In an attempt to broaden the Nigerian financial ecosystem, all eyes are on FMDQ as the OTC exchange has proposed to roll out a derivatives market. Analysts say that the advent of this platform, which will help to hedge against systemic risk, would lead to a more efficient capital market.
Derivatives are financial market products whose values are derived from one or more underlying assets or sets of assets, which can be bonds, stocks, commodities, precious metals, market indices, interest rates, etc.
Obinna Uzoma, a Lagos-based economist explained that “With the creation of an all-encompassing derivatives market, inefficiencies in the capital markets would be exploited by investors seeking arbitrages. These inefficiencies would then be corrected as demand for free money would outweigh supply of opportunities and thus, lead to price converging with value.”
As a strategic asset class, derivatives present a useful risk management tool required for surviving uncertainties in the financial markets. They play a vital role in the development and growth of an economy by supporting price discovery, competitiveness and market efficiency which helps attract capital flows, reduce cost of capital and deepen the financial markets.
A source close to FMDQ speculated that the time of completion of the derivatives market would likely be in the last quarter of 2019. The website of the OTC exchange explained that “having conducted a feasibility study towards the introduction of various OTC derivative products, FMDQ has begun rolling out, key interest rate and currency derivatives into the Nigerian financial markets.”
According to Head, Structured Products of FBN Capital, Michael Okon, “Existing financial securities coupled with derivatives can be used to address the needs of clients either for risk management, yield enhancements or funding purposes.
He further stated, “Due to the absence of a robust regulatory and legal framework to accommodate the peculiarities of derivatives in Nigeria, a majority of the transactions are still bilateral. However, as the market evolves and we have more market participants, we should see increased liquidity and price discovery which will help develop the exchange traded market.”
The Naira-settled OTC FX Futures is a proof that albeit a hard task, creation of a derivatives markets is well within the purview of FMDQ. It was introduced in 2016, with the Central Bank of Nigeria as the pioneer seller of the OTC FX Futures contracts. The apex bank currently offers non-standardized amounts for different tenors, from one month through to twelve months to Authorized Dealers, who in turn offer same to customers with trade-backed transactions or who trade same with other Authorised Dealers; settling on bespoke maturity dates.
Naira-settled OTC FX Futures are non-deliverable Forwards (i.e. contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity/settlement date). Upon maturity, both parties are assumed to have transacted at the Spot FX market rate. OTC FX Futures contracts are cash-settled in Naira and the differential between the contract rate and the NAFEX (Nigerian Autonomous Foreign Exchange Fixing) rate on the maturity day determines the settlement amount, i.e. the gain/loss inherent in the contract.
IFEANYI JOHN
