Nigeria Central Bank Lists Operational Requirements as OTC FX Futures Market Takes off

As the over-the-counter (OTC) foreign exchange (FX) futures market under the new FX regime takes off today, the Central Bank of Nigeria (CBN) has stressed that along with the requisite certificate of capital importation (CCI), all participating foreign portfolio investors (FPIs) in the market are expected to present an OTC FX Futures Settlement Advise.

The settlement advise, according to a circular from the central bank, is to be issued by the FMDQ. It will facilitate the externalisation of the settlement amount, which is the differential between the OTC FX Futures and the Nigerian Interbank Foreign Exchange (NIFEX) fixing, on the settlement date of OTC FX Futures Contracts.

Furthermore, the central bank in the circular signed by S.A. Olih on behalf of the Special Adviser/Head, Financial Markets Department, CBN, warned that  “for the avoidance of doubt, requests for repatriation of settlement amount of OTC FX Futures Contracts by FPIs that are not accompanied with the requisite settlement advise form from FMDQ and a CCI should not be processed by any deposit money bank in Nigeria”.

The CBN Governor, Mr. Godwin Emefiele, had explained two weeks ago that part of the objectives of the new framework for the NIFEX market was to discourage people from front-loading or hoarding forex due to uncertainty.

Providing clarification on how the CBN Naira-settled OTC FX Futures market would work, the central bank had explained that the proposal of the 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 date, i.e. the settlement date).

On 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, according to a document on the central bank’s website.

The CBN stated that it would kick off the market by acting as the seller of OTC FX Futures contracts for defined tenors, i.e. 1-month, 2-months, 3-months, 6-months, 9-months, 12-months, 18-months and 24-months.

The dollar/naira 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.

According to the central bank, the contracts would assist the CBN to manage the volatility in the spot FX market thereby promoting stability and entrenching confidence in the FX market.

It explained that all OTC FX Futures contracts would be trade-backed, adding that visible, invisible and investments qualify for OTC FX Futures.

FMDQ will act as the OTC FX Futures Exchange and its appointed agent, the Nigeria Inter-Bank Settlement System Plc (NIBSS) will clear the interbank OTC FX Futures, i.e. collect initial and variation margins and settle the party to compensate on maturity date.

Trading commenced on the NIFEX last week under new rules, which saw the central bank removing its currency peg and allowing the naira to be market-driven.