Treasury Securities - Central Securities Depository

Pledging of Securities

WHAT IS PLEDGING OF SECURITIES?

Pledging here refers to an activity in which the borrower (pledgor) of funds uses securities as a form of collateral to secure the funds it borrows or takes from the lender (Pledgee).
In other words, it is a secondary market activity in which securities are provisionally moved from the pledgor's/debtor's securities account into the pledgee's/creditor's securities account to back a debt facility as a form of collateral. When securities are pledged, the pledgee/creditor maintains possession of the pledged securities; however the pledgee/creditor does not have full ownership or title to the pledged securities unless default takes place.

WHO CAN PLEDGE SECURITIES FOR DEBT FACILITIES SUCH AS LOANS?

Individuals and institutions holding securities in the CSD system. Thus, anyone who owns securities in the CSD system.

WHAT IS THE RATIONAL FOR SECURITIES PLEDGING?

This service which is being rendered by CSD to market participants is to allow a pledgor/debtor to use securities as collateral or guarantee to borrow funds from a pledgee/creditor (Bank or any Lending Financial Institution). The purpose of using securities as collateral is to motivate the Banks and investors to easily do lending and borrowing guaranteed or backed by securities as a way to deepen transactions or activities in the securities market.

HOW CAN I PLEDGE MY GOVERNMENT OF GHANA SECURITIES FOR A DEBT FACILITY?

The investor or holder of securities must first contact a financial institution say a Bank to put in an application for a debt facility such as loans and to agree on the terms of reference for the facility.
Securities are set up as pledged securities upon relevant information (such as particulars of the pledgee & pledgor, securities description, term of the pledge etc) are submitted to CSD by either of the parties involved in the transaction.
CSD then moves or freezes the securities from the debtor's/pledgor's securities account into the debtor's/pledgee's securities account. CSD will reject any pledge if there is insufficient balance in the pledgor's securities account. To avoid any rejection by CSD it is recommended that the creditor verify in advance if the debtor has sufficient balance in his or her securities account to secure the debt facility.

HOW CAN I PLEDGE MY SHARE FOR A DEBT FACILITY?

The client or pledgor goes to a Recognized Bank or Lending Institution to negotiate a facility.
After negotiation, the Investor or pledgor will hand over a duly completed and signed securities pledge form to his DP.
The DP will verify instructions and signatures of investor and will acknowledge receipt of the pledge request by returning to the investor, a duplicate copy of the pledge form duly signed.
The DP in collaboration with CSD will freeze the share (s) in the investor's securities account and confirm to the Bank/ Recognised Lending Institution.

NOTE: For share certificates that have not yet been deposited in the Depository system, investors must first deposit them into the depository system through their Brokers or DPs before they can be used to secure a debt facility from any financial institution.

WHAT HAPPENS TO MY SHARE CERTIFICATE THAT I USED TO SECURE A PLEDGE BEFORE THE ESTABLISHMENT OF THE DEPOSITORY?

All such share certificates are to be converted into electronic format by the Lending Financial Institutions holding them so that in the case of fund default the Financial Institution can easily carry out a foreclosure through the Depository so as to have complete ownership of the shares.

CAN THE PLEDGEE/CREDITOR USE THE PLEDGED SECURITIES FOR OTHER TRANSACTIONS DURING THE TERM OF THE PLEDGE?

No. Because the securities even though have been moved into the pledgee's securities account it will be encumbered during the term of the pledge. Thus the securities will not be available in the pledgee's account hence restricting its usage for other transactions.

WHEN I PLEDGE MY SECURITIES WILL I RECEIVE MY COUPON PAYMENTS ON THE PLEDGED SECURITIES?

Yes, the coupon payment will be paid to the debtor/ pledgor during the term of the pledge and not the creditor any time corporate action such as interest payment is executed on the pledged securities.

WHEN CAN THE PLEDGE ON THE SECURITIES BE RELEASED?

CSD shall release the pledged securities only when the creditor/pledgee requests CSD to release the pledge imposed on the securities. In this case a request asking CSD to release the pledge must be sent to CSD by the pledgee/creditor.

WHAT HAPPENS TO THE PLEDGED SECURITIES IF THE PLEDGOR DEFAULTS TO THE PLEDGEE?

In the case of fund or loan default by the pledgor, the pledgee shall inform CSD accordingly and a non-judicial foreclosure will be carried out to move the pledged securities into the account of the Bank/Lending Institution. This is to allow the Pledgee Bank or Financial Institution to have complete ownership to the securities that have been pledged as collateral. At this stage the creditor can sell the security to defray the value of the loan defaulted by the pledgor.

It is expected that before the creditor inform CSD for a possible foreclosure to be exercised on the pledged securities, the pledgee Bank Or the Lending Financial Institutions would have given enough notices to the pledgor to pay the facility in due time. CSD will also seek the consent of the defaulting party concerning the foreclosure in question.

Debt

Debt is a financial asset which gives the investor (lender) the opportunity to receive interest payments and repayment of principal (face value/par value) based on the terms established in a loan contract (prospectus). Debts instruments are issued by both Government and Corporate Institutions. Government issues debt instruments to finance fiscal deficits due to excess governments spending over its tax revenue mobilization. Corporate Institutions also raise funds through the debt market to finance their institutional activities such as the acquisition of new machines etc. Unlike corporate debt securities with Government debt securities there is complete absence of default risk because the solvency rests on the government. The following debt securities are issued in Ghana

1. Treasury Bills

Treasury Bills are short-term debt or money market instruments (securities) issued by the Government of Ghana with a maturity of less than one year. They commonly have maturities of 91 days and 182 days. Treasury Bills are issued at discount from par, which means that rather than making fixed interest payments like conventional bonds, income is earned by the difference between the face value and the cost of purchase. Bank of Ghana also periodically issues short –dated bills to support its monetary operations and Cocobod for the purchase of cocoa in Ghana.

2. Treasury Notes

Treasury Notes are interest bearing securities which are sold at par and with maturity term ranging from one year to two years. Investors earn interest semi-annually at a fixed rate. On the redemption date the investor received the last coupon payment together with the nominal value of the securities purchased.

3. Treasury Bonds

Treasury Bonds are medium term debt instruments (securities) issued by the Government of Ghana and sold to individuals or companies to raise funds for a specified time at a fixed or variable interest rate. The bonds have maturity periods exceeding two years. Presently the 7 Year bond is the longest term security issued in Ghana. Bonds normally make fixed interest payments bi-annually (i.e. every six months) to the holder.

4. Corporate Bonds

Corporate Bonds are debt securities issued by organisations so as to raise funds for several reasons depending on the organisation's objectives to finance an ongoing task, to purchase new equipment or to expand business etc. Corporate Bonds normally have a redemption period exceeding one year and can either have a floating or fixed coupon rate.