₦airaland Forum

he first Naira-settled over-the-counter (OTC) foreign exchange (FX) Futures on the FMDQ OTC Securities Exchange was yesterday executed between the Central Bank of Nigeria (CBN) and Citibank Nigeria Limited.
Although the FMDQ which disclosed this on its website, did not give further details about the transactions, it was gathered from a reliable source in the market that the total amount of the FX Futures contract was $20 million.
“That money will come into Nigeria and in the short-medium term, as FX inflows into Nigeria increases, we expect to see an improvement in the liquidity position of the market,” the source who pleaded to remain anonymous said.

But at the end of trading yesterday, the exchange rate for the OTC FX Futures for one-month closed at N279/$1; while the two-month rate due for settlement on August 24 closed at N277/$; the three-month rate due for settlement on September 28 closed at N275/$, and the 4-month rate due for settlement on October 26 closed at N267/$1. In addition, while the 5-month OTC FX Futures closed at N260/$; the 6-month rate N250/$1; the 1-year rate closed at N225/$1.

The Naira-settled OTC FX Futures contracts was launched on Monday when the CBN sold naira-settled OTC FX Futures contracts of non-standardised amounts for different tenors from one month through to 12 months.
The Managing Director/CEO of FMDQ, Mr. Bola Onadele, had described the naira-settled OTC FX Futures product was a major milestone in the evolution of Nigerian financial markets.

“The futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape. This innovation provides opportunities for government, businesses, pension fund administrators, investors, individuals, etc., to hedge (not speculate), cope with exchange rate risk.
“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy,” Onadele said.
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Apparently excited by the cheering news on about the Naira-settled OTC FX Futures deal, the naira appreciated against the dollar by N1.09 on the NIFEX as it closed at N281.23 to a dollar yesterday, stronger than the N282.32 to a dollar it closed on Tuesday. Also, on the parallel market, the naira ended on a positive note as it gained N4 to close at N352 to a dollar,stronger than the N356 to a dollar it closed on Tuesday.
Meanwhile, the central bank yesterday confirmed that it had been discussing with members of the Association of Bureau De Change of Nigeria (ABCON) on how to accommodate the currency dealers in the new forex regime.
Deputy Director, Financial Policy and Regulation Department, CBN, Mr. Anthony Ikem, made this known while speaking at an interactive session on the flexible exchange rate policy in Lagos yesterday.
Ikem said the operators’ proposal to participate at the interbank market was under consideration.
According to him, the central bank recognises the BDC sub-sector as a critical segment of the market and so was working on how to accommodate them in the new forex regime.

He urged the bureau de change operators to exercise patience, saying the CBN was aware of the challenges confronting the sub-sector.
He added: “The CBN is asking the BDCS to exercise patience. The New policy is still being tested to see how it would be later.Even as the policy is being tested, the CBN still understands the role of the BDCs in the country. They are still relevant in the scheme of the affairs of the country.”
Earlier in his presentation, the Acting President, ABCON, President, Alhaji Aminu Gwadabe, appealed to the CBN to restore and enforce the self-regulatory status of ABCON and to develop a framework for regular training for BDCs.

I see a reprieve on the horizon.

With things gradually taking shape, the naira will further appreciate sooner rather than later. The future sure looks promising.

The depreciation really hit the economy hard. The rippling effect has not been this bad in a long long while.

"But at the end of trading yesterday, the exchange rate for the OTC FX Futures for one-month closed at N279/$1; while the two-month rate due for settlement on August 24 closed at N277/$; the three-month rate due for settlement on September 28 closed at N275/$, and the 4-month rate due for settlement on October 26 closed at N267/$1".

All the quoted prices here for either Future/Forward is lower than what I got from the banks, I hope someone is not playing games?

I got N280/$1 unspecified forward period (Max. of 60 days), while I got as high as N284/$1 for SPOT.

Firefire:
"But at the end of trading yesterday, the exchange rate for the OTC FX Futures for one-month closed at N279/$1; while the two-month rate due for settlement on August 24 closed at N277/$; the three-month rate due for settlement on September 28 closed at N275/$, and the 4-month rate due for settlement on October 26 closed at N267/$1".

All the quoted prices here for either Future/Forward is lower than what I got from the banks, I hope someone is not playing games?

I got N280/$1 unspecified forward period (Max. of 60 days), while I got as high as N284/$1 for SPOT.

Hope you understand that this is quite diffrrent from the normal forex futures that delivers USD $ at an agreed rate for future delivery?
This works more like hedging against risk in Naira term.

Well, how does this benefit most of us who want to buy things online or pay for services? At what rate shall we be charged? These people should, for once, allow the man on the street get same things as quoted on pages of papers.

What shall it profit I to read on nairaland that some rates are 250-280/$ and when I want to purchase something online or pay for a service, I am charged 350/$?

