Debt and Currency Market Outlook 2019 - Working Towards Delivering A Viable Derivatives Market


Friday, February 15, 2019 6:30AM /Proshare Research


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What were the key performance drivers of FMDQ’s markets?

Following the gradual recovery of the Nigerian economy from the recessionary and economic headwinds which had hitherto stagnated the financial markets, FMDQ OTC Securities Exchange (FMDQ)’s markets (fixed income, currencies and derivatives) experienced steady growth, particularly in the light of the sustained interest and activity levels of the Central Bank of Nigeria (CBN)’s Investors’ & Exporters’ (I&E) Foreign Exchange (FX) Window, and other market and product development initiatives deployed by FMDQ within the year 2018. 

Some of key performance drivers of FMDQ’s markets include: 


▪ Efficient Listings and Quotations Service: FMDQ provides an efficient, dynamic and innovative platform for capital formation for issuers seeking to raise debt finance, by providing robust and efficient platform for the registration, listing/quotation, trading and valuation of debt securities highly responsive and efficient listings/quotations process – thereby enhancing time-to-market - and promoting the requisite secondary market liquidity, among other benefits 

▪ Data and Information Services: Recognising the importance of accessing key market information, FMDQ provides access to market data and information, via its website and the FMDQ e-Markets Portal, promoting transparency and price discovery in its markets, through the publication of pre-trade and post-trade information services, securities valuation, real-time prices, trading and market data, market and analytical reports etc., as well as historical information on prices in the debt and currency markets, thereby positioning the OTC Exchange as a valuable market data and information repository, servicing the needs of its Members, the financial market regulators, issuers, local and international investors, as well as other market operators, to enable users stay abreast of the activities in the markets and make more informed business decisions 

▪ Strategic Partnerships: The actualisation of FMDQ’s transformative agenda for the Nigerian financial markets requires the collective input of all relevant stakeholders. In recognition of this, FMDQ places significant emphasis on its stakeholder engagements, ensuring the development and sustenance of participative, collaborative and informative relationships with stakeholder groups such as government, regulators, Members, issuers and the media, amongst others 

▪ Product and Market Development Initiatives: As an innovation-driven Exchange focused on powering growth, through product and market development, FMDQ has continued to spearhead initiatives to transform the Nigerian financial market to be globally competitive, operationally excellent, liquid and diverse, in line with its GOLD Agenda. Some of such initiatives include: 

  • Revival of the Commercial Paper (CP) market - The revival of activities in the CP market through the development of the Commercial Paper Quotation Rules and Process, and the establishment of a reliable and efficient platform for the registration, quotation and trading of CPs, provides an opportunity for corporates to raise working capital and offers an alternative asset class to investors and fund managers. FMDQ, being the organiser of the CP market, has welcomed a total of over 1.00 trillion from over twenty-five (25) registered CP Programmes (one hundred and twenty-two (122) quoted CPs) as at December 31, 2018.


