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CBN, FMDQ launch Naira-settled OTC FX futures market


The Central Bank of Nigeria (CBN) has made history in the Nigerian FX market as it becomes the pioneer seller of the Naira-settled OTC FX Futures contracts on FMDQ OTC Securities Exchange (FMDQ) today, Monday, June 27, 2016.

This comes exactly one week after two-way quote trading commenced in the Nigerian FX market on the back of the recent release of the revised CBN Guidelines for the Operation of the Nigerian Inter-Bank FX Market (the Guidelines), essentially transitioning the market from a pegged FX rate regime to a floating one.    

The Naira-settled OTC FX Futures product, whilst of tremendous benefit to Nigerian corporates, is of immense importance and advantage to the CBN, the Nigerian FX market, and the nation’s economy as a whole.

The OTC FX Futures market will serve to minimise the disequilibrium in the Spot FX market and cause the rate to moderate; attract significant capital flows to the Nigerian fixed income and equity markets; and achieve exchange rate stability.

This implies that there  is no longer the need to front-load FX requirements, which puts immense pressure on, and distorts the Spot FX rate.

Corporate treasurers are better able to make judgments on when to access the Spot FX market, managing more effectively, their liquidity positions. The demand for the US Dollar by end-users can be staggered appropriately, as there will be no requirement for “panic-buying” as end-users are guaranteed a fixed rate for their FX needs when required.

The Naira-settled OTC FX Futures market has today kicked off with the CBN selling OTC FX Futures contracts of non-standardised amounts for different tenors from one month through to 12 months, which will settle on bespoke maturity dates, providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their FX risks.

With FMDQ, as the OTC FX Futures Exchange, organising the smooth running of this market through its System, the FMDQ OTC FX Futures Trading & Reporting System and its market trading standards and rules, serving to provide the requisite transparency and governance for the success of the market, and the Nigeria Inter-Bank Settlement System PLC (NIBSS), acting as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts, ahead of the establishment of a Central Counterparty (CCP), the market has been positioned for a successful operation.

To ensure credibility of the contracts, especially at maturity, the Spot FX rate will be the FMDQ Spot FX Rate Benchmark – the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX), an independent fixing of the inter-bank FX market.   

In support of the successful take-off of the market, the CBN, on Friday, June 24, 2016, released a circular on the “Externalisation of Differentials on OTC FX Futures Contracts for Foreign Portfolio Investors”. This will no doubt have a positive impact on the Nigeria FX market as this serves as further encouragement for the flows of capital to the nation. 

The official opening and launch of this market is being commemorated today with a ceremony hosted by the board and management of FMDQ in Lagos.

This launch ceremony, certain to be memorable one, will have in attendance, key stakeholders in the Nigerian financial market and particularly in the FX futures market, including the governor of the CBN, Godwin Emefiele, represented by Emmanuel Ukeje, special adviser to the CBN governor on financial markets; and the Securities and Exchange Commission (SEC).

Bola Onadele. Koko, managing director/CEO of FMDQ, in a statement said, “The Naira-settled OTC FX Futures product is a major milestone development in the evolution of the Nigerian financial markets.

The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape. This innovation provides opportunities for government, businesses, pension fund administrators, investors, individuals and others to hedge (not speculate) to cope with exchange rate risk.”

He said, “It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.” 

The first Naira-settled OTC Futures contract quotes by the CBN will be unveiled during the ceremony, after which the quotes will be made available on the FMDQ website.

“The CBN remains steadfast in its purpose to position the Nigerian FX market to be competitive, transparent, liquid and diversified, thereby ensuring requisite fundamentals that make for a thriving economy. The launching of the first Naira-settled OTC FX Futures contracts demonstrates this intent in a significant way, and I am honoured that the CBN is able to pave the way for what I believe will be an important innovation in Nigeria’s financial markets”, the CBN Governor said. 

“The commencement of the futures market will be very positive for the naira as it will help reduce speculative demand for FX”, Kayode Tinuoye, head, research, financials, United Capital plc told BusinessDay in an emailed response.

The analyst notes that futures transactions will smooth-out the volatility that we have seen since the commencement of the flexible foreign exchange market.

“The fact that most of the backlog met by the CBN last week were sold forward means that much of the pressure on the currency in the last 16 months before the removal of the peg, was mostly as a result of front-loaded demand”, Tinuoye added.

This landmark achievement in the Nigerian Financial Markets has indeed been a long time coming, spanning 30 years, when the inter-bank FX market in Nigeria commenced and the Exchange Rate Liberalisation Policy was introduced in 1986, to the introduction of the Foreign Exchange (Monitoring & Miscellaneous Provisions) (FEMM) Act 1995.

The commencement of Two-way Quote System (market making) in the inter-bank FX market in 1996, then the further liberalisation of the FX Market by the introduction of the Wholesale Dutch Auction System (WDAS) in 2006.

This was followed by  the  commencement of the fixed exchange rate regime in 2015, and now, coming on the heels of a tumultuous Nigerian economic climate in 2015, the welcome development in 2016 in the form of the revised Guidelines, bestowing upon the nation, the ground-breaking Naira-settled OTC FX Futures, making history and upgrading the Nigerian FX market to global standards.

Iheanyi Nwachukwu