First Naira-Settled OTC FX Futures Contract Matured and Settled July 27 on FMDQ

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Friday, July 29, 2016 3:47pm/ FMDQ

·         ₦962.23mm Settlement Amount paid to the ‘Futures Banks’ on the $/₦279 NGUS JUL 27 2016 contract

The month of July is poised to report an encouraging increase in overall FX market activity. Precisely one (1) month into the June 27, 2016 introduction of and formal unveiling of the Naira-Settled OTC FX Futures Market, the pioneer 1M contract - NGUS JUL 27 2016 $/N 279, for about $26.73 million executed between the Central Bank of Nigeria (CBN) and Authorised Dealers on FMDQ OTC Securities Exchange (FMDQ), matured and was settled on Wednesday, July 27, 2016.

This is a milestone in the history of the Nigerian FX market, with the OTC FX Futures market having reported remarkable success in its almost one month of existence as over $1.20bn worth of the CBN’s OTC FX Futures contracts, across all the tenors, with the profile of the buyers of the contracts including Foreign Portfolio Investors (FPIs) and importers, among others, have been traded on FMDQ’s OTC FX Futures Trading & Reporting System.

In line with the OTC FX Futures Market Framework released by FMDQ and the FMDQ OTC FX Futures Market Operational Standards, the 1M contract was valued by the Exchange against the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) Spot rate, ceased to trade on Wednesday, July 20, 2016. Clearing operations and settlement for the final variation margins, as valued by FMDQ, were effected through the Nigeria Inter-Bank Settlement System PLC (NIBSS), acting as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts.

Consequently, in line with the FMDQ OTC FX Futures Market Framework, ₦962.23mm total Settlement Amount was paid to the ‘Futures Banks’ – the counterparties to the CBN - on the matured NGUS JUL 27 2016 at $/₦279 on the maturity date, July 27, 2016.

The CBN has replaced the matured July 2016 contract and has now offered the new 12M contract, to mature July 2017 i.e. NGUS Jul 19 2017, with a total notional amount on offer of $1.00bn at ₦250 to $1.

The Naira-Settled OTC FX Futures contracts are essentially non-deliverable Forwards (NDF) (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. Since these contracts are cash-settled in Naira, there is no physical delivery of the underlying currency to the counterparties, in this case the CBN and the Authorised Dealers. The differential between the OTC FX Futures contract rate and the NIFEX Spot rate on the settlement day determines the Settlement Amount, i.e. the gain/loss inherent in the contract; and the party that would have suffered a loss with the NIFEX Spot FX rate is paid the Settlement Amount in Naira.

Thus ensuring that both parties in purchasing or selling the US Dollar in the Spot FX market will achieve an effective rate equal to the NDF rate that had been guaranteed to each other via the trade in the OTC FX Futures contract.

The launch of the Naira-settled OTC FX Futures product, is adjudged by financial market analysts as a welcome development even as the Nigerian FX market continues to undergo reforms and experience a gradual move towards a vibrant market, in line with global standards; and has paved the way for businesses and corporates to enhance their business planning whilst effectively hedging their FX risk.

With over $1.20bn worth of contracts trading on the FMDQ System, market participants and end-users (importers, exporters, FPIs) etc.) have evidently recognised the opportunities inherent, in transforming risk into certainty through the recently introduced OTC FX Futures contracts by the CBN.

To facilitate the operational efficiency of the Futures market, the CBN, on June 24, 2016, issued a circular on ‘Externalisation of Differentials on OTC FX Futures Contracts for FPIs’, thus providing an avenue for this category of end-users, upon presentation of an FMDQ-issued Settlement Advice and a Certificate of Capital Importation, to repatriate the Settlement Amounts of the OTC FX Futures contracts. Similarly, on July 22, 2016, the apex Bank released another circular mandating the sale of foreign currency proceeds of international money transfers by banks to the Bureaux-de-Change (BDC) operators, who will in turn sell the proceeds to retail end-users. Thus serving to ease the demand pressure for FX in the BDC market and improving the value of the Nigerian Naira against the US Dollar.

The OTC FX Futures market continues to provide a feasible alternative for local and international end-users keen to hedge their FX exposures, and has availed a greater opportunity to manage exchange rate volatility, even as the CBN continues to empower and position the Nigerian FX market as an attractive, efficient and credible market.

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