Benefits of forex futures, by FMDQ OTC Securities

As FX two-way quote market goes live on platform

Following the release of the revised Central Bank of Nigeria (CBN) guidelines for the operation of the Nigerian Inter-Bank Foreign Exchange (FX) Market, FMDQ OTC Securities Exchange, has said it was introduced to make the market more efficient, liquid, transparent and globally competitive.

According to FMDQ, ‘there is light at the end of the tunnel’ for corporates operating in Nigeria as they can now heave a sign of relief, following the introduction of the Naira-settled OTC FX Futures market.

The Securities exchange noted that the introduction of the Naira-settled OTC FX Futures market, which it described as a long-awaited respite for
corporates would ensure effective and efficient business planning and boost operations.

The Naira-settled OTC FX Futures can be defined as non-deliverable forwards which is a contracts that obligate the counterparties
to purchase or sell a specific currency (the US Dollar, which is a notional amount) on a predetermined future date (the settlement date) for a fixed rate agreed on the date the contracts were entered into (trade date).

Listing the benefits of the product, FMDQ stressed that the Naira-settled OTC FX Futures contracts can be used to hedge a corporate’s exposure to FX (in this situation, the US Dollar) whereby the rate at which the corporate will purchase (or sell) FX at a period of time in the future is predetermined and fixed.

“ There is no obligation for the physical delivery of the currencies (Naira or US Dollar) and at maturity, net-settlement will be made in Naira based on the US Dollar notional amount, and determined by the difference between the agreed rate (on trade date) and spot FX rate (on settlement date).

“The Naira-settled OTC FX Futures market will be kicked off by the CBN on June 27, 2016, who will be the seller of the OTC FX Futures contracts of non-standardized amounts for different tenors between one (1) month and up to two (2) years, settling on bespoke maturity dates, providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their FX risk.

“FMDQ OTC Securities Exchange (FMDQ) will be the OTC FX Futures Exchange, organizing the smooth running of this market through its System, the FMDQ OTC FX Futures trading & reporting system and its market trading standards and rules, serving to provide the requisite transparency and governance for the success of the market.

Ahead of the establishment of a Central Counterparty (CCP), it added that the Nigeria Inter-Bank Settlement System PLC (NIBSS) will act as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts. CBN, through the FMDQ OTC FX Futures Trading & Reporting System, will offer the Naira-settled OTC FX Futures contracts to all authorised Dealers (and may in addition deal directly with its FXPDs on a two-way quote basis) who will in turn offer it to customers with trade-backed transactions.

With this, according to FMDQ, there is no longer the need to
front-load FX requirements, which puts immense pressure on and distorts the Spot FX rate.

“Corporate treasurers are better able to make judgments on when to access the Spot FX market, managing more effectively, their
liquidity positions. The demand for the US Dollar by end-users can be staggered appropriately as there will be no requirement for “panic-buying” as end-users are guaranteed a fixed rate for their FX needs when required, “ it added.

Meanwhile FMDQ OTC Securities Exchange also announced that the two-way quote (2-WQ) inter-bank FX Market is currently operating live on the platform, with the CBN’s authorised dealers setting the pace for this market-driven trading window through the FMDQ Thomson Reuters Foreign Exchange Trading System (the System).

The Guidelines, which set out a single and autonomous inter-bank FX market structure for the nation, support the CBN’s desire to enhance efficiency and facilitate a liquid and transparent Nigerian FX market.

According to FMDQ, the CBN will perform its role as a market intervention participant, in line with global standards, while market forces are left to determine demand and supply dynamics of the market. CBN FX Primary Dealers have also been introduced to help facilitate the CBN’s market interventionist role.

“Through the FMDQ Thomson Reuters FX Trading System, a dealing solution for the FX trading value chain (ADs, authorised Buyers, International Oil Companies, Oil Servicing Companies, Exporters, End-Users etc.), towards providing an enhanced user experience, improved market access and ultimately, credibility in the nation’s FX market, will be provided.

FMDQ explained that the CBN ADs (as well as the FX Primary Dealers (FXPDs)) shall buy and sell FX among themselves on a two-way quote basis via the System, trade with the CBN, and will also offer one-way quotes (bid or offer) on requests-to-quote to other authorised participants (Corporates, End-Users etc.).

According to the Vice President & Divisional Head, Marketing & Business Development, FMDQ, Tumi Sekoni, “The inter-bank 2-WQ FX market will, through the concerted efforts of the over-the-counter (OTC) Exchange and all market participants, serve to endear an even greater investor confidence in the Nigerian FX market.

“With its potential to drive transparency and liquidity, FMDQ, through the System, is adequately equipped to provide a complete and consolidated marketplace for FX trading and reporting, offering market participants and regulators a robust and flexible set of tools to support the full trade workflow.

Sekoni pointed out that the reforming of the 2-WQ inter-bank FX market brings about a lot of promise for the resuscitation of the Nigerian FX market and by extension the development of the nation’s economy.”