Extension of OTC futures to bring calmness to market, curb FX volatility

Adesola Afolabi

Asides infusing more confidence to foreign portfolio investors and foreign direct investors, the recently launched long-dated foreign exchange (FX) futures will sustain calmness and reduce volatility risks in the Nigerian money market.

This point of view was shared by Tumi Sekoni, managing director at FMDQ Securities Exchange last Friday, following the introduction of the product to the financial market last week.
The Central Bank of Nigeria (CBN) in collaboration with FMDQ Holdings PLC (FMDQ) introduced the much-awaited long-dated FX Futures. The collaboration saw an extension of the maximum contract tenor to up to 5 years.

This implies that 47 monthly OTC FX Futures contracts, in addition to the existing 13 contracts have been introduced from February 13, 2020, bringing the total number of open OTC FX Futures contracts at any point to 60.

According to Sekoni who spoke in a televised interview monitored by business a.m, market engagement and awareness carried out by FMDQ showed that a lot of investors wanted to do more in the Nigerian market, however, the maximum tenure in which they could hedge their funds for was 13 months.

Hedging is a way of transferring risk without having to buy insurance policies, using techniques like the cash or futures market facilitated by the FMDQ.
The volatility and price instability often experienced in Nigeria’s capital and other financial markets can be cured with the adoption of the derivatives market said Paul North a financial market consultant, and a derivative market expert.

Sekoni added that investors who want to bring in an inflow of FX for about 3 years and more can now invest in the country because this helps to close the gap in hedging FX exposures.
The extension of the product to 5 years also ensures that investors can engage in effective long term planning, to further boost the Nigerian financial market.

A statement issued by FMDQ expressed the excitement of the firm on the development.

Bola Onadele. Koko, chief executive officer of FMDQ Group, was quoted to have said “We are excited that the CBN has yet again introduced this a revolutionary initiative which will minimise the funding liquidity risk of CBN’s FX Management Blotter and significantly attract capital, incentivise domestic corporates to avail on low-interest rate FCY loans, as well as encourage FPIs/FDIs seeking to make medium-to-long-term investments in our economy.This product innovation, which will continue to provide opportunities for the government, businesses, fund managers investors, individuals etc. to hedge to manage exchange rate risk, thus achieving greater market confidence, liquidity, improvement in business planning, better allocation of resources, global competitiveness of the Nigerian financial markets, and in all, a thriving economy.”

Since the inception of the OTC futures contract in 2016, Sekoni clarified that there has been no settlement default. About $36bn worth of futures contract has been achieved so far. $26bn have been successfully cleared and settled by FMDQ’s wholly-owned clearing house, FMDQ Clear Limited while $10 is currently outstanding.