  • Launch of Short-Term Bonds - In order to support an even greater inclusion and participation of corporates in the Nigerian debt capital market (DCM), FMDQ, having identified the funding gap for corporates, (between the money market debt instruments such as CPs with maximum tenors of 270 days and the traditional medium- to long-term debt instruments (e.g. bonds) which are typically issued for three (3) years and above), launched the short-term bonds (STBs). STBs, which are short-term debt instruments issued by corporate entities for tenors of between one (1) year and not exceeding three (3) years, were also designed to serve the liquidity needs of the medium to large creditworthy corporates and commercial entities by providing an alternative/competitive source of financing to bank loans
  • Activation of Private Companies’ Bonds Noting Service - FMDQ, in its capacity as a securities exchange and self-regulatory organisation, took up the challenge of tackling the attendant inadequacies evident in any unregulated market by developing Quotation Rules for bonds  issued by private companies (“Private Companies’ Bonds Quotation Rules”) with the aim of providing adequate governance over the registration, quotation and trading of bonds of private companies on FMDQ, thereby supporting due diligence requirements of the buy-side (i.e. institutional investors) and essentially facilitating continuous information disclosure by private debt issuers through FMDQ’s restricted access portal (accessible only to Qualified Institutional Investors)
  • Launch of Naira-settled OTC FX Futures Market - Prior to June 2016, the Nigerian derivatives market was entirely an OTC market, comprising transactions in uncleared OTC derivatives executed by banks. Following the economic recession which began in 2016, brought on by the fall in crude oil prices and its attendant impact on supply of FX, demand pressure for FX led to multiple exchange rates in the market as the Central Bank of Nigeria (CBN) sought to maintain its exchange controls. To alleviate the FX pressure and encourage investments, the CBN in collaboration with FMDQ, introduced the very successful Naira-settled OTC FX Futures (“OTC FX Futures”), a bilaterally-cleared FX derivative contract which has since commenced trading. FMDQ also deployed the FMDQ FX Futures Trading & Reporting System (“FFTRS”) for trading the OTC FX Futures contracts and developed the necessary framework, processes and relevant documentation such as the OTC FX Futures Market Operational Standards (“OFFMOS”) and OTC FX Futures Market Framework to support the market. The total value of Naira-settled OTC FX Futures contracts traded since inception as at December 31, 2018 stands at $18.00 billion
  • Enhanced Clearing and Settlement Services - In a significant milestone for the nation’s financial markets, the Securities and Exchange Commission, Nigeria (SEC or the Commission) registered FMDQ Clear Limited (FMDQ Clear), the first central clearing house in Nigeria, a wholly-owned clearing and settlement subsidiary of FMDQ. As a crucial step towards vertical integration and as part of its continued pursuit to strengthen the Nigerian financial markets, FMDQ activated the Clearing House to deliver highly efficient post-trade services across Nigeria’s fixed income and  derivatives markets, addressing some of the key drivers for the development of the markets – risk mitigation, capital efficiency and price transparency, while promoting settlement finality on products traded and ensuring safety, stability, confidence and ultimately, inclusiveness in the marketplace.
  • Furthermore, in June 2018, FMDQ, with the critical and commendable support of the CBN and the FMDQ Dealing Member (Banks), successfully deployed a fixed income market Straight-Through Processing settlement solution through its Proprietary Market System – FMDQ’s Q-ex – a customised fully-integrated multi-asset trading system with attendant post-trade services capabilities. FMDQ’s Q-ex was integrated with the CBN’s Scripless Securities Settlement System (S4) to provide STP capabilities for efficient settlement in the fixed income market, improving the efficiency of the trading, reporting and settlement processes, whilst further developing, in no small measure, the Nigerian financial markets
  • Debt Capital Market Development (DCMD Project) -The DCMD Project was set up as a market-driven initiative, spearheaded by FMDQ in collaboration with key market stakeholders, and is positioned to stimulate and drive the Nigerian debt capital market (DCM) to deliver on its developmental role in the economy, by addressing the challenges faced with the various segments of the market. The Project is aimed at promoting the achievement of the overarching desire of fostering a highly liquid, efficient and well- developed DCM, in order to boost growth and support the future development aspirations of the Nigerian economy
  • FMDQ Academy - In furtherance of the FMDQ’s Products and Markets Development Agenda, FMDQ established an Academy with a mandate to deliver specialised financial markets training to its stakeholders on a competency-based curriculum, helping to deepen the knowledge of financial markets stakeholders and ultimately the Nigerian financial markets. The Academy is targeted at addressing the observed knowledge and skills gaps in the Nigerian financial markets and ensuring that capacities are aligned with the structural transformations and product innovations that are rapidly being introduced to the markets. In this light, the FMDQ Academy has been positioned to offer e-learning, face-to-face and tailored learning programs to meet the knowledge needs of FMDQ stakeholders across the FMDQ markets. Access to FMDQ Academy is available to all stakeholders at no cost via 

What developments will affect the market going forward?

From market development to product innovation and institutionalisation of requisite market infrastructure and systems, the Nigerian financial markets and indeed, the economy will be shaped by strategic initiatives which FMDQ has set in motion towards achieving its transformational agenda of making the markets “GOLD” – Globally Competitive, Operationally Excellent, Liquid and Diverse. 


Trailed by mixed reactions from investors and market participants, owing to the forthcoming elections, we look ahead with appreciable optimism for the FMDQ markets. Irrespective of the anticipated slowdown in market activities, the imminent stability in the FX market, which is largely attributed to the availability of the CBN’s risk management product, the Naira-settled OTC FX Futures, will expectedly continue to support a relatively stable market, providing a means of hedging against FX exposures during the course of the year 2019. In the same vein, the urgent need for a robust derivatives market to enable both domestic and offshore investors in the Nigerian financial markets access to a plethora of hedging products to manage their risk exposures is even more imminent and cannot be overemphasised. FMDQ, as part of its key mandate for the immediate to medium-term, has taken up this responsibility and is working assiduously towards delivering a viable Nigerian derivatives market with the introduction of Fixed Income Derivatives - Treasury Bills and Bond Futures - in the coming months. The activation of FMDQ’s wholly-owned Clearing House, FMDQ Clear, will also significantly strengthen the market as it is positioned to not only clear all fixed income spot trades, as well as OTC FX Futures transactions on the FMDQ platform, but also a plethora of derivatives products.


