| Doing Business in Nigeria |    3187 VIEWS  |
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Wednesday, August
19, 2020 / 08:50 AM / by FMDQ / Header Image Credit: FMDQ Group
The Nigerian financial market and the economy, as a
whole, are set to receive the long-awaited boost to spur economic development
and the repositioning of Nigeria as a compelling destination of capital, with
the Presidential assent of the Companies and Allied Matters Bill 2020, consequently
introducing the Companies and Allied Matters Act (CAMA) 2020, which has
repealed and replaced the 30-year old CAMA 1990. This historic act by the
President, Muhammadu Buhari, on this important piece of legislation, is
expected to usher in a new wave of innovative developments, significantly
improving the ease of doing business in Nigeria, and ushering in a new paradigm
in the Nigerian financial market.
With the increasing sophistication of the global
financial markets, comes the need for domestic markets to develop their
architecture and infrastructures to support requisite advancement as well as
align with international standards, and the new CAMA 2020 will position Nigeria
and its capital market at par with its international counterparts. Chief of the
several impactful provisions in the CAMA 2020, is the inclusion of netting and
bankruptcy remoteness provisions which signal the birth of a new financial
market in Nigeria. Indeed, these game changing provisions will cure critical
legal deficiencies that hitherto affected the development of the financial
markets, with the netting provisions addressing the credit risk challenges,
operational and legal bottlenecks of gross settlement for spot and derivatives
transactions, and the bankruptcy remoteness provisions tackling the uncertainty
around the finality of settled transactions whilst securely ring-fencing
collaterals placed in execution of financial contracts.
This Act is instrumental, in no small measure, to the
successful takeoff of the derivatives market in Nigeria, a much-desired
development, which will provide, amongst others, a wide range of risk
management opportunities, enhanced market liquidity, improved price discovery,
reduced risk capital charges and transaction costs as well as increased
financial markets stability. Indeed, as far back as 2015, FMDQ Holdings PLC
(FMDQ or FMDQ Group), in line with its mandate to build a thriving derivatives
market in Nigeria, facilitated a feasibility study on the introduction of
derivatives in the Nigerian financial market, and the findings showed that the
critical success factors for a derivatives market include, but are not limited
to, effective management of counterparty risk through the activation of a
central counterparty (CCP), and adequate legal framework, both of which have
been fully addressed in the CAMA 2020.
Leveraging on its aspiration to deepen the Nigerian
financial market, and transform it to be globally competitive, operationally
excellent, liquid and diverse, in line with the 'GOLD' Agenda, FMDQ Group has,
since its inception, engineered the requisite architecture towards improving
the diversity and depth of the market, as well as promoting an environment
within its markets, for innovation and market development to thrive. From an
over-the-counter (OTC) market launched in 2013, to a full-fledged Securities
Exchange, to a vertically integrated financial market infrastructure (FMI)
group, FMDQ Group has developed a sustainable market architecture through its
wholly owned subsidiaries – FMDQ Securities Exchange Limited, FMDQ Clear
Limited, FMDQ Depository Limited and FMDQ Private Markets Limited – towards
building, in collaboration with the regulators and market stakeholders, a
developed financial market in Nigeria.
According to the Chief Executive Officer of FMDQ
Group, Mr. Bola Onadele. Koko, "the CAMA 2020 commendably sets the tone for the
actualisation of key innovations in the market, providing enabling legal
backing for netting, bankruptcy remoteness and attendant regulatory frameworks
for the smooth functioning of financial markets in Nigeria. With FMDQ Exchange
as a market organiser for the fixed income, foreign exchange and derivatives
markets in Nigeria, and given the domestic and global call to improve
participation in the markets by providing hedging opportunities to support
investor interest, the Exchange is set to support the establishment of a
well-functioning derivatives market in Nigeria, following its launch of a
Derivatives Market Project in 2017, and the planned activation of derivative
products, in 2020, to hedge interest rate risks, in addition to the existing
currency risk hedging product, the OTC FX Futures product.
To ensure the successful activation of the derivatives
market, FMDQ Clear, Nigerian's first central clearing house (CCH), is well
positioned to providing the much-needed CCP services, upon regulatory approval,
and has proactively set aside a default resolution reserve with a near-term
target of ₦20 billion, which will
enable the novation of financial transactions in the Nigerian financial market
to a well-capitalised Clearing House, thereby de-risking counterparty risks
prevalent in derivative contracts, provision of clearing services for spot and
derivatives products towards ensuring settlement finality for financial market
transactions, and introduction of even greater efficiency and stability to the
Nigerian financial markets".
He further stated that the contributions of all the
Nigerian financial system regulators in the market development cannot be
over-emphasised; with the foresight of the Securities and Exchange Commission
(SEC) over the years, in approving the registration of the FMDQ Entities, the
erstwhile OTC market in 2012, FMDQ Clear in 2017, and FMDQ Depository and FMDQ
Exchange, both in 2019, providing the market with a one-stop shop for the
end-to-end execution of financial market transactions. Further, the Central
Bank of Nigeria (CBN) introduced in 2016, with FMDQ Exchange, the OTC FX
Futures market, ahead of the launch of other derivative products, which
fostered stability in the FX market, with circa US$50.00 billion worth of
contracts so far executed on FMDQ Exchange and cleared by FMDQ Clear.
Market analysts opined that with improved regulatory
landscape, adoption of liberalised markets – especially in foreign exchange,
promotion of improved risk management standards and financial markets
stability, catalysed by the emergence of a derivatives market and a functioning
CCP, the Nigerian economy is bound to witness a more attractive financial
system that will galvanise foreign capital flow, improve trading and funding
liquidity of the markets, attract human capital and cause reduction in cost of capital,
thereby boosting the nation's reserves, engendering the much-desired economic
transformation, and ultimately positioning Nigeria and Nigerians for
prosperity.
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