Discount Houses: Understanding Their Services and How you Can Use them

Five discount houses have operated in Nigeria, starting with three in 1993. The two others joined later, beginning operations in 1995 and 1996. A long period of market presence, obviously, but much are they known and to what extend are their services known about? To the general public, the answer will be a clear 'little'. However, they do have their primary constituency - the Central Bank, other banks, financial institutions and fund managers - and to this group, their activities may be well-known. However, discount houses offer services that the general public can benefit from, but largely doesn't know about.

Given that the discount houses were, at inception, expected to make a huge contribution to developing the money market and adding a lot of steam to the economy through their intermediation in short-term securities trading, it won't be misplaced to argue that more awareness by the public, and indeed, participation, is needed. Because we strive here to highlight opportunity areas for our readers to tap into, this article is an effort at showcasing the services of discount houses and the areas where ordinary folks can take advantage. This is an opener. In further articles on this sub-sector of the financial system, more searchlight will be beamed at their specific areas of operation and perhaps the unique services of individual operators.

WHAT THEY ARE
Discount houses are specialised financial institutions which primarily intermediate in money market transactions. Intermediation means acting as a go-between. Money market transactions are dealings in various short-term securities offered in the money market - the market for short-term lending and borrowing (and, as you would probably like to hear it, short-term investments). Securities and instruments traded in the money market include the Nigerian Treasury Bills (NTBs), Nigerian Treasury Certificates (NTCs), CBN Open Market Operations (OMO) Bills, commercial bills (like Bankers Acceptances and Commercial Papers), bank deposit certificates, etc. Because discount houses have a special focus on these securities, there is no doubt that they have a deeper understanding of that market. They also have the training and experience to deal in those securities.

SERVICE AND PRODUCT PORTFOLIO
Individual operators in the sub-sector may have their unique product bundles, but our focus here is on the general activity areas of discount houses, especially from the perspective of what non-institutional parties can participate in. Some key areas include:

• Treasury securities: discount houses are primary dealers, appointed by the CBN, for Treasury money market instruments: NTBs, OMO Bills, etc. That means that when you want to buy fresh Treasury Bills, for instance, discount houses are there to help you out, just as banks could. Since you are not permitted to bid directly for these securities, you can only access the market through these appointed dealers. Because of their key role in treasury securities intermediation, discount houses are also among the 15 financial institutions appointed primary dealers/market makers for Federal Government of Nigeria bonds. Though bonds are not short-term market securities (earlier said to be the domain of discount houses), discount houses are approved to deal in the primary market bond auctions as well as the secondary bond market. Simply put, when you desire to invest in Treasury (government) securities, discount houses are major players you can approach.
• Liquidity Management Products: The money market deals in short-term securities considered generally liquid. Discount houses consequently trade in and manage largely liquid assets which can support your own liquidity management. They, in particular, structure such investment tools as Open Buy-Back (OBB), which implicitly afford the investor a lot of liquidity management flexibility since they can be redeemed at short notice, without the rediscounting cost of Treasury Bills. So, if you seek both investment security (from treasury securities) and liquidity flexibility, these are products you need in your portfolio.
• Asset Management: Discount houses do provide asset managment services, with a bias for money market and treasury securities. Just as you could invest with other fund managers, a discount house can also manage your money market portfolio.
• Like banks, discount houses can also provide advisory services. With trained staff to run their investment desks, you have everything to gain from seeking guidance from these market actors. You not only learn the workings of the market in the process, you can also get advised on how to run you portfolio. Besides, you can gain access to a lot of beneficial market tips by dealing with active market players.
• Capital market subsidiaries. Yes, your are likely to find that a discount house has a leg in the capital market, albeit through a subsidiary. What that means, in essence, is that your money market and capital market (stocks, bonds, etc) investment needs can all be tackled under the same umbrella. That could bring some flexibility, especially in switching assets and funds.

TAKING ADVANTAGE
The product areas listed here, as stated, are on a general note. You are sure to find unique product offerings from each discount house. What has to be understood is that these institutions may be of benefit to you in managing your investment and asset management needs. It is hoped too, that discount houses will work to shed what so far has seemed more of an elitist toga, shrouding them from public access. Much as they serve institutional clients, particularly banks, they need to see the unique role of helping to nurture an investment culture as one they should support. Currently, most can at best be accessed by the high networth individuals, partly because of transaction volume limits that average people may not meet. Since the drive to rid our society of poverty has a lot to gain from investment knowledge and access, a more accommodating stance will definitely serve the public interest.

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