CBN on operational requirements of the new OTC FX Futures Market

The Central Bank of Nigeria (CBN) has explained that in addition to the requisite Certificate of Capital Importation (CCI), all participating foreign portfolio investors (FPIs) in the over-the-counter (OTC) which takes off today under the new forex policy of the CBN must also present an OTC FX Futures Settlement Advise.

The directive is contained in a circular from the CBN and it is to be issued by the FMDQ which facilitates the externalisation of the settlement amount, which is the differential between the OTC FX Futures and the Nigerian Interbank Foreign Exchange (NIFEX) fixing, on the settlement date of OTC FX Futures Contracts. The circular was signed by S.A. Olih on behalf of the Special Adviser/Head, Financial Markets Department of the apex bank.

In the circular, the CBN warned: “for the avoidance of doubt, requests for repatriation of settlement amount of OTC FX Futures Contracts by FPIs that are not accompanied with the requisite settlement advice form from FMDQ and a CCI should not be processed by any deposit money bank in Nigeria”.

It would be recalled that the CBN Governor, Mr. Godwin Emefiele, introducing the new policy two weeks ago, had explained that part of the objectives of the new framework for the NIFEX market was to discourage people from front-loading or hoarding forex due to uncertainty.

The apex bank had explained that the proposal of the OTC FX Futures is non-deliverable forwards, that is a contract 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 date,  which is the settlement date.

On maturity date, it will be assumed that both parties would have transacted at the spot FX market rate. The party that would have suffered a loss with the spot FX rate will be paid a settlement amount in naira, according to a document on the central bank’s website.

The CBN had also stated that it would kick off the market by acting as the seller of OTC FX Futures contracts for defined tenors that is 1-month, 2-months, 3-months, 6-months, 9-months, 12-months, 18-months and 24-months.