Nigeria FMDQ partners Frontclear on settlement guarantee fund for increased liquidity

FMDQ Clear Limited (FMDQ Clear), a wholly-owned clearing and settlement subsidiary of FMDQ OTC Securities Exchange, signed an agreement Thursday with Frontclear, a Netherlands-based development finance company, poised to deliver a first-class clearing structure in Nigeria’s financial markets as well as strengthen the Over-the-Counter (OTC) market liquidity.

A statement from the Financial Market Dealers Quote on Thursday stated that the agreement, enhanced with support and input from key Nigerian financial services regulators, including the Securities and Exchange Commission, Nigeria (SEC) and the Central Bank of Nigeria (CBN), as well as the local banking industry, is signed to jointly enhance Nigeria’s first central clearinghouse structure, with the support of a settlement guarantee fund.

According to Bola Onadele. Koko, MD/CEO, FMDQ Group, the agreement will bring about a much-desired stability in the financial markets of the Nigerian economy.

He said, “In our stride to position our markets on the path of increased liquidity and global competitiveness, the FMDQ-Frontclear guarantee fund initiative is a landmark achievement positioned to engender market integrity, which will bolster liquidity and financial system stability in the Nigerian economy.”

The collaboration is the culmination of a long-standing working relationship focused on improving how the Nigerian OTC financial market functions and follows-on an initial introduction via the International Capital Market Association (ICMA), of which FMDQ is a full Member and Frontclear is a long-standing partner.

The statement further noted that “FMDQ Clear, a SEC-registered central clearing house, positioned to deliver end-to-end clearing and settlement services that will help enhance integrity and eliminate the inherent risks to bilateral trades in the Nigerian capital market, will be backed by Frontclear’s core financial guarantee product, thereby improving the creditworthiness of participating counterparties and reducing initial set-up costs.

Explaining how the agreement is engineered to work, “The Frontclear guarantee will, in practice, function like a settlement/credit guarantee fund typical to more developed financial markets. Upon default of a clearing member, Frontclear guarantees any mark-to-market losses incurred by any other counterparty clearing or dealing member(s), and up to a pre-agreed maximum amount.”

“With this guarantee fund, FMDQ Clear can significantly improve access to a breadth of financial products such as interest rate and currency derivatives, and repurchase agreements (repos), especially for smaller dealing members who may have been previously excluded because of perceived counterparty credit risk.

FMDQ Clear, supported by settlement guarantee fund, and strong governance & risk frameworks to clear products in the cash, repos and derivatives markets, is exemplary of Frontclear’s development impact rationale: catalysing transactions that support healthy money markets and stable financial systems. It will be the first of such infrastructure in Africa, with a third-party settlement guarantee arrangement that improves on settlement finality.

The statement also noted that the agreement came up following a joint Frontclear Technical Assistance Programme (FTAP) project explored the feasibility of establishing clearing infrastructure in Nigeria as well as the most suitable design of such infrastructure for the Nigerian market.

In his comments on the agreement, Philip Buyskes, Chief Executive Officer of Frontclear said “We are excited to play such a catalytic role towards improved liquidity and price discovery in Nigeria. Working with FMDQ is a natural fit.”

FMDQ Clear participants are said to have access to further Technical Assistance provided by Frontclear as needed, including training on repo accounting and margining, amongst others.