Yemisi Izuora
FMDQ has positioned to bolster liquidity and financial system stability in Nigeria through the establishment of first-class central clearing and settlement structure.
The Nigerian fixed income and derivatives markets have hitherto experienced slow growth due to sustained counterparty, credit and settlement risks. Being Africa’s largest economy, the development of the Nigerian financial markets is crucial, with improved market architecture, increased risk management structures, growing need for bespoke hedging products i.e. derivatives and regulation as key drivers for this development.
In a significant milestone for the nation’s financial markets, the Securities and Exchange Commission, Nigeria (“SEC” or the “Commission”) registered FMDQ Clear Limited (“FMDQ Clear”), the first central clearing house in Nigeria, a wholly-owned clearing and settlement subsidiary of Nigeria’s foremost debt capital, currencies and derivatives OTC Exchange, FMDQ OTC Securities Exchange (“FMDQ”).
As part of its continued pursuit to strengthen the Nigerian financial markets, and in a bid to promote settlement finality on products traded, FMDQ activated the Clearing House to deliver highly efficient post- trade services across Nigeria’s fixed income and derivatives markets, addressing some of the key drivers for the development of the markets – risk mitigation, capital efficiency and price transparency, while ensuring safety, stability, confidence and ultimately, inclusiveness in the marketplace.
FMDQ Clear, having assumed the responsibility of a critical financial market infrastructure (FMI) in the Nigerian financial market landscape, has commenced initiatives to ensure that its risk management activities underpin its effectiveness, reliability and long-term sustainability, as it strives to resolve key clearing and settlement issues that led to the birth of the franchise, with the development of a robust risk management framework that provides the structure for risk policies, processes and internal control mechanisms to manage, assess and contain the risks posed to the clearing house, in compliance with the global standards set out in the International Organisation of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (PFMIs).
To ensure a full understanding of the needs of the market, and its readiness for growth and development, FMDQ, in 2015, engaged Salonica, an international-based consortium, to conduct a feasibility study on the introduction of OTC derivatives to the Nigerian financial market, and one of the strong recommendations of this study was the activation of a clearing house to ensure certainty of settlement finality and enforceability; promote market confidence among participants, and facilitate orderly markets in periods of stress. Furthermore, in 2017, FMDQ, supported by Frontclear Management B.V. (“Frontclear”), a Netherlands-based development finance company, engaged Catalyst Development (UK) Limited, a specialised consulting company focused on clearing, risk and regulation, to conduct a feasibility study on the activation of a central clearing house infrastructure in Nigeria, culminating in the birth of FMDQ Clear.