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 is a long-standing partner.
FMDQ Clear Limited (FMDQ Clear), a wholly-owned clearing and settlement subsidiary of FMDQ OTC Securities Exchange, and Frontclear, a Netherlands-based development finance company, have joined to realise a first in the Nigerian market by facilitating a clearing structure to strengthen the OTC market liquidity.
FMDQ Clear, a SEC-registered 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.
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-tomarket 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.
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 & risk frameworks to clear products in the cash, repos and derivatives markets, and is exemplary of Frontclear’s development impact rationale: catalysing transactions that support healthy money markets and stable financial systems.
According to Mr. Bola Onadele. Koko, MD/CEO, FMDQ Group, “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.”
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. Mr. Philip Buyskes, Chief Executive Officer of Frontclear said “We are excited to play such a catalytic role towards improved liquidity and price discovery in Nigeria. Working with FMDQ is a natural fit.”