Furthermore, in order to provide seamless integration of the fixed income inter-bank market (which is made up of FMDQ Dealing Member (Banks)) and the securities dealers (including investment banking firms, securities trading/stockbroking firms and OTC fixed income dealers licenced to make market in all fixed income products admitted for trading on the FMDQ platform), FMDQ launched its Dealing Member (Specialists) [DMSs] membership category. This recent integration of the money and capital markets on FMDQ’s platform, within which both the SEC-registered Nigerian Stock Exchange as well as FMDQ Dealers are afforded the opportunity to trade together in a liquid fixed income market operated by banks, is another novel initiative which FMDQ shall leverage on in 2019 and beyond, to drive and enhance the liquidity of the Nigerian fixed income market as well as serve as an efficient channel for the effective integration of retail participants into the Nigerian fixed income market.


Similarly, the launch of the much needed product - Repurchase Agreement (Repo) with collateral management, and the deployment of additional modules of FMDQ’s proprietary market system, Q-ex - a customised fully-integrated multi-asset trading system with attendant post-trade services capabilities - to support the activation of new products and markets, are some of the other initiatives which FMDQ shall leverage on in 2019 to further deepen its markets. FMDQ will also leverage its Academy to provide financial market education and capacity building to market participants in 2019.


What are your market risk expectations for the year ahead?

Even as we continue to look on with some level of optimism for the markets in the year ahead, we acknowledge the perceived trend and indeed, anticipated slowdown of market activities in view of the forthcoming elections in the country owing to the ‘wait and watch’ approach seen to be adopted by some investors at such times. Although the FX market stability may experience some pressure, the sustained activity in the Investors’ and Exporters’ (I&E) FX Window is expected to support and cushion this effect, as the CBN continues to sustain and review its efforts and policies to ensure market stability in line with its objectives.  


Furthermore, if Nigeria is to attain its potential and align itself as is expected in the global economic landscape, in view of the anticipated movement in oil prices vis-à-vis regulations amongst the oil producing countries of the world, the urgent need for Nigeria, led by conscious efforts of the government and its agencies, private sector and market stakeholders alike, to diversify the economy and lower the high dependency on foreign inflows, and indeed, crude oil, will remain at the fore burner of discussions as this cannot be overemphasised. 


What are your views for an improved and efficient market?

A well-functional financial market is the collective effort of all stakeholders and for us at FMDQ, our key mandate for the Nigerian market and beyond is prosperity – for governments, corporates and individuals alike. In so doing, bridging the knowledge gap and continually expanding the network effects to include more participants into the market remains key for FMDQ. It is in this regard that the FMDQ Academy, on the one hand, was launched to address the observed knowledge and skills gaps in the Nigerian financial markets towards ensuring that capacities are aligned with the structural transformations and product innovations that are rapidly revolutionising these markets. On the other hand, FMDQ has evolved from a market organiser and self-regulatory organisation to a prosperity ambassador, pursuing strategic goals of being an adviser to financial services regulators, promoting the potential and viability of Nigeria by acting as the financial markets diplomat and very importantly, a catalyst for unlocking the much-needed infrastructure capital in Nigeria. 


The deployment of stable government and regulatory policies guiding market activities; introduction of a thriving derivatives market to provide hedging opportunities to local and foreign investors; activation of a central clearing house (FMDQ Clear) to promote settlement finality of trades in the market, and the supporting establishment of a Settlement Guarantee Fund (SGF) towards mitigating settlement failure usually triggered by the inability of Clearing/Dealing Members or clients to meet their settlement obligations, and ensuring the complete settlement of trades; the eventual inclusion of a central counterparty (CCP) in the Nigerian markets to further mitigate systemic risk upon the provision of enabling laws;  and the effective integration of retail participants into the markets are some of the key factors that will support an improved and efficient market.


Indeed, all hands must be on deck, working together and collaborating on strategic initiatives, to achieve that globally competitive, operationally excellent, liquid and diverse market which we all so desire. 


Do feel free to share your opinions/observations and feedback with us vide and/or

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