CBN Offers New 12-Month Futures Contract of $1bn at N250/$

One month into the June 27, 2016 introduction of and formal unveiling of the Naira-Settled OTC FX Futures Market, the pioneer 1M contract – NGUS JUL 27 2016 $/N279, for about $26.73 million executed between the Central Bank of Nigeria (CBN) and authorised Dealers on FMDQ OTC Securities Exchange, matured and was settled on Wednesday, July 27, 2016, according to this BusinessDay.

Consequently, in line with the FMDQ OTC FX Futures Market Framework,N962.23mn total Settlement Amount was paid to the ‘Futures Banks’ – the counterparties to the CBN – on the matured NGUS JUL 27 2016 at $/N279 on the maturity date, July 27, 2016.

The CBN has consequently replaced the matured July 2016 contract and has now offered a new 12M contract, NGUS Jul 19 2017, with a total notional amount on offer of $1.00bn at N250 to $1.

Analysts say this is a milestone in the history of the Nigerian FX market, with the OTC FX Futures market having reported remarkable success in its almost one month of existence with over $1.20bn worth of the CBN’s OTC FX Futures contracts across all the tenors.

The profile of the buyers of the contracts includes Foreign Portfolio Investors (FPIs) and importers, among others, who have been trading on the FMDQ OTC FX Futures Trading and Reporting System.

In line with the OTC FX Futures Market Framework released by FMDQ and the FMDQ OTC FX Futures Market Operational Standards, the 1M contract was valued by the Exchange against the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) spot rate, which ceased to trade on Wednesday, July 20, 2016.

Clearing operations and settlement for the final variation margins, as valued by FMDQ, were effected through the Nigeria Inter-Bank Settlement System PLC (NIBSS), acting as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts.

Meanwhile, the hike in the Monetary Policy Rate (MPR), anchor rate at which the CBN lends to banks by the Monetary Policy Committee (MPC) may have started its positive impact, with over 4,000 percentage or $158million surge in deals at the interbank FX spot market, a day after the decision, data from the FMDQ website show.

Consequently, foreign exchange dealers traded $162.4million in 33 spot deals between Tuesday and Wednesday, compared to thin trade of $3.560million recorded the preceding Monday in six deals.

Nigeria’s currency traded at an average of N316.93/USD on Thursday, as at 2.39 PM, FMDQ data showed. At the FX interbank spot market, the local currency reached a high of N340.46/USD and a low of N283/USD yesterday. Dealers traded $23.414million on Thursday in 12 deals.

Charlie Robertson, global chief economist at Moscow-based Renaissance Capital said “Nigeria FX is closer to the market clearing rate and long-term fair value (315-320/$) on a 20 year average Real Effective Exchange Rate (REER) model”.

“The key point is that Africa is back – with two of the three biggest economies (Nigeria and Egypt) now making themselves investable again, after an overly long period where FX policy deterred investors. As we progress through 2H16, it is worth re-examining Africa again,” Robertson said.

Michael Famoroti, economic research analyst at Vetiva Capital Management, in recent commentary said the move by the MPC is positive for the naira in the short-term “but note that longer-term, it is in addressing the structural defects in Nigeria’s export sectors that will ensure a viable currency market.

“We expect that following this decision, the interbank market rate could retrace closer to the N300/USD level and if the CBN’s move to redirect liquidity via banks to Bureau De Changes (BDCs) proves successful, the gap between the interbank and parallel market rate could narrow in the coming weeks,” the Vetiva analyst added.

The prices of oil, Nigeria’s biggest source of revenue steadied just above three-month lows on Thursday, as producers continued to pump more than needed, filling inventories, and economic growth prospects darkened.

Brent crude oil was down 35 cents at $43.12 a barrel by 1335 GMT, after touching $42.88, its lowest since April 20. U.S. light crude was down 15 cents at $41.77.

“Having introduced a flexible exchange rate policy, we expect the current move by the CBN to raise interest rates to positively affect the foreign exchange market as we anticipate that more foreign direct investments (FDI) will begin to flow into the country, targeting investments in Government securities which will now return higher. This should immediately improve liquidity in the FX market and reduce volatility,” said research analysts at Lagos-based Capital Bancorp Plc.

Naira-Settled OTC FX Futures contracts are essentially non-deliverable Forwards (NDF) contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity/settlement date.

Upon maturity, both parties are assumed to have transacted at the Spot FX market rate.

Since these contracts are cash- settled in Naira, there is no physical delivery of the underlying currency to the counterparties, in this case the CBN and the Authorised Dealers.

The differential between the OTC FX Futures contract rate and the NIFEX Spot rate on the settlement day determines the Settlement Amount, the gain/loss inherent in the contract; and the party that would have suffered a loss with the NIFEX Spot FX rate is paid the Settlement Amount in Naira, thus ensuring that both parties in purchasing or selling the US Dollar in the Spot FX market will achieve an effective rate equal to the NDF rate that had been guaranteed to each other via the trade in the OTC FX Futures contract.

To facilitate the operational efficiency of the Futures market, the CBN, on June 24, 2016, issued a circular on ‘Externalisation of Differentials on OTC FX Futures Contracts for FPIs’, thus providing an avenue for this category of end-users, upon presentation of an FMDQ-issued Settlement Advice and a Certificate of Capital Importation, to repatriate the Settlement Amounts of the OTC FX Futures contracts. Similarly, on July 22, 2016, the apex Bank released another circular mandating the sale of foreign currency proceeds of international money transfers by banks to the Bureaux-de-Change (BDC) operators, who will in turn sell the proceeds to retail end-users.

Thus serving to ease the demand pressure for FX in the BDC market and improving the value of the Nigerian Naira against the US Dollar.

Meabwhile in its continued efforts aimed at bringing back liquidity into the Nigerian FX market, attracting foreign investors and shoring up the contracting economy, the Central Bank revised its quotes on the OTC FX Futures market on July 27, 2016.

A month after the launch of the product, the OTC FX Futures market has witnessed significant buy-in from the market, with c. $1.33bn of contracts purchased in the first month, considerably reducing front-loading in the spot market and promoting hedging

Although the Spot FX rate depreciated 14.73 percent between June 27 (N281.49) and July 27, 2016 (N330.12) and yields on the 1-year and 3-month bills (Jul-6-2017 & Oct-20-2016) recorded 7.20 percent and 4.13 percent hikes over the same period, OTC FX Futures quotes by the CBN were adjusted to remain competitive in furtherance of the strategy to attract foreign investors into the domestic market.

Changes along the OTC FX Futures curve were asymmetric, with significant adjustment at the short-end of the curve.

NGUS APR 26 2017, previously quoted at N210.00 (the lowest priced contract), is now quoted at N260.00, reflecting a 23.81% increment in the price – the largest change across the curve.

Patrick Atuanya & IHEANYI NWACHUKWU