Capital market liquidity unlocked as experts hail FMDQ’s derivatives (2024)

There were cheers from stakeholders in the Nigerian financial markets, yesterday, as FMDQ Securities Exchange Limited and FMDQ Clear Limited, wholly owned subsidiaries of FMDQ Group Plc, went live with the introduction of the long-awaited FMDQ Exchange-Traded Derivatives (ETD) Market to compete favourably with other exchanges across the globe.

Former Chief Economist of the Securities and Exchange Commission (SEC), Dr. Afolabi Olowookere, described the development as a ‘great initiative.’

He said: “Derivatives markets are known to have lower transaction costs and engender liquidity in the spot market. They can be used to manage/hedge risks and close market inefficiencies through the activities of arbitrageurs. These and many more are the potential benefits of this great innovation in our market.

“Congratulations to FMDQ, congratulations to the SEC and other regulators. The market should be properly operated to avoid unnecessary risks, reduce high speculative activities and comply with good global practices in derivatives trading.”

President of Ibadansone Shareholders Association, Eric Akinduro said: “The introduction of FMDQ ETD Market is long overdue and it is a welcome development that will play a very significant role in the entire financial system.

“ It will lead to a more stable and developed market. Our market is expected to attract more global and domestic financial operators. It is also expected to attract more capital inflows and increase the liquidity of the market.”

With the development, market stakeholders, corporates, foreign and domestic investors as well as pension fund administrators can now hedge inherent financial market risks in their operational and investment activities. It provides an opportunity to convert risk to financial security, which would ultimately attract capital flows, reduce the cost of capital, promote market liquidity, and deepen the markets.

According to the exchange, the ETD Market goes live with two pioneer products: the FGN Bond Futures and USD-naira non-deliverable FX futures – which will be traded and cleared on FMDQ ETD systems, the FMDQ Q-ex Trading System and FMDQ Q-ex Clearing System, respectively.

Driven by FMDQ Securities Exchange Limited (FMDQ Exchange or the Exchange), Nigeria’s largest exchange by turnover, in collaboration with FMDQ Clear Limited (FMDQ Clear or the Central Counterparty (CCP), Nigeria’s foremost CCP, the FMDQ ETD Market, boasts of participation from 10 pioneer Deposit money banks (DMBs) and five pioneer non-bank financial institutions.

The stakeholders are well-positioned to change the landscape of the Nigerian financial markets in the near-to-medium term.

“With the CCP’s extensive risk management structures and robust financial resources $20 million in FMDQ Clear’s proprietary default Resolution Reserve, and over $12 million from Members’ contributions to the CCP’s default waterfall – the players will be able to leverage the financial capacity of the very big players in a market structure that transfers counterparty risks to a credible world-class CCP, FMDQ Clear.

“In support of the ETD Market, the three pioneer General Clearing Members (GCMs) – Access Bank Plc, Zenith Bank Plc, and Stanbic IBTC Bank Plc who are capable of clearing transactions for their proprietary positions and those of other trading members and clients, will share mutualised responsibility as members of the CCP, and clear their proprietary positions, as well as 12 derivatives trading members, bringing the pioneer trading Members in the ETD Market to fifteen (15)

“ Meristem Stockbrokers Limited, CardinalStone Securities Limited, Chapel Hill Denham Securities Limited, Coronation Merchant Bank Limited, Union Bank of Nigeria PLC, Parthian Securities Limited, DLM Securities Limited, FBNQuest Merchant Bank Limited, First City Monument Bank Limited, Fidelity Bank PLC, FSDH Merchant Bank Limited, Greenwich Merchant Bank Limited, Access Bank PLC, Zenith Bank PLC and Stanbic IBTC Bank Plc.”

The FMDQ ETD market, which is geared towards transforming risk to certainty, in an unprecedented move, brings about the integration of the banking sector and capital market in Nigeria.

The visionary pioneer members of this FMDQ ETD Market, who have positioned themselves to take advantage of the emerging novel segment of the financial markets, must be commended for their instrumental role in driving the activation of this Market and the broader Nigerian financial markets. These pioneer Members have demonstrated their commitment as catalysts in fostering sustained growth and development in the Country’s financial landscape.

FMDQ Group is Africa’s first vertically integrated financial market infrastructure (FMI) group, strategically positioned to provide registration, listing, quotation and noting services; integrated trading, clearing and central counterparty, settlement, and risk management for financial market transactions; depository of securities, as well as data and information services, across the debt capital, foreign exchange, equity and derivatives markets, through its wholly owned subsidiaries – FMDQ Exchange, FMDQ Clear, FMDQ Depository Limited and FMDQ Private Markets Limited. As a sustainability-focused FMI group, FMDQ Group, through FMDQ Exchange, operates Africa’s premier Green Exchange – FMDQ Green Exchange – positioned to lead the transition towards a sustainable future.

