By Kayode Tokede
The FMDQ OTC securities Exchange limited has disclosed that the Central Bank of Nigeria (CBN) has sold $34.83 billion Over the Counter (OTC) Foreign Exchange (FX) futures since June 2016 it was launched.
The apex bank has yet again shown its commitment towards the development of the FX market in collaboration with FMDQ Holdings, to introduce the much-awaited long-dated FX Futures, extending the maximum contract tenor to up to five years.
This implies that 47 new monthly OTC FX Futures contracts, in addition to the existing 13 contracts have been introduced from February 13, 2020, bringing the total number of open OTC FX Futures contracts at any point to 60.
As the pioneer and sole seller of the Naira-settled OTC FX Futures contracts, the CBN, having successfully sold a total value of circa $34.83 billion so far on FMDQ Securities Exchange Limited, made history with the landmark achievement following the launch of the product in June 27, 2016, to the relief of Nigerian corporates, foreign portfolio investors (FPIs), foreign direct investors (FDIs) and other investors, as the product served to minimise the disequilibrium in the Spot FX market and caused the exchange rate to moderate; attracting significant capital flows to the Nigerian fixed income and equity markets; and achieving exchange rate stability.
With this product administered via the bespoke FMDQ FX Futures Trading & Reporting System, it is noteworthy that since the introduction of the product almost four years ago, there has been no settlement default, with FX Futures contracts over the last 43 maturities, totalling circa $25.53 billion, successfully cleared and settled by FMDQ’s wholly owned clearing house, FMDQ Clear Limited.
Under the erstwhile OTC FX Futures market structure, the CBN offered 13 monthly contracts allowing market participants hedge FX exposures for up to a 1-year period. Whilst this was a welcome development, a gap was identified where investors seeking to hedge FX risk longer than one-year were unable to achieve a perfect hedge using the FX Futures product due to the maturity mismatch.
The resultant risk of unwanted variability in the product deterred investors from using OTC FX Futures market for long-term capital hedging as this was considered unsuitable for long-term investment and capital budgeting purposes, leaving the Nigerian financial markets struggling to attract much-needed FPIs/FDIs and long-term foreign currency (FCY) denominated borrowings for sustainable development and economic growth.
The impact of the extension of the hedge curve by the CBN to up to 60 months can therefore not be overemphasised as this will greatly reduce potential FX exposures, encourage long-term planning and increase investments in the Nigerian financial markets.
The Chief Executive Officer of FMDQ Group, Mr. Bola Onadele in a statement said, “We are excited that the CBN has yet again introduced this revolutionary initiative which will minimise the funding liquidity risk of CBN’s FX Management Blotter and significantly attract capital, incentivise domestic corporates to avail on low interest rate FCY loans, as well as encourage FPIs/FDIs seeking to make medium-to-long-term investments in our economy. This product innovation, which will continue to provide opportunities for the government, businesses, fund managers investors, individuals etc. to hedge to manage exchange rate risk, thus achieving greater market confidence, liquidity, improvement in business planning, better allocation of resources, global competitiveness of the Nigerian financial markets, and in all, a thriving economy.”