▪ 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) SECregistered 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.