Economy
Has Naira-settled OTC FX Futures Stabilized Naira Exchange Rate?
By Quantitative Financial Analytics Ltd
To stem the continued devaluation of the Naira and to breathe some air of stability into the ever-volatile Naira/Dollar relationship, the Central Bank of Nigeria (CBN) introduced some far-reaching measures at different times.
One of such measures was the launching of the Naira-settled OTC FX Futures Market. That “history making” event which commenced on June 27, 2016 made the CBN “the pioneer seller of the Naira-settled OTC FX Futures contracts on the FMDQ OTC Securities Exchange (FMDQ)”.
Before the advent of the Naira-settled OTC FX Futures, various governments in Nigeria had been tinkering with the Naira exchange rate management using different policy driven methodologies at different times.
In 1986, the Exchange Rate Liberalization Policy was introduced and with it, the Naira was devalued officially for the very first time on September 26, 1986 to be specific. From that day till today, the Naira has been heading south.
Economic and financial historians have it that Nigerian governments have tried to manage the exchange rate with the Foreign Exchange (Monitoring & Miscellaneous Provisions) (FEMM) Act of 1995, the two-way Quote System (market making) in the inter-bank FX market in 1996 and the Wholesale Dutch Auction System (WDAS) in 2006.
Unfortunately, it seems none of those worked. It is therefore not surprising that the currency futures market has been put in place as a way to “stabilize” the Naira.
It is now almost two years since the Naira-settled OTC FX Futures market was introduced and the question is ‘how far it has gone in stabilizing the Naira/Dollar exchange rate?’
Though the Naira/Dollar exchange rate continues to remain high, it is a bit comforting that the new FX currency risk exposure management instrument, (the Naira-settled OTC FX Futures), has been able to curb or curtail the speed at which the Naira depreciates relative to the Dollar. At least, for over six months the rate has remained in the N360s to the $.
When used properly, Currency Futures are a veritable instrument of managing foreign currency risk exposure. This works well when there are buyers and sellers and probably not so well when there are buyers with the CBN as the only seller.
By definition, a futures contract is an agreement between two parties where one (the buyer) agrees to buy and the other, (the seller) agrees to sell a given amount of the underlying asset or subject of the contract, at an agreed price on future date.
A futures contract entails a long position by one party and a corresponding short position by another. It does look like the CBN is the seller or the short position party in the Naira-settled OTC FX futures contracts although it is not apparent who the long position parties are.
By their nature, futures are zero sum games. Futures do not involve an initial cash flow, meaning that money does not change hands at the initiation of the contract except where commissions are charged but subsequently, it becomes apparent how much the parties to a contract will pay/receive as the price of the underlying instruments change from day to day.
The method of determining the amount payable/receivable by either party is called marking to market, (the technicalities involved in mark to market calculation will not be part of this discuss).
Market Activity
It is noteworthy to point out that the Currency Futures market in Nigeria has been very active and vibrant since inception although the momentum seems to be reducing as rates converge.
On the date that the market went live, it recoded $26.73 million in open interest. As at April 6, 2018, the open interest had increased to $3,278.43 million, an increase of 12176 percent. This underscores the extent of Nigeria’s dependence on and demand for the dollar, among other implications.
The implication of this is also that, if the CBN is the only party that holds the short positions, it means that the CBN has contracted to sell $3,278.34 million to various parties over a range of period depending on the maturity dates of the contracts.
However, the Naira-settled OTC FX Futures are non-deliverable, meaning that the CBN is not going to sell or deliver $3,278.34 million to the long position holders; rather, the CBN will pay them the difference between the contract price and the NIFEX/NAFEX rate as at the maturity date of each futures contract.
It will be recalled that the first futures contract matured on July 27, 2016, and the CBN had to pay N962.23 million to the long position holder.
For the almost two years of existence of the FX Futures market in Nigeria, 21 of such contracts have matured. Looking at the contract prices of the open trades in relation with the current exchange rate, there is indication that the CBN will be at the paying end of the contracts.
According to analysis by analysts at Quantitative Financial Analytics, the total notional value of all contracts from inception to date is $11.743 billion while total matured contracts stand at $8.464 billion, leaving current outstanding open interest at $3.278 billion.
Out of the matured contracts, the short position holders (probably the CBN) have paid an estimated $503.8 million to the long position holders, according to the analysis.
As said before, currency futures are derivatives, and derivatives are high risk instruments, if used properly, they are beneficial but when misused, they can lead to catastrophe.
To a large extent and in most recent times, the FX currency futures market has helped in stabilizing the Naira Dollar exchange rate although the decreasing momentum arising from convergence of rates may diminish its role in managing the currency risk exposure of Nigerians. We are watching
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange closed higher by 1.41 per cent on Friday, May 15, supported by four securities on the platform.
During the session, FrieslandCampina Wamco Plc added N14.24 to its share price to sell for N159.00 per unit, in contrast to the previous day’s N144.76 per unit.
Further, Central Securities and Clearing System (CSCS) Plc appreciated by N1.34 to N72.34 per share from N71.00 per share, Geo-Fluids Plc improved its price by 4 Kobo to N2.94 per unit from N2.90 per unit, and Industrial and General Insurance (IGI) Plc gained 1 Kobo to trade at 61 Kobo per share compared with Thursday’s closing price of 60 Kobo per share.
As a result, the NASD Unlisted Security Index (NSI) rose by 58.20 points to 4,188.41 points from 4,130.21 points, and the market capitalisation soared by N34.82 billion to N2.506 trillion from N2.471 trillion on Thursday.
