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Nigeria’s apex capital market regulator, Securities and Exchange Commission (SEC), has granted approval to NG Clearing Limited and FMDQ Clear Limited to launch the country’s first central counterparty clearing (CCP) houses.
SEC’s approval-in-principle has been described as a ground-breaking development which opens up the financial markets to possibilities of permissible products.
FMDQ Clear is a subsidiary of FMDQ Group while the NG Clearing is a subsidiary of the Central Securities Clearing System (CSCS) Plc. NG Clearing was promoted by the Nigerian Stock Exchange (NSE) and CSCS alongside other key stakeholders including Nigeria Sovereign Investment Authority (NSIA), Access Bank Plc, Consonance Kuramo Special Opportunities I, Coronation Merchant Bank Limited, Greenwich Trust Limited, Union Bank of Nigeria (UBN) Plc, United Bank for Africa (UBA) Plc and Association of Securities Dealing Houses in Nigeria (ASHON).
FMDQ noted that the laudable achievement of CCP re-defines the landscape for financial transactions as is now and introduces endless possibilities to the scope of permissible products that can be developed and deployed within the ecosystem towards delivering long-lasting prosperity to the economy.
As a critical financial market infrastructure, a CCP will interpose itself between two counterparties by becoming the buyer to every seller and seller to every buyer, thereby aggregating and consolidating counterparty risks and introducing the much-desired counterparty agnostic trading feature that could catapult the growth of trading liquidity of financial products in the Nigerian markets to international standards.
Besides, a CCP, with its robust risk management structures and financial resources, is able to manage the consolidated risks in an operational-, cost- and capital-efficient manner that unlocks value for market participants within its value chain.
“The FMDQ Clear CCP ushers the actualisation of the outstanding building block that will enable the development of thriving repurchase agreements, derivatives, and commodities markets in Nigeria like other developed economies and markets,” FMDQ stated.
According to FMDQ, it is noteworthy that FMDQ Clear, having provided clearing services for the Central Bank of Nigeria (CBN) naira-settled over-the-counter foreign exchange futures product from its inception with over $50 billion of contracts executed, has acquired operational capabilities and experience that rival similar markets internationally, while adapting to local peculiarities.
“This attribute has uniquely positioned FMDQ Clear to take on the new responsibilities of a CCP effectively and efficiently well for the benefit of all market participants and in perfect alignment with the Nigerian financial markets regulators’ aspirations,” FMDQ stated.
In many emerging markets, derivatives markets are small, while hedging costs are high, making it difficult for issuers and borrowers as well as investors and lenders to tailor their currency and other risk exposures to their needs
According to FMDQ, FMDQ Clear has not only made adequate arrangements to enable it meet the regulatory capital requirements of N5 billion set by SEC for a CCP, but it has also proactively further developed and deployed a robust Default Resolution Reserve, bringing FMDQ Clear’s total financial resources to N15 billion with the ambition of doubling this in the medium-term.
Chief Executive Officer, FMDQ Group, Bola Onadele.Koko, said the approval-in-principle granted FMDQ Clear’s registration as a CCP shows foresight.
According to him, the evolution of FMDQ Clear to a CCP marks a critical and long-awaited milestone in the Nigerian financial markets ecosystem, positioning the markets for revolutionary growth in potentially colossal proportions.
“FMDQ, as a group, is indeed appropriately placed to de-risk the Nigerian financial markets and thereby, in collaboration with market stakeholders, ensure the realisation of this enormous feat,” Onadele.Koko said.
He outlined that the FMDQ Group is strategically positioned to provide seamless execution, clearing and settlement of financial market transactions, and depository of securities, through its wholly owned subsidiaries – FMDQ Securities Exchange Limited, FMDQ Clear Limited, FMDQ Depository Limited and FMDQ Private Markets Limited.
Chairman, NG Clearing Limited, Mr. Oscar Onyema, said the company’s main role was to improve the safety of Nigerian financial market by delivering best-in-class post-trade services that manage counterparty credit risk and reduce systemic risk.
He explained that in order to mitigate these credit risks in an efficient and robust manner, the company will interpose itself as a guarantor to both parties in a transaction, thus ensuring the successful execution of derivatives and other trades from various trade points in Nigeria.
“We intend to deliver an unparalleled CCP experience for the Nigerian financial market,” Onyema said.
He added that the company will optimize deployment of its resources to achieve long-term value creation for its stakeholders using a state-of-the-art risk management framework, which complies with global best practices for mitigating settlement risk.
According to him, NG Clearing’s risk-based additional collateral requirement will ensure that capital deployed by clearing members is always optimal while the company intends to deploy a competitive low-cost clearing fee regime for members.
Managing Director, NG Clearing Limited, Mr. Tapas Das sad the company has sufficient financial resources, including settlement guarantee fund, to cover participants’ risk exposures.
He said members will have access to a wide range of financial reports that equip them with extensive knowledge and enable them make informed decisions.
“NG Clearing shall be playing a key role in the financial market ecosystem in the region, upholding stability and safety of the marketplace, through efficient and timely settlement of derivative trades. The aim is to strengthen the country’s investment environment through solutions that systematically reduce risks, enhance operating efficiency, and minimize costs for all market participants, thereby serving as a catalyst to national development,” Das said.