They should please stop bugging us with things that does not benefit us, except the elite few.

loopman:
Hope you understand that this is quite diffrrent from the normal forex futures that delivers USD $ at an agreed rate for future delivery?
This works more like hedging against risk in Naira term.

How do you mean, hedging against Naira risk?


If you understand the challenges and tension in the market, you will see clearly that manufacturers are not talking about hedging for the future risks but sourcing FX to pay their foreign suppliers to restart or continue their production.

Firefire:
How do you mean, hedging against Naira risk?


If you understand the challenges and tension in the market, you will see clearly that manufacturers are not talking about hedging for the future risks but sourcing FX to pay their foreign suppliers to restart or continue their production.

I perfectly understand the challenges of most people as I am affected, having a dollar exposure over USD$7M and with a double jeopardy of my item being on the 41 items list.
My explanation is on the Over-the-counter (OTC) foreign exchange (FX) Futures on the FMDQ OTC Securities Exchange

Find below how it work.

Understanding CBN OTC FX Futures
How It Works

The Naira-settled OTC FX Futures (FX Futures) is an exchange traded foreign exchange (FX) price
hedging derivative transaction where the physical exchange of foreign currency at expiry is
replaced by net settlement between counterparties of the spot price differential. The spot price
differential is calculated as the difference between the FX Futures rate and the NIFEX1
Spot Rate
prevailing on the futures expiry date. The net settlement occurs in the local currency, the Naira
(NGN).
Settlement amount = (NIFEX Spot Rate – FX Futures rate) * Notional USD Amount
Every FX Futures transaction is a contract between a buyer (e.g. an importer) and a seller (e.g.
GTBank/CBN); both called “Parties”. The contract defines the USD notional amount being traded
(e.g. $3,000,000), the agreed FX Futures rate (e.g. $/₦250) and the expiry month of the contract
(e.g. Dec 2016).

Under an FX Futures contract, there will be no exchange of principal (USD and NGN); but each
Party will be required to post collateral (also called ‘margin’) to secure its obligation to the other
Party. The margin required per FX Futures transaction is dependent on the risk rating of each
customer and the notional amount traded. A Futures transaction may also involve a commission.
At maturity of a futures contract, the parties are obligated to exchange an amount equivalent to
the net difference between the value of the notional amount at the futures price and its value at
the NIFEX spot rate. Since the NIFEX spot rate can fix higher or lower than the futures rate, the
party losing value is compensated by the other.

An FX Futures contract is a tool that enables companies/firms minimize their foreign exchange
price risk There is no actual delivery of USD between the buyer and the seller.

Example
XYZ Company imports pharmaceutical products from a Malaysian supplier at a cost of USD 3
million. XYZ Co. is invoiced and payment is due in Dec 2016. XYZ Co. sells the products locally and
receives NGN from its retailers. Thus XYZ Co. is exposed to exchange rate fluctuations between
when goods are sold and payment is due to the supplier.
To hedge its exposure to exchange rate movements, XYZ Co. buys a futures contract:

1 Nigerian Interbank Foreign Exchange Fixing. The NIFEX rate is a benchmark rate provided by the FMDQ-OTC
Securities Exchange through a fixing process. More information is available from its website www.fmdqotc.com
The document is for discussion purposes only and does not, in any way, represent a service commitment on the part of the Bank. The terms and conditions
under which GTBank shall provide its banking services shall be governed by a separate Engagement Letter and /or Agreement(s) to be executed
subsequently by both parties.
Contract Maturity: NGUS Dec 2016
Notional Amount: USD 3.0 MM
FX Futures Rate: $/₦250
Initial Margin: 15% of NGN Value of Notional Amount
Maintenance margin: 80%

XYZ Co. and GTBank will be required to exchange an amount equal to the difference between
futures rate of $/₦250 and the NIFEX spot rate at maturity, multiplied by the notional amount.
Since the contract does not involve the delivery of USD, the net amount will be settled in NGN.
Scenario 1: If at maturity the NIFEX Spot Rate is $/₦280, FX Futures is In-the-Money
If at maturity, the NIFEX spot rate fixes above the futures rate, GTBank will be obligated to
compensate XYZ Co. for the higher spot rate (this is the price hedge benefit to XYZ Co.). To settle
the FX Futures contract, GTBank will make a payment of NGN 90,000,000 to XYZ Co. The
settlement amount is calculated as follows from the perspective of XYZ Co.:
Settlement Amount: (280 - 250)*$3,000,000 = ₦90,000,000

Since XYZ Co. thereafter purchases $3,000,000 from the interbank market at the prevailing spot
rate (e.g. at $/₦280),
Cost of FX purchase = $3,000,000 * $/₦280= ₦840,000,000,
Effective cost of purchase = ₦840,000,000 - ₦90,000,000 = ₦750,000,000
… for an effective rate of $/₦250
XYZ Co. therefore benefits from the futures hedge despite the weakening of the NGN because it
is able to reduce the cost of buying the $3,000,000 by the settlement amount received under the
futures contract.

