The Swaps and Derivatives WorkGroup of the Financial Market Dealers Association of Nigeria (FMDA) will be organizing market-development seminar titled: “Legal Documentation as a driver to introducing New Products and a Healthier Financial Market in Nigeria”. The event scheduled for March 19, 2019 at the Lagos Continental Hotel Victoria Island, Lagos will attract financial markets participants, bank treasurers, treasury operations, risk and legal teams, investors, and other players in the financial market. Chairman, Swaps & Derivatives WorkGroup and FMDA President, Samuel Ocheho speaks on the forthcoming event, the state of the financial market, the derivatives market and prospects for the equities market.
What is your take on the Nigerian forex market and what in your view is responsible for the level of stability witnessed in the market in the last one year. What impact will the introduction of Derivatives Market have on the market?
The Nigerian Forex Market has managed fairly well, especially with the introduction of the Investors & Exporters Foreign Exchange (I&E Forex) window by the Central Bank of Nigeria (CBN) in 2017. This restored some level of confidence, especially from foreign investors at the height of the Forex scarcity which began at the advent of collapse of oil prices about four years ago.
The willing buyer-willing seller arrangement gave bearing to the structure of the market along with the CBN’s participation as an active buyer and seller of Forex creating a stabilizing force. The CBN being a player (buyer or seller) of last resort, their high level of responsiveness and closeness to the market have been key factors responsible for the relative stability over the last two years.
The recent introduction of the FMDQ OTC Forex Futures, which can pass as a derivative, has positively contributed to the attraction of foreign flows in Nigeria. However, for a proper Derivative market to flourish, the underlying asset markets (Interest Rates, Foreign Exchange, Equities among others) need to be vibrant, deep and market driven to enable good price discovery.
The impact of an active derivative market is that customers would be able to manage their interest rate cost and exchange rate risk. This will spur confidence in the market and act as a good planning tool for Chief Financial Officers of businesses instead of being left open to market volatilities.
The Swaps and Derivatives WorkGroup of the Financial Market Dealers Association of Nigeria (FMDA) will be organising a market-development seminar on March 19, at the Lagos Continental Hotel, Victoria Island, Lagos. What is the theme of the seminar?
The theme of this workshop is “Legal Documentation as a driver to introducing New Products and a Healthier Financial Market in Nigeria”.
Who are the stakeholders expected to attend this programme and what will be their takeaways?
We expect financial markets participants, Bank Treasurers, Treasury Operations, Risk and Legal Teams, Corporate Treasurers, Regulators, Investors, and other stakeholders to attend this seminar. The event is to discuss standardization of documentation in our market especially as it relates to derivatives and other vanilla transactions, with the view of boosting the integrity of our markets.
How does introduction of Derivatives market trading solve Nigeria’s exchange rate challenges?
In the absence of a Derivatives trading market, the bulk of Forex supply falls into the Spot market thereby creating a lot of uncertainties. An introduction of Derivatives markets trading can help provide more Forex liquidity and help reduce front-loading of obligations in the spot market.
What is your view on the state of the mutual funds market and what opportunities do you see in that market?
There has been significant growth in the Collective Investment Scheme (CIS) industry in recent years; Assets under Management (AuM) have grown from N116 billion in 2013 to N655 billion in 2018, representing a growth of 465 per cent during the period. The numbers of Asset Managers and CIS offerings have also increased in the same period, as there are over 80 Mutual Funds available to the public in Nigeria. In addition to the traditional Equity and Fixed Income biased Funds, retail and Institutional investors can now access Dollar Based Funds, Exchange Traded Funds (ETFs) and Specialist Fund although there remains a strong preference for Fixed income biased funds. Consequently, 83 per cent of the total AuM of CIS in 2018 was concentrated in fixed income biased funds.
Given the low penetration rate (less than two per cent of the total population) of subscribers to CIS, there is increased collaboration amongst Asset Managers through the Fund Managers Association of Nigeria (FMAN) to increase awareness of investment products. Asset Managers are also deploying various digital initiatives to reach out to the public.
What are the opportunities available to Asset Managers and other players in the Collective Investment Scheme Industry?
