In boost to for­eign in­flows, CBN, FMDQ launch long-term naira con­tract

… con­tracts now up to 5yrs

Business Day (Nigeria) - - FRONT PAGE - LOLADE AKINMURELE

The Cen­tral Bank ( CBN) yes­ter­day took a ma­jor step to­wards deep­en­ing Nige­ria’s fi­nan­cial mar­kets through a col­lab­o­ra­tion with FMDQ Hold­ings PLC to launch the much-awaited long-dated FX Fu­tures that ex­tends the max­i­mum con­tract tenor to up to five years.

This im­plies that 47 new monthly OTC FX Fu­tures con­tracts, in ad­di­tion to the ex­ist­ing 13 con­tracts, have been in­tro­duced from February 13, 2020, bring­ing the to­tal num­ber of open OTC FX Fu­tures con­tracts at any point to 60.

As the pi­o­neer and sole seller of the naira-settled OTC FX Fu­tures con­tracts, the CBN, hav­ing suc­cess­fully sold a to­tal value of circa $34.83 bil­lion so far on FMDQ Se­cu­ri­ties Ex­change Limited, made history with the land­mark achieve­ment fol­low­ing the launch of the prod­uct in June 27, 2016.

The launch came as a re­lief to Nige­rian cor­po­rates, for­eign port­fo­lio in­vestors (FPIS), for­eign

