The FMDQ Securities Exchange has hailed the Naira settled OTC FX futures market being facilitated by the Central Bank of Nigeria (CBN) calling it an innovative product helping to oil the Nigerian economy.
In a statement yesterday, the exchange said “the development of a vibrant market to effectively hedge risks remains pivotal to the development of any country and Nigeria, being one of the frontier economies in the global financial markets space, is undoubtedly an exploratory gold mine for hedging transactions.
“Recent regulatory reforms, led by the Central Bank of Nigeria (CBN) and the associated market activities, have supported the introduction of these products, creating awareness and encouraging their trading, with the market environment raking in positive results.
According to FMDQ, “the CBN, having recognised the importance of such strategic market development focus for the Nigerian FX market, supported and kicked off activities in this regard, with the launch of the Naira-settled OTC FX Futures derivatives product in June 2016.
“With FMDQ OTC Securities Exchange (FMDQ) serving as the OTC FX Futures Exchange, the CBN commendably championed this market development initiative by becoming the pioneer seller of the OTC FX Futures contracts of non-standardised amounts for different tenors, (one (1) month through to twelve (12) months) settling on bespoke maturity dates, and providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their FX risk.
“To date, the CBN remains the sole seller of these contracts. The Naira-settled OTC FX Futures, which are non-deliverable forwards, essentially obligate counterparties to purchase or sell a specific currency (the US Dollar, which is a notional amount) on a predetermined future date (the settlement date) for a fixed rate agreed on the date a contract is entered (trade date). In a Naira-settled OTC FX Futures contract, the effective rate at which a counterparty will purchase (or sell) FX at a time in the future is predetermined and fixed.
“There is no obligation for the physical delivery of the currencies (Naira or US Dollar) and at maturity, net-settlement will be made in Naira, based on the US Dollar notional amount, and determined by the difference between the agreed rate (on trade date) and spot FX rate (i.e. the Nigerian Inter-Bank Foreign Exchange Fixings (NIFEX) rate) (on settlement date).
“The introduction of the OTC FX Futures product, with about $6.60bn worth of contracts so far executed between the CBN and Authorised Dealers on FMDQ, is adjudged by financial market analysts and investors, as a welcome development, even as the Nigerian FX market continues to undergo reforms and experience a gradual move towards regaining its vibrancy.
“The OTC FX Futures market, among other commendable results, paved the way for businesses and corporates to enhance their business planning, whilst effectively hedging their FX risk; giving them the much-needed certainty to ensure effective and efficient business planning, and indeed to keep operations going.
“The CBN’s resilience in maintaining this market and ensuring its viability and sustainability is indeed worth applauding _applauding. The apex bank has successfully settled nine contracts through nine different maturities and continues to sustain its offering of 12 monthly contracts to address the needs of just about all the end-users of the product.
“In a little over nine months since its launch, the OTC FX Futures market has also attracted capital flows to the Nigerian fixed income markets, affording the CBN an opportunity to manage exchange rate volatility. The OTC FX Futures have made corporate treasurers better able to make judgements on when to access the Spot FX market, potentially giving them the ability to manage more effectively, their liquidity positions.
“The CBN has indeed brought some measure of stability to the Nigerian FX market and has been able to practically demonstrate the profound significance of a market with hedging options. In line with its objective to maintain stability in the FX market, whilst diligently fighting speculation against the nation’s currency, the due diligence accorded the structuring of the OTC FX Futures product as led by the CBN Governor, Mr. Godwin Emefiele, is such as to aid the apex bank’s drive to eliminate speculators of the Naira from participating in the product.
“The CBN, through the FMDQ OTC FX Futures Trading & Reporting System, offers the OTC FX Futures contracts to Authorised Dealers who in turn offer same to only clients (corporate and commercial entities) with eligible trade-backed transactions, as documented in the FMDQ OTC FX Futures Market Operational Standards.
“Further to the feasibility study conducted by FMDQ, to determine the readiness of the Nigerian financial market to harness the opportunities within the hedging products market, and the CBN paving the way for such important innovation towards the transformation and global competitiveness of the Nigerian financial markets, the OTC FX Futures market continues to provide a feasible alternative for local and international end-users keen to hedge their FX exposures.
“Even as the CBN continues to implement reforms aimed at empowering and positioning the Nigerian FX market as an attractive, efficient and credible market, it is expected that once the FX market fully operates as a liberalised market and liquidity returns to the inter-bank market, that the banks (Authorised Dealers) will support the apex bank’s FX market stability initiatives by increasing the menu and availability of the hedging products.”
