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Nigeria’s Liberalized Foreign Exchange Regime: Current Impacts And The Near Future


In addition to the hedging products earlier approved in the 2011 CBN’s “Guidelines for FX Derivatives and Modalities for CBN FX Forwards”, the new FX Guidelines introduced a new hedging product, through which the risks and volatility associated with the FX market can be further avoided. This newly introduced FX Derivative is tagged the “Naira-settled Non-deliverable OTC FX Futures (“OTC FX Futures”) and it is to be traded on the FMDQ.

Essentially, the OTC FX Futures are special purpose vehicles for guaranteeing future market liquidity at stable and bespoke exchange rates. They are contracts that obligate the counterparties to buy or sell foreign currency on a predetermined future date (the settlement date), for a fixed rate agreed on the date the contracts were entered into (trade date) , without the obligation to deliver the underlying foreign currency (i.e. the US$ notional amount) at maturity.

Simply, all that happens on the settlement date is that, whatever is the difference between the Spot FX rate (the market rate at the Nigerian Inter-Bank Foreign Exchange Market – “NIFEM”) and the OTC FX Futures rate (the agreed rate), will be settled through the Nigeria Inter-Bank Settlement System Plc (“NIBSS”) – the interim Clearing House appointed for the OTC FX Futures Contracts. With this, both parties end up trading at the predetermined or agreed FX rate.

The CBN, on June 27, 2016 announced the rates and tenors for the OTC FX Futures for different tenors and entered into the first sets of FX Futures contracts, on the same day, for tenors ranging from one month through to 12 months as follows: 12-Month Contract (maturing June 2017) at N225/US$; 9-Month Contract (maturing March 2017) at N222/US$; 6-Month Contract (maturing December 2016) at N250/US$; 3-Month Contract (maturing September 2016) at N275/US$ and; 1-Month Contract (maturing July 2016) at N279/US$.
The 1-Month component of the FX Futures Contracts matured on the 27th of July, 2016 and were settled that day at the bespoke rate of N279/US$ (about US$26.73 million Naira-settled at N962.23 million) in spite of the fact that the Spot FX rate at the inter-bank market closed on the date at circa N304/US$.

Since the settlement of the first sets of FX Forwards and Futures Contracts in the last days of July, renewed confidence in the new FX Guidelines has been recorded among corporate treasurers,: businesses, governments, pension managers, oil and other commodities importers, corporates, and individual investors. End users no longer have any need for making front-loaded FX demand or involving in speculation. Instead, they are now simply keying into the OTC FX Futures Contracts as a safe way of hedging their risks in the FX market.

Notably, the CBN immediately replaced the 1-Month FX Futures Contracts settled in July with a new 12-Month FX Futures Contracts (of US$1 billion notional amount on offer), which are to mature in July 2017 at the bespoke rate of N250/US$. The CBN has since continued to replace other tenors of FX Futures Contracts with new ones, at their maturity dates.