FMDQ set to go live with exchange-traded derivatives

FMDQ Securities Exchange Limited, a wholly owned subsidiary of FMDQ Group PLC, with the support of the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN), FMDQ Clear Limited, and key market participants is set to provide a long-awaited panacea to the Nigerian financial markets, with the introduction of its dynamic Exchange-Traded Derivatives (ETD) market, on Wednesday, July 12, 2023.

According to findings by BusinessDay, the FMDQ ETD market will go live with three products – the Federal Government of Nigeria Bond Futures, Treasury Bills Futures, and Open Market Operation Bills Futures.

The products are expected to deliver the dividends of derivatives markets by serving as useful risk management tools, supporting price discovery, competitiveness, and market efficiency, which in turn will help attract capital flows, reduce the cost of capital, promote secondary market liquidity, and ultimately deepen the Nigerian financial markets.

“The stage is, therefore, set for the go-live of the FMDQ ETD market, the biggest innovation to yet arise from the stables of the FMDQ franchise, following the launch of the Naira-Settled OTC FX Futures by CBN and FMDQ in 2016, which was instrumental in minimising the disequilibrium in the FX market, whilst attracting significant inflows into the Nigerian fixed income and equity markets,” FMDQ said.

Globally, financial markets are plagued with heightened price volatility, fluctuating market prices/rates, and the constant uncertainty of macroeconomic indicators, with the Nigerian financial markets not faring any better.

To counter and assuage these adverse effects, robust and efficient risk management tools, such as derivatives are typically employed.

Whilst model markets have been able to harness the potential of the derivatives markets to mitigate risk efficiently, diversify investment portfolios, and allow businesses to pursue expansion with a higher risk in a safe manner, the reverse is the case in emerging and frontier markets, such as Nigeria, as derivatives markets are non-existent or small – with a dearth of derivatives products – at best, and hedging costs are high, making it uninteresting for market participants.

It is on this premise that FMDQ, in keeping with its mandate to advance economic progress by championing laudable market development initiatives in the Nigerian financial markets, activated the FMDQ Derivatives Market Project.

Commencing as a feasibility study in 2015, the Project was set up with the aim to launch Nigeria’s most dynamic Exchange-Traded Derivatives (ETD) Market, in collaboration with market stakeholders; thereby introducing exchange-traded risk hedging products to the Nigerian financial markets, as is obtainable in other developing and developed financial markets globally.

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The Project has recorded many milestones and implemented several initiatives including, but not limited to, the development of the FMDQ ETD Market Framework, SEC-approved Rules, and membership requirements; deployment of fit-for-purpose and optimised ETD trading and clearing modules on the FMDQ Q-ex System; development of Risk Management and Operational Framework across the financial market infrastructure (FMI) value chain; development of SEC-registered derivatives products; and execution of various stakeholder engagements and training sessions, impacting over 2,600 market stakeholders across the financial markets value chain, ranging from regulators, financial and non-bank financial institutions, corporate treasurers, accountants, legal practitioners, journalists and individuals, to sensitise and promote readiness for the imminent launch of the FMDQ ETD market.

Also primed for the activation of the FMDQ ETD market is FMDQ Clear Limited (FMDQ Clear), Nigeria’s foremost Central Counterparty (CCP), which since receiving its CCP registration from the SEC in 2021, has re-defined the landscape of the sanctity of financial transactions and sparked the introduction of endless possibilities to the scope of permissible products (including derivatives), which can be developed and deployed within the Nigerian financial markets.

FMDQ Clear, in preparation for the ultra-important CCP role of de-risking the Nigerian financial markets, has steadily built its Default Resolution Reserve, which will form part of its robust default waterfall, to ensure adequate financial resources are available to the CCP to deal with any defaults that may arise in the ETD market, to c.$20mm from its retained earnings over the past five years, and is positioned to grow this to over $30mm in the short- to medium term.

With its extensive risk management structures and robust financial resources, FMDQ Clear is well able to manage the consolidated risks in an operational, cost and capital-efficient manner that unlocks value for market participants in the FMDQ ETD market, by aggregating and consolidating counterparty risks and introducing the much-desired counterparty agnostic trading feature that will propel the growth of trading liquidity of financial products in the Nigerian financial markets to international standards and practices.

As market participants position themselves to take advantage of the emerging novel segment of the financial markets, FMDQ Exchange is working with its twenty-one (21) Dealing Members (DMs) – three DMs with full licences and eighteen (18) DMs with Approval-in-Principle – to participate in the FMDQ ETD market as its pioneer Derivatives Trading Members (DTMs).

The DTMs will receive support from FMDQ Clear, through six Deposit Money Banks (DMBs) who will share mutualised responsibility, as Members of the CCP, in its mandate of ‘de-risking’ the Nigerian financial markets either as General Clearing Members (GCMs) – capable of clearing transactions for their proprietary positions and those of other DTMs and clients; or as Direct Clearing Members (DCMs) – capable of clearing their proprietary positions and those of their clients only.

It is worthy of note that of the six DMBs, there are five GCMs, three of which have full licences (Access Bank PLC, Stanbic IBTC Bank PLC, and Zenith Bank PLC) whilst the other two have Approval-in-Principle, pending the completion of their SEC registration (First City Monument Bank Limited and United Bank for Africa PLC). The sixth DMB (Fidelity Bank PLC) is a DCM with an Approval-in-Principle, also pending the completion of its SEC registration.

In support of the launch of an active and thriving ETD market, FMDQ Exchange introduced the first of its kind Derivates-focused Podcast in Nigeria, ‘Q-Dialogue’, an FMDQ-framed colloquy, which is aimed at providing valuable, accurate, and objective information and insight on the FMDQ ETD market. Likewise, in furtherance of its business development mandate to implement initiatives that promote awareness and drive participation in the FMDQ derivatives market, FMDQ Exchange developed the ‘Q-Estimator’, an automated calculator that avails market participants the opportunity to estimate the cost of hedges and potential profit/loss in derivatives transactions or positions in the Nigerian financial markets, thereby equipping market participants to make strategic and informed investment decision-making in the FMDQ derivatives market.

As an important financial market infrastructure aspiring to transform the Nigerian financial markets, in collaboration with key market stakeholders, to be globally competitive, operationally excellent, liquid and diverse, in line with the FMDQ ‘GOLD’ Agenda, the overarching essentiality of the FMDQ ETD market cannot be overemphasised as it leads a pathway to the future of the Nigerian markets, which will see the actualisation of a thriving financial market like other developed economies and markets. While acknowledging the susceptibility of the Nigerian financial markets and the broader economy to external shocks, it is envisaged that the combined strength and resilience of the Nigerian people and markets, coupled with the launch of the FMDQ ETD market, will propel the Nigerian financial markets towards a trajectory of growth and progress.

FMDQ Group is Africa’s first vertically integrated financial market infrastructure group, strategically positioned to provide registration, listing, quotation and noting services; integrated trading, clearing & central counterparty, settlement, and risk management for financial market transactions; depository of securities, as well as data and information services, across the debt capital, foreign exchange, equity and derivatives markets, through its wholly owned subsidiaries – FMDQ Exchange, FMDQ Clear, FMDQ Depository Limited and FMDQ Private Markets Limited.