CBN settles $180m OTC FX futures contract

The Central Bank of Nigeria (CBN) yesterday settled the third OTC foreign exchange (FX) futures contract, even as low liquidity continues to mar interbank FX market trading.
The NGUS SEP 28 2016, 1M contract with a notional value of $180 million executed between the CBN and authorised dealers on FMDQ OTC securities exchange, matured and was settled yesterday, Business Day can report.
However, the spot market continued to be marred by thin liquidity as only $13.4 million in value traded yesterday as at 5.48 p.m, local time, data from the FMDQ OTC exchange showed.
The naira closed at N305.50 to the dollar on the official interbank market, while it plunged further to a new record low of N460 to the dollar on the black market, down from N452 at the close of trading on Tuesday.
Analysts say the much expected inflows since the move to flexible FX trading have yet to materialise as a lot of offshore funds are still underweight Nigeria.
“I understand that the average weight for many of them is 4% compared to benchmark weight of 12%,” said Tosin Ojo, head of research at investment firm, Cardinal Stone Partners.
“Many of the investors that track the MSCI frontier market index will be seeking to raise their allocation closer to benchmark weight. However, I expect they will also want to see the interbank market function properly for a while, so they can be assured that there’s sufficient FX liquidity.”
The spread between the official and parallel market rate is widening as investors raise concern over the lack of volatility in the interbank FX market.
Trading activity in the Spot FX market between banks and their clients showed no real signs of improvement in value in the three-business day week ended Sep. 16, 2016 when compared with the turnover in the previous week, as the average daily turnover stood at $71.64mm (average daily turnover for week ending Sep. 7, 2016 was $72.22mm).
While the spot FX market turnover for the reporting week, Sep. 16, 2016, was about $215.00mn, turnover in the Spot FX market among banks during the reporting week was recorded at $59.73mm; with the average daily turnover recorded at circa $19.91 million.
Analysts say these levels are still not very encouraging as the FX market still has a very long way to go to attain similar levels of pre 2015.
The inter-bank FX market closed at $/N307.79 for the week ending Sep. 23, 2016, from a close of $/N308.69 the preceding week.
“This indefensible stability of the Nigerian naira is not doing much to assuage the scepticism of most corporate treasurers and portfolio investors that full transparency and credible price formation are still not being attained,” one bank treasurer told BusinessDay.
The naira-settled OTC FX Futures contracts are essentially non-deliverable Forwards (contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar notional amount on the maturity/settlement date).
Upon maturity, both parties are assumed to have transacted at the Spot FX market rate.
OTC FX Futures contracts are cash-settled in naira and the differential between the contract rate and the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) Spot rate on the maturity day determines the settlement amount, the gain/loss inherent in the contract.
The naira-settled OTC FX Futures market kicked-off on June 27, 2016, with the CBN as the pioneer seller of the OTC FX Futures contracts, offering non-standardised amounts for different tenors, from one (1) month through to 12 months to Authorised Dealers, who in turn offer same to customers with trade-backed transactions or who may trade same with other Authorised Dealers; settling on bespoke maturity dates.
The apex bank, will again be expected to reprice its quotes on each of the eleven (11) monthly OTC FX Futures contracts and introduce another 12-month contract, ensuring the rates are competitive enough to attract foreign investors (portfolio and direct) and Nigerian portfolio investors.