During the session, the volume of trades went up by 180.8 per cent to 1.2 million units from 417,349 units, and the value of transactions increased by 29.8 per cent to N29.8 million from N23.2 million, while the number of deals fell by 22.6 per cent to 24 deals from 31 deals.
Great Nigeria Insurance (GNI) Plc ended the day as the most traded stock by value on a year-to-date basis with 3.4 billion units sold for N8.4 billion, followed by CSCS Plc with 60.8 million units exchanged for N4.1 billion, and Okitipupa Plc with 27.9 million units valued at N1.9 billion.
GNI Plc also closed the session as the most traded stock by volume on a year-to-date basis with 3.4 billion units worth N8.4 billion, followed by Resourcery Plc with 1.1 billion units transacted for N415.7 million, and Infrastructure Guarantee Credit Plc with 400 million units traded for N1.2 billion.
By Dipo Olowookere
The bears overpowered the Nigerian Exchange (NGX) Limited on Friday, sinking it further by 0.76 per cent when the closing gong was struck by 4 pm.
The nation’s flagship equity market was under selling pressure during the session, as investors booked profits after the shares witnessed price appreciation in the past trading sessions.
The energy sector was the most impacted, as it shed 4.43 per cent. The consumer goods index declined by 0.90 per cent, the banking counter decreased by 0.15 per cent, and the industrial goods sector lost 0.08 per cent, while the insurance counter gained 2.42 per cent, which was not enough to salvage the situation.
Consequently, the All-Share Index (ASI) contracted by 1,912.19 points to 250,330.92 points from 252,243.11 points, and the market capitalisation moderated by 1.225 trillion to N160.444 trillion from N161.669 trillion.
Zichis was the worst-performing stock for the session after it gave up 9.97 per cent to close at N29.43, FTN Cocoa slipped by 9.95 per cent to N8.96, The Initiates slumped by 9.90 per cent to N32.30, LivingTrust Mortgage Bank tumbled by 9.88 per cent to N3.83, and International Energy Insurance dropped 9.71 per cent to trade at N2.79.
The best-performing stock was ABC Transport, which grew by 10.00 per cent to N6.27. May and Baker also appreciated by 10.00 per cent to N47.30, SCOA Nigeria surged by 9.98 per cent to N33.05, Trans-Nationwide Express expanded by 9.97 per cent to N7.06, and DAAR Communications jumped 9.76 per cent to N2.25.
Yesterday, investors traded 1.1 billion shares worth N44.3 billion in 65,744 deals compared with the 1.0 billion shares valued at N41.6 billion transacted in 74,822 deals a day earlier. This indicated a dip in the number of deals by 12.13 per cent, and a rise in the trading volume and value by 10.00 per cent and 6.49 per cent, respectively.
Chams was the busiest equity for the day, with 328.5 million units sold for N1.1 billion. UBA traded 61.6 million units worth N2.7 billion, First Holdco transacted 58.7 million units valued at N4.2 billion, Secure Electronic Technology exchanged 51.9 million units worth N45.0 million, and Access Holdings traded 51.8 million units valued at N1.3 billion.
By Adedapo Adesanya
The last trading session of the week at the Nigerian Autonomous Foreign Exchange Market (NAFEX) ended on a negative note for the Naira on Friday, May 15, as it lost N15 Kobo or 0.1 per cent against the Dollar to trade at N1,371.04/$1 compared with the previous day’s N1,370.89/$1.
However, it further appreciated against the Pound Sterling in the same market segment yesterday by N20.77 to close at N1,830.61/£1 versus Thursday’s value of N1,851.38/£1, and gained N7.91 against the Euro to settle at N1,595.07/€1 versus N1,602.98/€1.
At the GTBank FX desk, the Naira lost N2 against the US Dollar during the session to sell at N1,383/$1 compared with the preceding session’s N1,381/$1, and at the black market, it remained unchanged at N1,385/$1.
The Naira is forecast to be broadly stable, supported by Dollar sales by the Central Bank of Nigeria (CBN) amid steady, higher oil receipts, with the market settling into a balance.
Policy direction is also expected to give the market some boost as the CBN said the new edition of the FX market guidelines will deepen liquidity, improve transparency and strengthen confidence in the country’s foreign exchange market.
According to the Governor of the CBN, Mr Yemi Cardoso, the update is due to changing global economic realities, domestic reforms and the need for a more coherent and forward-looking regulatory framework. According to him, the last edition of the FX manual was issued in 2018, making the latest review both timely and necessary.
Meanwhile, the cryptocurrency market plunged into the red zone as rising bond yields hit risk assets across markets, while traders are increasingly betting the Federal Reserve may need to raise rates again. Rising energy prices and resurging inflation could force central banks back into tightening mode.
Cardano (ADA) shrank by 4.4 per cent to $0.2557, Dogecoin (DOGE) slid by 3.7 per cent to $0.1104, Ripple (XRP) depreciated by 3.5 per cent to $1.41, Solana (SOL) crashed by 3.5 per cent to $87.81, and Binance Coin (BNB) slumped by 3.4 per cent to $659.64.
Further, Bitcoin (BTC) declined by 2.6 per cent to $78,547.49, Ethereum (ETH) lost 2.1 per cent to quote at $2,209.19, and TRON (TRX) tumbled by 0.7 per cent to $0.3509, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) traded flat at $1.00 each.
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