di­rect in­vestors (FDIS) and other in­vestors as the prod­uct served to min­imise the dis­e­qui­lib­rium in the Spot FX mar­ket and caused the ex­change rate to moder­ate, at­tract­ing sig­nif­i­cant cap­i­tal flows to the Nige­rian fixed in­come and eq­uity mar­kets and achiev­ing ex­change rate sta­bil­ity. Since the in­tro­duc­tion of the prod­uct al­most four years ago, there has been no set­tle­ment de­fault, with FX Fu­tures con­tracts over the last 43 ma­tu­ri­ties to­talling circa $25.53 bil­lion suc­cess­fully cleared and settled by FMDQ’S wholly owned clear­ing house, FMDQ Clear Limited (“FMDQ Clear”). In the global fi­nan­cial sys­tem, hedg­ing prod­ucts are mar­ket en­ablers, al­low­ing busi­nesses and in­vestors around the world to in­vest freely across borders, ef­fec­tively hedge their risks and in­vari­ably con­tribut­ing to eco­nomic growth. With the FX Fu­tures con­tracts, the ef­fec­tive rate at which a coun­ter­party will pur­chase (or sell) FX at any given time in the fu­ture is pre­de­ter­mined and fixed, es­sen­tially obli­gat­ing the par­ties to the trans­ac­tion which is con­sum­mated on FMDQ Ex­change to pur­chase or sell a cur­rency (in this case, US dollar) on a pre­de­ter­mined fu­ture date (the set­tle­ment date) for a fixed rate agreed on the date a con­tract is en­tered (trade date). No obli­ga­tion ex­ists for the phys­i­cal de­liv­ery of the cur­rency and at ma­tu­rity, clear­ing and net set­tle­ment, which is ef­fected by FMDQ Clear, is made in naira-based on the US dollar no­tional amount, and determined by the difference be­tween the agreed rate (on trade date) and the rate on ma­tu­rity (on set­tle­ment date) as determined by FMDQ’S FX ref­er­ence rate – the Nige­rian Au­ton­o­mous For­eign Ex­change Fix­ing (NAFEX). Un­der the erst­while OTC FX Fu­tures mar­ket struc­ture, the CBN of­fered 13 monthly con­tracts al­low­ing mar­ket par­tic­i­pants hedge FX ex­po­sures for up to a one-year pe­riod. Whilst this was a wel­come de­vel­op­ment, a gap was iden­ti­fied where in­vestors seek­ing to hedge FX risk longer than one year were un­able to achieve a per­fect hedge us­ing the FX Fu­tures prod­uct due to the ma­tu­rity mis­match. The re­sul­tant risk of un­wanted vari­abil­ity in the prod­uct de­terred in­vestors from us­ing OTC FX Fu­tures mar­ket for long-term cap­i­tal hedg­ing as this was con­sid­ered un­suit­able for long-term in­vest­ment and cap­i­tal bud­get­ing pur­poses, leav­ing the Nige­rian fi­nan­cial mar­kets strug­gling to at­tract much-needed FPIS/ FDIS and long- term for­eign cur­rency-de­nom­i­nated bor­row­ings for sus­tain­able de­vel­op­ment and eco­nomic growth. The im­pact of the ex­ten­sion of the hedge curve by the CBN to up to 60 months can there­fore not be overem­pha­sised as this will greatly re­duce po­ten­tial FX ex­po­sures, en­cour­age long-term planning and in­crease in­vest­ments in the Nige­rian fi­nan­cial mar­kets. “We are ex­cited that the CBN has yet again in­tro­duced this rev­o­lu­tion­ary ini­tia­tive which will min­imise the fund­ing liq­uid­ity risk of CBN’S FX Man­age­ment Blot­ter and sig­nif­i­cantly at­tract cap­i­tal, in­cen­tivise do­mes­tic cor­po­rates to avail on low in­ter­est rate FCY loans, as well as en­cour­age FPIS/FDIS seek­ing to make medi­umto-long-term in­vest­ments in our econ­omy,” Bola Onadele. Koko, chief ex­ec­u­tive of­fi­cer of FMDQ Group, said in a state­ment said. “This prod­uct in­no­va­tion, which will con­tinue to pro­vide op­por­tu­ni­ties for the gov­ern­ment, busi­nesses, fund man­agers in­vestors, in­di­vid­u­als, etc to hedge to man­age ex­change rate risk, thus achiev­ing greater mar­ket con­fi­dence, liq­uid­ity, im­prove­ment in business planning, bet­ter al­lo­ca­tion of re­sources, global com­pet­i­tive­ness of the Nige­rian fi­nan­cial mar­kets, and in all, a thriv­ing econ­omy,” he said. With de­riv­a­tive prod­ucts con­tin­u­ing to prove to be very use­ful tools for in­vestors and the fi­nan­cial mar­ket in gen­eral, FMDQ Group, through its Ex­change sub­sidiary, fol­low­ing the ac­ti­va­tion of its De­riv­a­tives Mar­ket De­vel­op­ment Project and sub­se­quent stake­holder en­gage­ments cut­ting across var­i­ous mar­ket par­tic­i­pants in­clud­ing banks, fund man­agers, reg­u­la­tors, me­dia, etc, is set to in­tro­duce new de­riv­a­tives prod­ucts into the Nige­rian fi­nan­cial mar­kets. And FMDQ Clear, po­si­tion­ing as a cen­tral coun­ter­party (CCP) in the near-term, shall con­tinue to pro­vide ef­fec­tive risk man­age­ment ser­vices for de­riv­a­tives prod­ucts, en­sur­ing trades are cleared and settled in a timely, se­cure and ef­fi­cient man­ner. With its re­newed as­pi­ra­tion as en­cap­su­lated in its mis­sion to col­lab­o­rate with the mar­kets for eco­nomic progress to­wards de­liv­er­ing pros­per­ity, FMDQ Group, com­pris­ing FMDQ Ex­change, FMDQ Clear and FMDQ De­pos­i­tory, hav­ing con­sol­i­dated its ac­tiv­i­ties into a fully di­ver­si­fied plat­form (fixed in­come, cur­ren­cies and de­riv­a­tives mar­kets) and ver­ti­cally in­te­grated fi­nan­cial mar­ket in­fra­struc­ture group (pro­vid­ing a one-stop plat­form for ex­e­cu­tion, clear­ing and set­tle­ment of trades), is strate­gi­cally po­si­tioned to sup­port the upgrade of the Nige­rian fi­nan­cial mar­kets and in­deed, the econ­omy to be­come glob­ally com­pet­i­tive, oper­a­tionally ex­cel­lent, liq­uid, and di­verse, in line with the Group’s GOLD Agenda.

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