Some of the available opportunities include establishing a back-office company with the required infrastructure and technology to handle back-office operations for multiple Asset Managers. In other climes, a number of Asset Managers outsource this responsibility to other players.
Also, the development of specialist funds (Real Estate, Infrastructure, and Private Debt etc.) targeted at Institutional Investors and High Net worth individuals (“HNIs”). There is a dearth of these funds in Nigeria and deployment of lifestyle, ramified digital investment solutions targeted at millennials.
They can also partner with foreign asset managers to offer investment products issued in Nigeria but linked to foreign assets like Depository receipts, Structured Notes. The Securities and Exchange Commission of Nigeria (“SEC”) prohibits CIS from investing in assets not issued or incorporated in Nigeria. However, segregated portfolios of HNIs or Institutional Investors can invest directly in foreign markets.
Can you explain standardization of documentations to a common man in the financial market? What does it entail?
In the financial markets, standardizing documents relate to creation of minimum requirements to be fulfilled by the trading counter-parties, a product, process, service, or system. The document will state out the obligations, rights and entitlement of the parties in the trade. The terms stated therein become binding on all parties and it also helps in the event of litigation.
What level of development is the derivatives market in Nigeria and how can the financial system and stakeholders benefit from it?
The Nigerian derivative market can be deemed shallow when compared to the international derivatives market in terms of volumes dealt and the bouquet of structures created/traded. Nevertheless, the current products being traded provide an adequate platform for stakeholders to hedge trade obligations. The market I must confess is still largely plain vanilla and we have a dream of raising its level in Nigeria to a state where it can be compared to the international financial markets.
Can you explain to us what is meant by transaction netting and what it means to financial market operators and impact it could have on the economy?
Netting involves offsetting the value of multiple positions or payments due to be exchanged between two or more parties. It can be used to determine which party is owed remuneration in a multiparty agreement. For financial market operators, this implies that the need to exchange principal amounts at the maturity of the derivatives transactions is eliminated, especially in cases which involve multiple trades with the same counter-party. Costs and time are saved and settlement risk is reduced as well.
What is the stage of derivatives market in Nigeria and how can it be improved for the benefit of the economy?
Derivatives trades in Nigeria are currently more bilateral between financial institutions and their respective customers. The more developed the derivatives market, the more banks are able to provide cheap hedging solutions to their respective clients; this ranges from interest rate cost reduction solutions for corporates, which allow them to borrow more and expand their various businesses. Forex derivatives also provide hedges for corporates and foreign portfolio investors. Case in point is the OTC Forex futures market which provides stability and spurs confidence as investors can hedge exchange Risk.
Many foreign companies now play in the mutual fund market. Do you think that local players have what it takes to compete favourably with these foreign operators?
The local players have a sound understanding of the local market in terms of drivers of the performance of the capital market, the taste and preference of various segments of the market and regulatory requirements. As such, local players continue to dominate market share of retail and institutional investors despite the continuous foray of foreign companies. Foreign operators tend to partner with the local players to offer their products or buy into existing local players to gain access to the Nigerian market.
What is your 2019 forecast on Nigeria’s economic growth and performance of financial institutions?
We expect GDP growth of 2.5 per cent in 2019, driven by the non-oil sector, as we foresee further recovery from Q4:18. We expect further recovery in trade, agriculture, manufacturing and telecoms sectors. A stronger recovery in consumer sentiments and purchasing power should spur the economy further. We also expect a slight decline in inflation in 2019-year end to 11%, from current levels of 11.44 per cent. Nevertheless, we see likely increase in energy prices as upside risk to our assumption. We expect moderate recovery in the financial sector in 2019, as we expect a growth in private sector credit vs. the decline in 2018. We also expect moderate improvement in asset quality which was weak at 14 per cent in 2018; we also expect a slight increase in capital adequacy ratio for the sector. Nevertheless, we foresee interest from investment securities driving interest income growth for the sector in 2019.
Given the fact that there is volatility in the market, what will be your advice to investors on the best way to play in the equities market this year?
The winners this year will be the investors trading contrary to general market sentiments; this has been evident so far since the start of the year. It is best to stick with quality names and with companies that have strong corporate governance, paying high yielding dividend. We also recommend tier 1 banks, which we believe will thrive in a high interest rate environment.