- Nigerian Financial Markets Display Resilience in 2020
- CBN’s OTC FX Futures Product Provides Succour to Corporates and Investors
2020 was undoubtably challenging, with the outbreak of the COVID-19 pandemic, and the attendant turbulence in the global and domestic economic landscapes.
With a GDP
contraction of 1.79% in 2020, a significant decline from the 2.21% growth
recorded in 2019, inflation rate of 13.25% compared to 11.40% in 2019, and a
trade deficit of $33.46 billion, a 33.77% increase from the deficit of $25.01
billion in 2019, Nigeria was plunged into its second recession in two (2)
years.
Indeed, the
fortunes of the Nigerian financial markets were not spared in 2020 as
activities in the foreign exchange (FX) market remained constrained by reduced
liquidity and volatile capital flows, leading to market contraction.
The capital
market saw investors access the fixed income market to avoid losses in equity
portfolios, but by mid-2020, the fixed income market took a turn as yields
started tumbling to below 1% per annum, and the equity market picked up in the
last quarter of 2020 as investors surged back in.
As
corporates and investors were faced with very difficult choices during the
period, many found succour in the Central Bank of Nigeria (CBN)’s innovative
Naira-settled OTC FX Futures product, a panacea for the foreign exchange rate
risk faced by market participants – domestic and international.
Whilst the
product, launched by the CBN in 2016 following almost two (2) years of major
challenges in the FX market, has been successfully traded on FMDQ Securities
Exchange Limited (FMDQ Exchange), and cleared on FMDQ Clear Limited (FMDQ
Clear) – both wholly owned subsidiaries of FMDQ Group – since its inception,
2020 saw a significant increase in participation levels from hedgers, with
total value of OTC FX Futures Contracts of $18.88 billion from 1,726 deals, up
from $15.07 billion from 1,068 deals, $7.88 billion from 671 deals and $5.49
billion from 613 deals, in 2019, 2018 and 2017, respectively.
At its 9th
Annual General Meeting (AGM) which held recently, FMDQ Group, an integrated financial
market infrastructure (FMI) group and a one-stop platform to commence and end
all financial market transactions in a seamless, timely and cost-efficient
manner, revealed significant market development initiatives across all its
subsidiaries, in contribution to the development of the Nigerian financial
markets, with a focus on de-risking the markets across the full capital market
value chain – trade and post-trade.
The Group
Chairman, FMDQ Group, and Deputy Governor, Economic Policy, CBN, Dr. Kingsley
Obiora, stated that despite the challenges, “2020 was a landmark year for FMDQ,
as it saw the Company’s reorganisation into a Group structure, with FMDQ Group
becoming a non-operating Holding Company registered by the Securities and
Exchange Commission (SEC), with three (3) SEC-registered capital market
subsidiaries – FMDQ Exchange, FMDQ Clear and FMDQ Depository – and a private
markets subsidiary, FMDQ Private Markets, all further consolidating our
business model, transforming FMDQ to Africa’s first vertically integrated FMI
group.
Our Group’s
performance in 2020 was remarkable, improving across financial metrics and
strategic positioning, despite the challenges experienced during the year. The
sustained performance of the Group is a result of enhanced product and market
development activities, as well as the diversification and expansion of the
business to incorporate clearing and settlement services”.
An analysis
of FMDQ Group’s financial performance shows that its market diversification
strategy was successful, as the Group recorded an increase of 44% in Revenue,
to ₦31.00 billion, in 2020.
Total
market activity in the fixed Income, currency and derivatives markets declined
marginally by circa 8% to ₦215.09 trillion in 2020 from ₦232.68 trillion in
2019, with the most actively traded product category – Nigerian Treasury Bills
& Open Market Operation (OMO) Bills – contributing a combined total of 35%
to total turnover.
The
Securities Admission business of the Exchange continued to thrive in 2020, as
an impressive number of eighty-two (82) securities – 13 Bonds, 67 Commercial
Papers and 2 Funds – were admitted on the platform, with a total value of ₦2.07
trillion. In the Clearing business, owing to the impact of the COVID-19
pandemic that inadvertently shaped the course of the year, a decline of 22% in
the value of cleared sovereign fixed income securities transactions was
recorded by the Group.
On the
other hand, as corporates and investors sought relief from the volatilities
experienced in the market, there was a marked increase in OTC FX Futures
participation levels, as total value of contracts executed by local and foreign
corporates on FMDQ Exchange and cleared by FMDQ Clear grew by 25.25%. The
Depository and Private Markets business also contributed, albeit marginally, to
the Group’s Revenue during the period under review.
A further
analysis of FMDQ Group’s performance shows that whilst the Futures Management
Fees earned on the OTC FX Futures Product – charged to clients (local and
foreign corporates) for the maintenance and valuation of open contracts and
collateral margins – was the highest contributor to Revenue at 44%, with N13.71
billion, the Revenue was well-diversified across various sources and
participants, with a split of 41% (2019: 53%) from clients (local and foreign),
17% (2019: 14%) from Dealing Member (Banks), 23% (2019: 8%) from the CBN (as a
transaction party in the OTC FX Futures market) and 18% (2019: 25%) from other
sources including securities admissions, interest income, settlement and
depository services, private market notings, amongst others.
According
to FMDQ Group’s Chief Executive Officer, Mr. Bola Onadele. Koko, “I am
incredibly proud of the progress we made in 2020, and we would never have
achieved this without the unwavering support of all our stakeholders. As the
pandemic strained our economy and markets during the year, the level of engagement
by our stakeholders testified to their commitment to making our markets thrive.
The support
of the SEC – the apex regulator of the capital markets, and the CBN – the apex
bank, has been invaluable and is extremely appreciated. Also, the unrivalled support
of the Board Chairman and Directors cannot be overemphasised and has been
critical to the achievements and progress made during the year.
Your
exemplary leadership, trust, and determination to steer the ship with utmost
care, during the turbulent year, despite your busy schedules, was nothing short
of remarkable, as evidenced by the Corporate Governance and Board Evaluation
Reports from our external consultant, PricewaterhouseCoopers (PwC), upon their
conclusion of the 2020 reviews in accordance with the SEC’s Corporate
Governance Guidelines, 2020, and the Nigerian Code of Corporate Governance,
2018.”
A review of
the Reports from PwC, which were published in the Group’s 2020 Annual Reports,
revealed that FMDQ Directors retained a high level of competence in 2020,
maintaining oversight of the Group’s affairs and providing adequate guidance
towards achieving the objectives of the Group, and that FMDQ complied
significantly with the principles set forth in the Codes.
FMDQ Group
will, in 2021, continue to focus its attention on critical market development
initiatives, towards the swift activation of robust and thriving Derivatives
and Equity Markets, whilst consolidating its Debt Markets leadership position,
across its Exchange, Clearing and Depository businesses.
2021 will
also see FMDQ Group working to deliver on its commitment for the Private
Markets – to be the leading marketplace for private capital in Nigeria – in
collaboration with domestic and global partners, to create synergies that will
be beneficial to all stakeholders, from the start-up enterprises, to the
small-sized, through to the medium and large-sized private companies.
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