By Kelechi Mgboji
Assistant Business Editor
The Central Bank of Nigeria (CBN) and Citibank have executed the country’s first naira-settled futures trade against the dollar, according to market regulator, FMDQ Over-the-Counter (OTC) Securities Exchange.
Futures is a financial Derivatives product easily traded between parties other than the two initial parties to the standardised forward contract.
The parties initially agree to buy and sell an asset for a price agreed upon today (the forward price) with delivery and payment occurring at a future point, the delivery date.
Futures contracts help to mitigate the risk of unfavourable price or exchange rate fluctuations by allowing parties to fix prices or rates in advance for future transactions.
The naira had been on speculative attacks in the last 18 months due to anxiety which saw a lot of business men front loading their demand for dollars.
On Monday, June 27, the CBN introduced an OTC futures market on the currency, to help manage dollar demand, quoting the naira firmer at N279 to the dollar in a month’s time and at N210 by April next year.
However, the rate at which the futures deal was done and the size of the trade on Wednesday, June 29 was not disclosed, Reuters reported.
The bank had auctioned $3.5 billion on the futures market to clear a backlog of currency demand after it lifted its 16-month-old peg to allow the naira to trade freely on the interbank market.
It sold $697 million in one-month futures, $1.22 billion in two-month contract and $1.57 billion due in three months, in order to clear a backlog of $4.02 billion of demand.
In the non-deliverable forwards market, the naira rose against the dollar on Wednesday, with the one-month contract quoting the currency at N283, converging almost with the spot market, which traded the naira at N282.
Associate Vice President, and Divisional Head Market Development and Regulations, FMDQ OTC Securities Exchange, Olajumoke Olaniran, noted that as a hedge product, Futures will cushion foreign exchange (FX or forex) risks and eliminate speculative attacks on the naira, stressing that it is a timely and appropriate instrument to moderate fluctuations in exchange rate value.
It enables contracting parties hedge FX trading risks ahead of maturity date, or the time to make payment or need the forex.
Olaniran, hinged her expectations on this planned introduction of financial Derivatives as hedge products which can cushion FX risks and eliminate speculative attacks on the naira.
“Now that you have Futures where the price is guaranteed at the exact time and date you need it, you don’t necessarily have to come to the market right now because on the day you execute Futures transactions you’re certain that there will be payment on the maturity date,” said the analyst.
On how Futures contracts work, she told a local television programme that everything happens on the maturity date.
“If you enter into the market today, and you enter a futures contract, you are comfortable because you have locked in an exchange rate at which you hope to obtain the hard currency.
“Therefore, the buyers under futures contract are not exposed to fluctuations of the exchange rate in the spot market.
“Futures is one that gives you a lot of flexibility such that you can make your choice ahead and decide your price ahead and you are guaranteed the price on the maturity date. It doesn’t matter what the spot rate is on that day.
“You may purchase the form in the spot market but the way the settlement happens is that the differentials paid back to you bring you back to the guaranteed price at m the end of the day.
“So, if you have entered into a futures contract for say N300 per dollar three months ago, and on the maturity date you have to purchase the currency at say N350 per dollar, your counter party on the futures contract will pay you N50 differential.
“On other hand if you have the spot market people selling N280 per dollar, which means you have N20 in your favour but you have been guaranteed N300, you will have to pay your counter party N20.”
CBN Deputy Governor (Economic Policy) and FMDQ Chairman, Sarah Alade, said the naira-settled OTC FX futures contracts will boost liquidity, transparency, price formation and diversification in the FX market, making the market globally competitive.
“This innovative product will bring liquidity, transparency, price formation and diversification into the forex market, making the market globally competitive,” Alade explained in a statement
“FMDQ, the market organiser and the ‘OTC FX Futures Exchange,’ in collaboration with the CBN and other stakeholders, is adequately equipped to deliver the needed transformation in the Nigerian financial market.
“This achievement in the Nigerian financial markets has indeed been a long time coming, spanning 30 years, when the inter-bank forex market in Nigeria commenced and the Exchange Rate Liberalisation Policy was introduced in 1986, to the introduction of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995.”
The naira-settled OTC FX futures market started with the CBN selling the OTC FX futures contracts of non-standardised amounts for different tenors from one month through to 12 months, which will settle on bespoke maturity dates, providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their forex risk.
FMDQ said: “To ensure credibility of the contracts, especially at maturity, the spot FX rate will be the FMDQ spot FX rate benchmark – the Nigerian Inter-Bank Foreign Exchange Fixing, an independent fixing of the inter-bank FX market.
“The naira-settled OTC FX futures product, while of tremendous benefit to Nigerian corporates, is equally of immense importance and advantage to, among others, the CBN, the Nigerian forex market, and the nation’s economy as a whole.
“The OTC FX futures market will serve to, inter alia, minimise the disequilibrium in the Spot FX Market and cause the rate to moderate; attract significant capital flows to the Nigerian fixed income and equity markets; and achieve exchange rate stability.”
In another development, the Debt Management Office (DMO) has disclosed that the government would raise between N305 billion and N395 billion in 2021, 2026, 2036 bonds in the third quarter of 2016 (Q3 2016).
Reuters reported the $1.08 billion – $1.40 billion bonds would be local currency-denominated with maturities ranging from five to 20 years.
The DMO said it would auction between N105 and N135 billion worth of bonds maturing in 2021, 2026 and 2036 in July 2016, N95 and N125 billion worth in August, and N105 and N135 billion worth in September.
In its latest debt issuance calendar, the DMO said the 2021 paper was a new issue, while the 2026 and 2036 maturing paper re-opened previously issued debt.
The government through the DMO issues sovereign bonds monthly to support the local bond market, create a benchmark for corporate issuance, and fund its budget deficit.
The government plans to borrow about N900 billion locally to finance part of the N2.2 trillion deficit in its 2016 budget.
