FMDQ OTC Securities Exchange Releases Guidelines On How The Naira-Settled OTC FX Futures Market Will Work

Sarah Alade

As a follow up to the announcement of the single market Forex Policy, FMDQ OTC Securities Exchange is the market where authorised dealers shall buy and sell FX among themselves on a two-way quote basis via the FMDQ Thomson Reuters FX Trading Systems (TRFXTConversational Dealing) as required by the Central Bank of Nigeria.

According to the FMDQ guidelines:

The proposed Naira-settled OTC FX Futures are Non-Deliverable Forwards. (i.e. a contract 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). On the maturity date, it will be assumed that both parties would have transacted at the Spot FX market rate. The party that would have suffered a loss with the Spot FX rate will be paid a settlement amount in Naira. This ensures that both parties enjoy the rate that had been guaranteed to each other through the OTC FX Futures.

Settlement Amount = (Difference between the Agreed Rate and Spot Rate on the Maturity Date) x Notional Contract Sum

The Spot FX Rate will be the FMDQ1 Spot FX Rate Benchmark – Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX 2 ) which is an independent fixing of the inter-bank FX market. The OTC FX Futures contract is an effective exchange rate management tool supported by a transparent price driven two-way quote (2WQ) market. The Central Bank of Nigeria (CBN) will kick off the market by acting as the seller of OTC FX Futures contracts for defined tenors i.e. 1M, 2M, 3M, 6M, 9M, 12M, 18M and 24M. The USD/NGN OTC FX Futures contracts will provide the CBN the opportunity to kick-start the liquidity of risk management products available to end-users in the FMDQ OTC markets. The contracts will assist the CBN in managing the volatility in the Spot FX market thereby promoting stability and entrenching confidence in the FX market. All OTC FX Futures contracts will be trade-backed. Visible, invisible and investments qualify for OTC FX Futures.

Giving an example of how a typical trade will look like, the guideline gave an example:

Settlement Analysis for Naira-settled OTC FX Futures Contracts

Day 1: June 15, 2016 – Bank A buys a 3-month OTC FX Futures contract from the CBN on the FMDQ OTC FX Futures Trading & Reporting System with the following details:

  • Buyer: Bank A
  • Seller: CBN
  • Notional amount: $1,000,000.00
  • OTC FX Futures Rate: $/₦260.00
  • Benchmark: NIFEX
  • Maturity Date: September 14, 2016
  • Initial Margin: 5% (payable by both parties)
  • Maintenance Margin: 60% of initial margin
  • Settlement Currency: Naira

Maturity Day: September 14, 2016 – NIFEX is $/₦270.00

It is assumed that Bank A would have transacted (bought USD in the Spot FX market) at $/₦270.00 which is higher than the OTC FX Futures contract rate of $/₦260.00.

The Clearing House, NIBSS, will pay Bank A ₦10,000,000.00 (i.e. ₦10.00 [₦270.00-₦260.00] per USD) thereby bringing Bank A’s effective rate to $/₦260.00 (₦270.00 assumed paid in buying USD less ₦10.00 received on the OTC FX Futures) which is the OTC FX Futures rate.

CBN is assumed to have transacted (sold USD in the Spot FX market) at $/₦270.00 which is higher than the OTC FX Futures contract rate of $/₦260.00.

The Clearing House, NIBSS, will take ₦10,000,000.00 (i.e. ₦10.00 per USD) from the Margin Account of the CBN thereby bringing CBN’s effective rate to $/₦260.00 (₦270.00 assumed received in selling USD less ₦10.00 paid out on the OTC FX Futures) which is the OTC FX Futures rate.

Both parties end up with an effective rate of $/₦260.00 as this was the guaranteed rate for both parties.

If NIFEX had been $/₦250.00 on maturity date, Bank A would pay CBN ₦10.00 per USD.

According to its website, the FMDQ was promoted by the Financial Markets Dealers Association (FMDA) in 2009 and sponsored in 2010 by the Bankers’ Committee. The Bankers’ Committee is chaired by the Central Bank of Nigeria (CBN), with the Nigeria Deposit Insurance Corporation (NDIC) and all the banks and discount houses operating in Nigeria as its members. The Committee resolved to operate all the over-the-counter (OTC) inter-bank market activities in fixed income and currencies under a Securities and Exchange Commission (SEC)-registered self-regulatory organisation, and be governed by this authorised body.

In order to fulfil this purpose, FMDQ OTC Securities Exchange was incorporated on January 6, 2011 following a ₦100 million contribution by the CBN and equal contribution of ₦15 million by each of the 25 banks and 5 discount houses (operational as at December 2010) to the company’s initial capital. Having met all required stipulations, FMDQ was on November 6, 2012 registered by SEC as an OTC securities exchange and self-regulatory organisation.

FMDQ OTC Securities Exchange formally launched unto the Nigerian financial market landscape on November 7, 2013.


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