……Positions Nigerian Financial Market for Radical Transformation
The Nigerian financial market and the economy, as a whole, are set to receive the long-awaited boost to spur economic development and the repositioning of Nigeria as a compelling destination of capital, with the Presidential assent of the Companies and Allied Matters Bill 2020, consequently introducing the Companies and Allied Matters Act (CAMA) 2020, which has repealed and replaced the 30-year old CAMA 1990. This historic act by the President, Muhammadu Buhari, on this important piece of legislation, is expected to usher in a new wave of innovative developments, significantly improving the ease of doing business in Nigeria, and ushering in a new paradigm in the Nigerian financial market.
With the increasing sophistication of the global financial markets, comes the need for domestic markets to develop their architecture and infrastructures to support requisite advancement as well as align with international standards, and the new CAMA 2020 will position Nigeria and its capital market at par with its international counterparts. Chief of the several impactful provisions in the CAMA 2020, is the inclusion of netting and bankruptcy remoteness provisions which signal the birth of a new financial market in Nigeria. Indeed, these game changing provisions will cure critical legal deficiencies that hitherto affected the development of the financial markets, with the netting provisions addressing the credit risk challenges, operational and legal bottlenecks of gross settlement for spot and derivatives transactions, and the bankruptcy remoteness provisions tackling the uncertainty around the finality of settled transactions whilst securely ring-fencing collaterals placed in execution of financial contracts.
This Act is instrumental, in no small measure, to the successful takeoff of the derivatives market in Nigeria, a much-desired development, which will provide, amongst others, a wide range of risk management opportunities, enhanced market liquidity, improved price discovery, reduced risk capital charges and transaction costs as well as increased financial markets stability. Indeed, as far back as 2015, FMDQ Holdings PLC (FMDQ or FMDQ Group), in line with its mandate to build a thriving derivatives market in Nigeria, facilitated a feasibility study on the introduction of derivatives in the Nigerian financial market, and the findings showed that the critical success factors for a derivatives market include, but are not limited to, effective management of counterparty risk through the activation of a central counterparty (CCP), and adequate legal framework, both of which have been fully addressed in the CAMA 2020.
Leveraging on its aspiration to deepen the Nigerian financial market, and transform it to be globally competitive, operationally excellent, liquid and diverse, in line with the ‘GOLD’ Agenda, FMDQ Group has, since its inception, engineered the requisite architecture towards improving the diversity and depth of the market, as well as promoting an environment within its markets, for innovation and market development to thrive. From an over-the-counter (OTC) market launched in 2013, to a full-fledged Securities Exchange, to a vertically integrated financial market infrastructure (FMI) group, FMDQ Group has developed a sustainable market architecture through its wholly owned subsidiaries – FMDQ Securities Exchange Limited, FMDQ Clear Limited, FMDQ Depository Limited and FMDQ Private Markets Limited – towards building, in collaboration with the regulators and market stakeholders, a developed financial market in Nigeria.
According to the Chief Executive Officer of FMDQ Group, Bola Onadele. Koko, “the CAMA 2020 commendably sets the tone for the actualisation of key innovations in the market, providing enabling legal backing for netting, bankruptcy remoteness and attendant regulatory frameworks for the smooth functioning of financial markets in Nigeria. With FMDQ Exchange as a market organiser for the fixed income, foreign exchange and derivatives markets in Nigeria, and given the domestic and global call to improve participation in the markets by providing hedging opportunities to support investor interest, the Exchange is set to support the establishment of a well-functioning derivatives market in Nigeria, following its launch of a Derivatives Market Project in 2017, and the planned activation of derivative products, in 2020, to hedge interest rate risks, in addition to the existing currency risk hedging product, the OTC FX Futures product. To ensure the successful activation of the derivatives market, FMDQ Clear, Nigerian’s first central clearing house (CCH), is well positioned to providing the much-needed CCP services, upon regulatory approval, and has proactively set aside a default resolution reserve with a near-term target of ₦20 billion, which will enable the novation of financial transactions in the Nigerian financial market to a well-capitalised Clearing House, thereby de-risking counterparty risks prevalent in derivative contracts, provision of clearing services for spot and derivatives products towards ensuring settlement finality for financial market transactions, and introduction of even greater efficiency and stability to the Nigerian financial markets.“
He further stated that the contributions of all the Nigerian financial system regulators in the market development cannot be over-emphasised; with the foresight of the Securities and Exchange Commission (SEC) over the years, in approving the registration of the FMDQ Entities, the erstwhile OTC market in 2012, FMDQ Clear in 2017, and FMDQ Depository and FMDQ Exchange, both in 2019, providing the market with a one-stop shop for the end-to-end execution of financial market transactions. Further, the Central Bank of Nigeria (CBN) introduced in 2016, with FMDQ Exchange, the OTC FX Futures market, ahead of the launch of other derivative products, which fostered stability in the FX market, with circa US$50.00 billion worth of contracts so far executed on FMDQ Exchange and cleared by FMDQ Clear.
Market analysts opined that with improved regulatory landscape, adoption of liberalised markets – especially in foreign exchange, promotion of improved risk management standards and financial markets stability, catalysed by the emergence of a derivatives market and a functioning CCP, the Nigerian economy is bound to witness a more attractive financial system that will galvanise foreign capital flow, improve trading and funding liquidity of the markets, attract human capital and cause reduction in cost of capital, thereby boosting the nation’s reserves, engendering the much-desired economic transformation, and ultimately positioning Nigeria and Nigerians for prosperity.