Scenario 2: If at maturity, the NIFEX Spot Rate is $/₦245, FX Futures is Out-of-the-Money
If at maturity the NIFEX Spot rate fixes below the futures rate, XYZ Co. will be obligated to
compensate GTBank for value lost as a result of a lower spot rate. Thus, to settle the futures
contract, XYZ Co. will make a payment of NGN 15 MM to GTBank on maturity date. The settlement
amount is calculated as follows from the perspective of XYZ Co:
(245 - 250) * $3,000,000 = - ₦15,000,000

If XYZ Co. purchases the required USD 3.0 MM from the interbank market at a spot rate of $/₦245,
its effective cost can be determined as:
Cost of FX purchase = $3,000,000 * $/₦245 = ₦735,000,000
Effective cost of purchase = ₦735,000,000 + ₦15,000,000 = ₦750,000,000
… for an effective rate of $/₦250
Thus, XYZ Co. is locked-in to a rate of $/₦250; which is comparable to the futures rate contracted.


Other Requirements
Futures Agreement
All interested customers will be required to execute a futures agreement with the bank before
executing futures contracts.
Margining Requirements
Customers will be required to post collateral funds (initial margin amount) in a margin account at
execution of a futures contract, and will also be required to top up the margin account if the value
of the margin cover declines by a prescribed percentage (maintenance margin).
For instance, in the above example, XYX Co. will provide an initial margin of ₦112,500,000, which
is 15% of the NGN value of the USD notional amount; i.e.
0.15 * (250 * $3,000,000) = ₦112,500,000
If the margin amount held reduces to 80% of its initial value, the customer will be required to
provide additional funds to ‘top up’ the margin account.
Associated Risks

The risk of loss associated with dealing in FX Futures contracts can be significant. Customers must
ensure that they adequately understand their responsibilities under a futures contract. In addition,
customers must ensure that the futures contract executed meets their hedging needs. Where in
doubt, professional advice should be obtained.
The following should be carefully considered before entering into a FX Futures contract:
The document is for discussion purposes only and does not, in any way, represent a service commitment on the part of the Bank. The terms and conditions
under which GTBank shall provide its banking services shall be governed by a separate Engagement Letter and /or Agreement(s) to be executed
subsequently by both parties.
a. Potential for Loss: Customers should be aware that a futures positions can result in
a loss. This loss is reflected in the net settlement paid to a counterparty when NIFEX
spot rate fixes below the futures rate.
b. Maintenance Margin Call: If the agreed rate under a futures contract deviates
significantly from the spot rate, there is a possibility for the Bank to request for
additional collateral funds to cover the customer’s margin account. If the
customer’s accounts are not funded for the additional collateral within 2 business
days, the Bank may overdraw the customer’s account. This could result in
additional charges.
c. Spot Price Risk: There is always the possibility that the customer may not be able
to source their FX requirements from the spot market at the NIFEX Spot rate upon
maturity of the futures contract. In addition, the customer might be unable to
source the full amount required as at when needed. Either of the above could result
in a loss to the customer.

Benefits of Futures Contracts
– Easily implemented for both future foreign payables and receivables.
– Minimizes impact of adverse fluctuations to currency exposure
– Currently available for period up to 12months
– FX Futures are moderately liquid and transparent foreign exchange hedging tools.
– Allows a client to keep allocated cash in its main operating currency until the time of
settlement, though the prescribed margin amount will be debited at trade date
– Margin amounts will be withheld from customer’s account at trade date and returned
upon settlement of the contract
An FX Futures should only be used where you need to manage the impact of currency risk on
eligible trade transactions; it should not be used for proprietary trading or speculative purposes.

Hi bro,

Have you utilized this naira-settled futures contract previously?

loopman:
I perfectly understand the challenges of most people as I am affected, having a dollar exposure over USD$7M and with a double jeopardy of my item being on the 41 items list.
My explanation is on the Over-the-counter (OTC) foreign exchange (FX) Futures on the FMDQ OTC Securities Exchange

Find below how it work.

Hello bro,
Which bank quoted the NGN280/$1 for the forward contract?

Firefire:
"But at the end of trading yesterday, the exchange rate for the OTC FX Futures for one-month closed at N279/$1; while the two-month rate due for settlement on August 24 closed at N277/$; the three-month rate due for settlement on September 28 closed at N275/$, and the 4-month rate due for settlement on October 26 closed at N267/$1".

All the quoted prices here for either Future/Forward is lower than what I got from the banks, I hope someone is not playing games?

I got N280/$1 unspecified forward period (Max. of 60 days), while I got as high as N284/$1 for SPOT.