June 4, 2018/FMDQ
FMDQ positions to bolster liquidity and financial system stability in Nigeria through the establishment of first-class central clearing and settlement structure
The Nigerian fixed income and derivatives markets have hitherto experienced slow growth due to sustained counterparty, credit and settlement risks. Being Africa’s largest economy, the development of the Nigerian financial markets is crucial, with improved market architecture, increased risk management structures, growing need for bespoke hedging products i.e. derivatives and regulation as key drivers for this development.
In a significant milestone for the nation’s financial markets, the Securities and Exchange Commission, Nigeria (“SEC” or the “Commission”) registered FMDQ Clear Limited (“FMDQ Clear”), the first central clearing house in Nigeria, a wholly-owned clearing and settlement subsidiary of Nigeria’s foremost debt capital, currencies and derivatives OTC Exchange, FMDQ OTC Securities Exchange (“FMDQ”).
As part of its continued pursuit to strengthen the Nigerian financial markets, and in a bid to promote settlement finality on products traded, FMDQ activated the Clearing House to deliver highly efficient posttrade services across Nigeria’s fixed income and derivatives markets, addressing some of the key drivers for the development of the markets – risk mitigation, capital efficiency and price transparency, while ensuring safety, stability, confidence and ultimately, inclusiveness in the marketplace.
FMDQ Clear, having assumed the responsibility of a critical financial market infrastructure (FMI) in the Nigerian financial market landscape, has commenced initiatives to ensure that its risk management activities underpin its effectiveness, reliability and long-term sustainability, as it strives to resolve key clearing and settlement issues that led to the birth of the franchise, with the development of a robust risk management framework that provides the structure for risk policies, processes and internal control mechanisms to manage, assess and contain the risks posed to the clearing house, in compliance with the global standards set out in the International Organisation of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (PFMIs).
To ensure a full understanding of the needs of the market, and its readiness for growth and development, FMDQ, in 2015, engaged Salonica, an international-based consortium, to conduct a feasibility study on the introduction of OTC derivatives to the Nigerian financial market, and one of the strong recommendations of this study was the activation of a clearing house to ensure certainty of settlement finality and enforceability; promote market confidence among participants, and facilitate orderly markets in periods of stress. Furthermore, in 2017, FMDQ, supported by Frontclear Management B.V. (“Frontclear”), a Netherlands-based development finance company, engaged Catalyst Development (UK) Limited, a specialised consulting company focused on clearing, risk and regulation, to conduct a feasibility study on the activation of a central clearing house infrastructure in Nigeria, culminating in the birth of FMDQ Clear.
Furthermore, FMDQ Clear, positioned to becoming a world-class central clearing house, has formally partnered with Frontclear, which provides third-party settlement guarantee funds (SGFs), to further strengthen the clearing house risk waterfall framework, with a third-party settlement guarantee arrangement that improves on settlement finality, a first of such infrastructure in Africa. The SGF is aimed towards mitigating settlement failure, usually triggered by the inability of Clearing/Dealing Members or clients to meet their settlement obligations, and ensuring the complete settlement of trades, thereby mitigating settlement failure by providing compensation on replacement costs (adverse market risk movement) for clients whose trades are not settled on the agreed settlement date due to default of a Clearing/Dealing Member.
The governance structure of FMDQ Clear also conforms to the IOSCO PFMIs, with the Board of Directors chaired by Ms. Daisy Ekineh, an independent Non-Executive Director of FMDQ, and a capital market doyen with over 30 years of experience, garnered from various roles, including but not limited to being a former acting Director-General of the SEC, who has played a critical role in driving several policy initiatives in the Nigerian capital market. She was also a Chair of the African & Middle East Regional Committee of IOSCO. She is ably supported by Alhaji Ahmad Abdullahi, the Director of Banking Supervision of the Central Bank of Nigeria (“CBN”), whose experience in financial system stability will be brought to bear in providing guidance to the Company; Mrs. Vivien Shobo, the Chief Executive Officer of Agusto & Co Limited, a risk management expert and the Chairperson of the SEC-registered Credit Rating Agencies Association in Nigeria; Mr. Bola Onadele. Koko, Managing Director/CEO of FMDQ, an experienced financial market architect, amongst other shareholder representatives also on the Board. The Board will also consist of representatives of Clearing Members i.e. banks, to ensure that key market participants are duly represented.
The establishment of this clearing infrastructure, FMDQ Clear, will greatly contribute to making the Nigerian inter-bank market globally competitive, operationally excellent, liquid and diverse, in line with FMDQ’s GOLD Agenda for the transformation of the Nigerian financial markets, as participating Clearing/Dealing Members will have expanded access and in turn, be better able to serve the needs of their client base and the real economy. The support of and input from key Nigerian financial services regulators, including the SEC, CBN, the National Pension Commission (“PenCom”), as well as the local banking industry and other key market stakeholders cannot be over-looked in the achievement of this milestone in the Nigerian financial markets and such collaborative efforts have helped to place Nigeria on a global pedestal. The recent circular, released by the CBN, directing all deposit money banks who wish to participate in OTC market to pledge a collateral of ₦1.00bn worth of Government/CBN Securities, in an effort to enhance efficiency in trading and post-trade activities, and build confidence in the financial markets, is a strong indication of its continuous support for the development of the Nigerian financial market.
FMDQ, as a change agent, and in its quest towards becoming a fully diversified and integrated market infrastructure, providing a securities exchange – an efficient platform for registration, listing, quotation, noting, trading, order execution and trade reporting within its markets (fixed income, currency and derivatives); a central clearing house – facilitating the clearing, settlement and delivery of securities and financial market products within the Nigerian capital market; as well as offering a full suite of products, inter alia, remains resolute in its commitment to its strategic mandate of aligning the markets within its purview to international standards.