Derivatives are financial market products whose values are derived from one or more underlying assets or sets of assets, which can be bonds, stocks, commodities, precious metals, market indices, interest rates, etc. As a strategic asset class, derivatives present a useful risk management tool required for surviving uncertainties in the financial markets. They play a vital role in the development and growth of an economy by supporting price discovery, competitiveness and market efficiency which helps attract capital flows, reduce cost of capital and deepen the financial markets.

Having conducted a feasibility study towards the introduction of various OTC derivative products, FMDQ has begun rolling out, key interest rate and and currency derivatives into the Nigerian financial markets. There are four main types of derivatives, namely – Swaps, Forwards, Futures, Options.

Naira-Settled OTC FX Futures

The Naira-settled OTC FX Futures product was introduced in 2016, with the Central Bank of Nigeria as the pioneer seller of the OTC FX Futures contracts. The apex bank currently offers non-standardised amounts for different tenors, from one month through to twelve months to Authorised Dealers, who in turn offer same to customers with trade-backed transactions or who trade same with other Authorised Dealers; settling on bespoke maturity dates.

Naira-settled OTC FX Futures are  non-deliverable Forwards (i.e. contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity/settlement date). Upon maturity, both parties are assumed to have transacted at the Spot FX market rate. OTC FX Futures contracts are cash-settled in Naira and the differential between the contract rate and the NAFEX (Nigerian Autonomous Foreign Exchange Fixing) rate on the maturity day determines the settlement amount, i.e. the gain/loss inherent in the contract.