Leveraging on its aspiration to transform the Nigerian financial markets to be globally competitive, operationally excellent, liquid, and diverse, in line with the FMDQ ‘GOLD’ Agenda, the pre-eminence of the FMDQ ETD Market cannot be overemphasised as it ushers the actualisation of the panacea that will enable the development of a thriving financial sector, like other developed economies, positioning it for revolutionary growth in potentially colossal proportions.

Globally, the derivatives market has attained the highest growth of all financial market segments in recent years and has become the central contributor to the stability of the financial world. In recent years, derivative markets have grown by leaps and bounds in emerging economies and given the high level of economic and financial risks faced by market participants and investors in emerging countries, derivatives contribute to a country’s economic development by making these risks manageable.

For instance, in the United Kingdom, pension funds have in the past years increased their use of derivatives, something that could be emulated in Nigeria. The overall derivatives market is vast and estimated at more than $1.2 quadrillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world gross domestic product (GDP).

Therefore the development is no doubt a step in the right direction, as it would signal a new opportunity for Nigeria because derivatives are extremely flexible due to their contractual nature and they can be used to accomplish a broad array of risk management objectives if properly utilised.

South Africa’s derivatives market has grown rapidly in recent years, which has supported capital inflows and helped market participants to price, unbundle and transfer risk.

The development of this ETD market in Nigeria has long been a topic of interest amongst capital market operators, regulators, and market participants, as the market directly plays a vital role in financial system stability and greatly contributes to various aspects of the economy as a whole.

As a seasoned expert in financial markets and derivatives trading, I bring a wealth of knowledge and experience to the table. Having closely followed global financial trends and market developments, I can provide valuable insights into the recent introduction of the FMDQ Exchange-Traded Derivatives (ETD) Market in Nigeria.

The FMDQ ETD Market is a groundbreaking initiative by FMDQ Securities Exchange Limited and FMDQ Clear Limited, both subsidiaries of FMDQ Group Plc. The launch of this market has garnered cheers from stakeholders in the Nigerian financial markets, and it is poised to compete favorably with other global exchanges. The move is particularly noteworthy given the endorsem*nt by Dr. Afolabi Olowookere, the former Chief Economist of the Securities and Exchange Commission (SEC), who hailed it as a 'great initiative.'

The key concepts in this article revolve around the significance, benefits, and implications of the FMDQ ETD Market. Let's break down the essential elements:

  1. Derivatives Markets and Benefits:

    • Derivatives markets are known for lower transaction costs and increased liquidity in the spot market.
    • They serve to manage and hedge risks while addressing market inefficiencies through arbitrage activities.
  2. Market Stakeholders' Reactions:

    • Stakeholders, including the President of Ibadansone Shareholders Association, Eric Akinduro, express enthusiasm and believe the introduction of the FMDQ ETD Market is long overdue and a welcome development.
    • Expectations include a more stable and developed market, attracting global and domestic financial operators, increasing capital inflows, and improving market liquidity.
  3. FMDQ ETD Market Products:

    • The ETD Market launches with two pioneer products: FGN Bond Futures and USD-Naira non-deliverable FX futures.
    • These products will be traded and cleared on FMDQ ETD systems, specifically the FMDQ Q-ex Trading System and FMDQ Q-ex Clearing System.
  4. Key Players and Clearing Mechanism:

    • FMDQ ETD Market involves collaboration between FMDQ Securities Exchange Limited and FMDQ Clear Limited.
    • Ten pioneer Deposit Money Banks (DMBs) and five non-bank financial institutions are actively participating.
    • The Central Counterparty (CCP), FMDQ Clear, provides extensive risk management structures and substantial financial resources to ensure the market's stability.
  5. General Clearing Members (GCMs) and Trading Members:

    • Three pioneer GCMs (Access Bank Plc, Zenith Bank Plc, and Stanbic IBTC Bank Plc) and 12 derivatives trading members are integral to the ETD Market.
  6. FMDQ Group's Role:

    • FMDQ Group is Africa's first vertically integrated financial market infrastructure (FMI) group.
    • It operates FMDQ Exchange, FMDQ Clear, FMDQ Depository Limited, and FMDQ Private Markets Limited.
    • FMDQ Group is dedicated to transforming Nigerian financial markets to be globally competitive and sustainable, with a focus on its 'GOLD' Agenda.
  7. Global Perspective on Derivatives Markets:

    • The article emphasizes the global growth of derivatives markets and their central role in stabilizing the financial world.
    • Examples from the United Kingdom and South Africa highlight the positive impact of derivatives in supporting capital inflows, risk management, and economic development.

In conclusion, the FMDQ ETD Market represents a significant step forward for Nigeria's financial sector, offering opportunities for risk management, attracting capital flows, and promoting market liquidity. The collaboration of key stakeholders and the support from regulatory bodies position this initiative for success in the evolving landscape of global financial markets.

Capital market liquidity unlocked as experts hail FMDQ’s derivatives (2024)

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