Nigeria’s SEC mandates transition to real-time bond valuation by 2027

In Nigeria, the Securities and Exchange Commission recently implemented a new directive for fund managers regarding the valuation of bonds. The directive requires fund managers to value bonds based on current market prices rather than their original purchase cost, a practice known as mark-to-market (MTM) valuation. This change is designed to enhance transparency in the market and ensure that asset values reflect real-time market conditions, bringing Nigerian fixed income assets in line with global benchmarks.

By adopting the mark-to-market approach, fund managers can better assess and compare the pricing and liquidity of their portfolios in emerging markets. However, this shift may also expose fund holders to previously hidden price volatility. Niyi Falade, an executive director at investment firm Custodian Investment Plc, noted that under the new method, fund prices may fluctuate with the market, potentially revealing losses that were not apparent before. As interest rates and credit risk change in the market, bond prices will now accurately reflect these fluctuations, introducing a level of volatility that previously went unnoticed.

The transition to mark-to-market accounting for fixed income securities will be gradual, with fund managers given until September 2027 to fully comply with the new rules. During this transition period, the SEC is allowing a temporary relaxation of asset-allocation rules, permitting a 50:50 split between mark-to-market and amortized cost methods, as opposed to the standard 70:30 ratio. However, all new bond purchases must be valued immediately using the mark-to-market approach. Additionally, fund managers are required to submit an implementation plan by October 2 outlining how they will adhere to the new framework before the grace period expires.

These changes come amidst broader economic reforms in Nigeria under President Bola Tinubu, including exchange rate liberalization and subsidy removal, which have attracted renewed interest from investors. By aligning bond valuations with current market prices, the Securities and Exchange Commission aims to enhance transparency and accuracy in the Nigerian financial market, making it more attractive to both domestic and international investors.