31 May 2018. Today, FMDQ Clear Limited and Frontclear signed an agreement to jointly enhance Nigeria’s first central clearing house structure, with the support of a settlement guarantee fund. The collaboration is the culmination of a long-standing working relationship focused on improving how the Nigerian OTC financial market functions and follows-on an initial introduction via the International Capital Market Association (ICMA), of which FMDQ is a full Member and Frontclear a long-standing partner.
FMDQ Clear Limited (FMDQ Clear) and Frontclear have joined to realize a first in the Nigerian market. Combined, they will facilitate a clearing structure to strengthen the OTC market liquidity. FMDQ Clear, a central clearing house positioned to deliver end-to-end clearing and settlement services that will help enhance integrity and eliminate the inherent risks to bilateral trades in the Nigerian capital market, will be backed by Frontclear’s core financial guarantee product, thereby improving the creditworthiness of participating counterparties and reducing initial set-up costs. A wholly-owned subsidiary of FMDQ OTC Securities Exchange, who provides a platform for the registration, listing, quotation, noting, trading, order execution and trade reporting of fixed income, currency and derivatives products in the Nigerian financial markets, FMDQ Clear has been engaged by the OTC Exchange to carry out post-trade services for transactions executed in its cash and derivatives markets.
The Frontclear guarantee will, in practice, function like a settlement/credit guarantee fund typical to more developed financial markets. Upon default of a clearing member, Frontclear guarantees any mark-to market losses incurred by any other counterparty clearing or dealing member(s), and up to a pre-agreed maximum amount. With this guarantee fund, FMDQ Clear can significantly improve access to a breadth of financial products such as interest rate and currency derivatives, and repurchase agreements (repos), especially for smaller dealing members who may have been previously excluded because of perceived counterparty credit risk.
A joint Frontclear Technical Assistance Programme (FTAP) project explored the feasibility of establishing clearing infrastructure in Nigeria as well as the most suitable design of such infrastructure for the Nigerian market. This effort was made possible with the support and input from key Nigerian financial services regulators, including the Securities and Exchange Commission, Nigeria (SEC) and the Central Bank of Nigeria (CBN), as well as the local banking industry. FMDQ Clear participants will have access to further Technical Assistance provided by Frontclear as needed, including trainings on repo accounting and margining, amongst others.
FMDQ Clear, which will be the first of such infrastructure in Africa, with a third-party settlement guarantee arrangement that improves on settlement finality, is positioned to becoming a world-class central clearing house, with robust risk waterfall supported by settlement guarantee fund, and strong governance and risk frameworks to clear products in the cash, repos and derivatives markets, and is exemplary of Frontclear’s development impact rationale: catalyzing transactions that support healthy money markets and stable financial systems. The establishment of this clearing infrastructure will greatly contribute to making the Nigerian interbank market globally competitive, operationally excellent, liquid and diverse, in line with FMDQ Group’s GOLD Agenda for the transformation of the Nigerian financial markets, as participating clearing and dealing members will have expanded access and in turn, be better able to serve the needs of their client base and the real economy.
“In our stride to position our markets on the path of increased liquidity and global competitiveness, the FMDQ-Frontclear guarantee fund initiative is a landmark achievement positioned to engender market integrity, which will bolster liquidity and financial system stability in the Nigerian economy.” Bola Onadele. Koko, Managing Director/Chief Executive Officer, FMDQ Group