Wednesday, August19, 2020 / 08:50 AM / by FMDQ / Header Image Credit: FMDQ Group

The Nigerian financial market and the economy, as awhole, are set to receive the long-awaited boost to spur economic developmentand the repositioning of Nigeria as a compelling destination of capital, withthe Presidential assent of the Companies and Allied Matters Bill 2020, consequentlyintroducing the Companies and Allied Matters Act (CAMA) 2020, which hasrepealed and replaced the 30-year old CAMA 1990. This historic act by thePresident, Muhammadu Buhari, on this important piece of legislation, isexpected to usher in a new wave of innovative developments, significantlyimproving the ease of doing business in Nigeria, and ushering in a new paradigmin the Nigerian financial market.

With the increasing sophistication of the globalfinancial markets, comes the need for domestic markets to develop theirarchitecture and infrastructures to support requisite advancement as well asalign with international standards, and the new CAMA 2020 will position Nigeriaand its capital market at par with its international counterparts. Chief of theseveral impactful provisions in the CAMA 2020, is the inclusion of netting andbankruptcy remoteness provisions which signal the birth of a new financialmarket in Nigeria. Indeed, these game changing provisions will cure criticallegal deficiencies that hitherto affected the development of the financialmarkets, with the netting provisions addressing the credit risk challenges,operational and legal bottlenecks of gross settlement for spot and derivativestransactions, and the bankruptcy remoteness provisions tackling the uncertaintyaround the finality of settled transactions whilst securely ring-fencingcollaterals placed in execution of financial contracts.

This Act is instrumental, in no small measure, to thesuccessful takeoff of the derivatives market in Nigeria, a much-desireddevelopment, which will provide, amongst others, a wide range of riskmanagement opportunities, enhanced market liquidity, improved price discovery,reduced risk capital charges and transaction costs as well as increasedfinancial markets stability. Indeed, as far back as 2015, FMDQ Holdings PLC(FMDQ or FMDQ Group), in line with its mandate to build a thriving derivativesmarket in Nigeria, facilitated a feasibility study on the introduction ofderivatives in the Nigerian financial market, and the findings showed that thecritical success factors for a derivatives market include, but are not limitedto, effective management of counterparty risk through the activation of acentral counterparty (CCP), and adequate legal framework, both of which havebeen fully addressed in the CAMA 2020.

Leveraging on its aspiration to deepen the Nigerianfinancial market, and transform it to be globally competitive, operationallyexcellent, liquid and diverse, in line with the 'GOLD' Agenda, FMDQ Group has,since its inception, engineered the requisite architecture towards improvingthe diversity and depth of the market, as well as promoting an environmentwithin its markets, for innovation and market development to thrive. From anover-the-counter (OTC) market launched in 2013, to a full-fledged SecuritiesExchange, to a vertically integrated financial market infrastructure (FMI)group, FMDQ Group has developed a sustainable market architecture through itswholly owned subsidiaries – FMDQ Securities Exchange Limited, FMDQ ClearLimited, FMDQ Depository Limited and FMDQ Private Markets Limited – towardsbuilding, in collaboration with the regulators and market stakeholders, adeveloped financial market in Nigeria.

According to the Chief Executive Officer of FMDQGroup, Mr. Bola Onadele. Koko, "the CAMA 2020 commendably sets the tone for theactualisation of key innovations in the market, providing enabling legalbacking for netting, bankruptcy remoteness and attendant regulatory frameworksfor the smooth functioning of financial markets in Nigeria. With FMDQ Exchangeas a market organiser for the fixed income, foreign exchange and derivativesmarkets in Nigeria, and given the domestic and global call to improveparticipation in the markets by providing hedging opportunities to supportinvestor interest, the Exchange is set to support the establishment of awell-functioning derivatives market in Nigeria, following its launch of aDerivatives Market Project in 2017, and the planned activation of derivativeproducts, in 2020, to hedge interest rate risks, in addition to the existingcurrency risk hedging product, the OTC FX Futures product.

To ensure the successful activation of the derivativesmarket, FMDQ Clear, Nigerian's first central clearing house (CCH), is wellpositioned to providing the much-needed CCP services, upon regulatory approval,and has proactively set aside a default resolution reserve with a near-termtarget of ₦20 billion, which willenable the novation of financial transactions in the Nigerian financial marketto a well-capitalised Clearing House, thereby de-risking counterparty risksprevalent in derivative contracts, provision of clearing services for spot andderivatives products towards ensuring settlement finality for financial markettransactions, and introduction of even greater efficiency and stability to theNigerian financial markets".

He further stated that the contributions of all theNigerian financial system regulators in the market development cannot beover-emphasised; with the foresight of the Securities and Exchange Commission(SEC) over the years, in approving the registration of the FMDQ Entities, theerstwhile OTC market in 2012, FMDQ Clear in 2017, and FMDQ Depository and FMDQExchange, both in 2019, providing the market with a one-stop shop for theend-to-end execution of financial market transactions. Further, the CentralBank of Nigeria (CBN) introduced in 2016, with FMDQ Exchange, the OTC FXFutures market, ahead of the launch of other derivative products, whichfostered stability in the FX market, with circa US$50.00 billion worth ofcontracts so far executed on FMDQ Exchange and cleared by FMDQ Clear.

Market analysts opined that with improved regulatorylandscape, adoption of liberalised markets – especially in foreign exchange,promotion of improved risk management standards and financial marketsstability, catalysed by the emergence of a derivatives market and a functioningCCP, the Nigerian economy is bound to witness a more attractive financialsystem that will galvanise foreign capital flow, improve trading and fundingliquidity of the markets, attract human capital and cause reduction in cost of capital,thereby boosting the nation's reserves, engendering the much-desired economictransformation, and ultimately positioning Nigeria and Nigerians forprosperity.

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