FMDQ Securities Exchange Limited, a wholly owned subsidiary of FMDQ Group PLC, with the support of the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN), FMDQ Clear Limited and key market participants, will provide a long term, the anticipated panacea for the Nigerians Financial Markets with the launch of its dynamic Exchange Traded Derivatives (ETD) market on Wednesday 12 July 2023.
According to BusinessDay, the FMDQ ETD market will be operational with three products: the Federal Government of Nigeria Bond Futures, Treasury Bills Futures and Open Market Operation Bills Futures.
The products are expected to deliver the dividends of the derivatives markets by serving as useful risk management tools and supporting price discovery, competitiveness and market efficiency, which in turn will help attract capital flows, reduce the cost of capital, promote secondary market liquidity, etc. ultimately deepen Nigerian financial markets.
“This sets the stage for the go-live of the FMDQ ETD market, the biggest innovation yet to emerge from the stables of the FMDQ franchise, following CBN and FMDQ’s launch of naira-settled OTC FX futures in 2016.” , which was instrumental in minimizing the imbalance in the foreign exchange market while attracting significant inflows into the Nigerian bond and equity markets,” said FMDQ.
Global financial markets are suffering from heightened price volatility, fluctuating market prices/rates and constant uncertainty of macroeconomic indicators, and Nigerian financial markets are faring no better.
To counteract and mitigate these adverse effects, robust and efficient risk management tools such as derivatives are typically employed.
While model markets have been able to harness the potential of derivatives markets to efficiently mitigate risk, diversify investment portfolios and allow companies to safely expand at higher risk, the opposite is true in emerging and frontier markets, e.g. Nigeria, as derivatives markets are non-existent or at best small (with a lack of derivative products) and hedging costs are high, making it unattractive to market participants.
With this premise, FMDQ has launched the FMDQ Derivatives Market Project, in line with its mission to drive economic progress by promoting laudable market development initiatives in Nigeria’s financial markets.
The project started in 2015 as a feasibility study and was launched with the aim of launching Nigeria’s most dynamic Exchange Traded Derivatives (ETD) market in collaboration with market players. This will introduce exchange traded risk hedging products to the Nigerian financial markets as are available in other developing and developed financial markets worldwide.
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The project has recorded many milestones and implemented several initiatives including, but not limited to, the development of the FMDQ ETD Market Framework, SEC-approved rules and membership requirements; Providing fit for purpose and streamlined ETD trading and clearing modules on the FMDQ Q-ex system; Development of risk management and operational framework across the Financial Market Infrastructure (FMI) value chain; Development of SEC-registered derivative products; and conducting various stakeholder engagements and training courses impacting over 2,600 market actors along the financial markets value chain including regulators, financial and non-bank financial institutions, corporate treasurers, accountants, legal professionals, journalists and individuals to raise awareness and foster readiness for the upcoming launch of the FMDQ ETD market.
Also poised to activate the FMDQ ETD market is FMDQ Clear Limited (FMDQ Clear), Nigeria’s leading central counterparty (CCP), which has redefined the landscape of the sanctity of financial transactions since receiving its CCP registration from the SEC in 2021 and sparked the introduction of endless possibilities for the scope of eligible products (including derivatives) that can be developed and deployed in Nigeria’s financial markets.
In preparation for the CCP’s paramount role in risk mitigation in Nigeria’s financial markets, FMDQ Clear has steadily built up its Default Resolution Reserve, which will form part of its robust default waterfall to ensure the CCP has adequate financial resources to deal with any To manage failures in the ETD market, the company has reduced its retained earnings to approximately $20 million over the past five years and has the ability to grow this to over $30 million in the short to medium term. increase dollars.
With its extensive risk management structures and robust financial resources, FMDQ Clear is well positioned to manage the consolidated risks in an operational, cost and capital efficient manner, adding value to market participants in the FMDQ ETD market through the aggregation and consolidation of counterparty risks and the launch of the coveted counterparty independents Trading function that will align the growth of trading liquidity of financial products in Nigeria’s financial markets with international standards and practices.
As market participants prepare to capitalize on the emerging novel segment of financial markets, FMDQ Exchange works with its twenty-one (21) Dealing Members (DMs) – three DMs with full licenses and eighteen (18) DMs with permission. Basically – participating in the FMDQ ETD market as its pioneer Derivatives Trading Members (DTMs).
The DTMs are supported by FMDQ Clear by six Deposit Money Banks (DMBs) who, as members of the CCP, share responsibility for their mandate to “de-risk” Nigeria’s financial markets, either as General Clearing Members (GCMs). – able to process transactions for their own positions and those of other DTMs and clients; or as Direct Clearing Members (DCMs) – who can only clear their own positions and those of their clients.
It is worth noting that of the six DMBs, there are five GCMs, three of which have full licenses (Access Bank PLC, Stanbic IBTC Bank PLC and Zenith Bank PLC), while the other two have in-principle approval pending finalization their SEC registration (First City Monument Bank Limited and United Bank for Africa PLC). The sixth DMB (Fidelity Bank PLC) is a DCM with an approval in principle also awaiting the completion of its SEC registration.
To support the launch of an active and thriving ETD market, FMDQ Exchange launched the first derivatives-focused podcast of its kind in Nigeria, “Q-Dialogue”, a colloquium designed by FMDQ that aims to provide valuable, accurate and useful information objectives Information and insights into the FMDQ ETD market. Likewise, to further its business development mission to implement initiatives that raise awareness and encourage participation in the FMDQ derivatives market, FMDQ Exchange has developed the “Q-Estimator”, an automated calculator that offers market participants the ability to estimate the cost of hedging potential Profit/loss on derivative transactions or positions in the Nigerian financial markets, enabling market participants to make strategic and informed investment decisions in the FMDQ derivatives market.
As a key financial market infrastructure aiming to transform the Nigerian financial markets in collaboration with key market players to be globally competitive, operationally excellent, liquid and diverse in line with the FMDQ “GOLD” agenda, the overarching essentiality of the FMDQ ETD The market cannot be overstated as it points the way forward for the Nigerian markets which will see the emergence of a thriving financial market like other developed economies and markets. While recognizing the vulnerability of Nigeria’s financial markets and broader economy to external shocks, the combined strength and resilience of the Nigerian people and markets coupled with the launch of the FMDQ ETD market are believed to propel Nigerian financial markets in this direction becomes a trajectory of growth and progress.
FMDQ Group is Africa’s first vertically integrated financial markets infrastructure group strategically positioned to provide registration, listing, listing and listing services; integrated trading, clearing and central counterparty, settlement and risk management for financial market transactions; Securities custody, data and information services for the debt, foreign exchange, equity and derivatives markets through its wholly owned subsidiaries FMDQ Exchange, FMDQ Clear, FMDQ Depository Limited and FMDQ Private Markets Limited.
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