OMO.
OMO auctions are held on a weekly basis. Presently, the notice is put out on Wednesday. Banks and other participants forward their bids to the discount houses on Thursday whilst the results are released the following day, Friday.
The discount house submits bids from authorised dealers, including its needs for OMO
instruments, to the Central Bank and facilitates the payments and settlement of the
transactions.
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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 & Commercial Paper.
The heart of activity in the money market occurs in the dealing rooms of discount houses and banks. Each day billions of Naira are 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.
The market has a large and diverse number of participants
The money market is a wholesale market. Trades involve large amounts of money and therefore skill is paramount.
The motto of the money market is "My word is my bond". Traders do not renege on commitments made, even when such commitments are made verbally.
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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.
- The money market is used to iron out imbalances in the supply of money between the financial system as a whole and the government. Through the conduct of Open Market Operation, the Central Bank will, through discount houses, periodically offer to buy/sell money market instruments to the public in order to influence the money supply level. Where one intends 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 offer to buy instruments from the market
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All About FSDH
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First Securities Discount
House Limited |
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Head Office:
Niger House
(6th floor),
1/5 Odunlami Street,
P.M.B 12913,
Lagos,
Nigeria.
E-mail:
info@fsdhgroup.com
Phone: 234-1-2640160-9,
234-1-2640150-9,
234-1-2702880-2 (Dealing only)
Fax: 234-1-2640173-4
Telex: 28453 FSDHNG
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Abuja Office:
- Plot 990, 1st
floor,
- NAL Building, NAL Boulevard
Opposite Leventis Close
Central Business District
Garki, Abuja
Nigeria.
E-mail:
fsdh-abuja@fsdhgroup.com
Phone: 234-9-6700535 ,
234-9-2731170
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Portharcourt Office:
Afribank Building (2nd floor)
5 Trans Amadi Road,
PortHarcourt.,
Nigeria.
E-mail:
fsdh-phc@fsdhgroup.com
Phone: 234-84-463308,
234-802-4081331
Fax: 234-84-463174
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