Nigeria has launched the first central counterparty (CCP) clearing system for securities trades in West Africa. This paves the way for exchange-traded derivatives. NG Clearing Limited launched the CCP yesterday, 9 December.

NG Clearing will facilitate the clearing and settlement of exchange-traded derivatives, manage counterparty risk, reduce systemic risk, and promote the safety and integrity of Nigeria’s capital market.

Speakers at the official launch in Lagos included Boss Mustapha, Secretary to the Government of the Federation, who said the new clearing house would open opportunities for investors and help deepen financial inclusion. He assured the launch of the support of the Federal Government under President Muhammadu Buhari.

Zainab Ahmed, Minister for Finance and Economic Planning, said the capital market has a critical role of meeting the infrastructure needs of the nation, including mobilizing medium- to long-term funds crucial to the nation’s economic growth. She said a robust capital market correlates strongly with growth, economic stability and a more competitive economy.

Aisha Ahmad, Deputy Governor, Financial System Stability, Central Bank of Nigeria, CBN, said the new CCP will help strengthen the country’s investment environment through solutions that systematically reduce risks, enhance operating efficiency, and minimize costs for all market participants, thereby contributing to national development. The NG Clearing will also boost clearing and settlement of payment on trades among Africa countries.

Critical market infrastructure

Oscar Onyema, Chairman of NG Clearing, commented yesterday: “I am very glad to be an integral part of the launch of NG Clearing Limited as a central counterparty (CCP) clearing house in Nigeria.

This report in Vanguard news quotes him: “NG Clearing will position the Nigerian capital market as a stable and resilient market that offers local and foreign investors sound opportunities without compromising global standards. It will be playing a key role in the Financial Markets ecosystem in Nigeria, upholding stability and safety of the marketplace, through the efficient and timely settlement of derivative trades.

“With the establishment of NG Clearing as a CCP, the long-awaited dream of having exchange-traded derivatives in our capital market has now become a reality. The NG Clearing dream was borne out of a firm commitment to position the Nigerian capital market as a stable and resilient market that offers local and foreign investors sound opportunities without compromising global standards.

“One of the gaps we identified was the absence of the financial market infrastructure known as a CCP. On this journey, we overcame some interesting challenges. The biggest of which were gaps in legislation. As I have reiterated in earlier engagements, having a CCP is key to the realization of the Nigerian capital market master plan. It opens new doors for all stakeholders, and it will reinforce the existing infrastructure in our markets.”

Why a central counterparty for clearing securities in Nigeria?

Trading standardized derivatives on regulated exchanges through electronic trading platforms using a well capitalized and regulated CCP is the gold standard for market stability. Tapas Das, Managing Director/CEO of NG Clearing, explained that the realization came from the global financial meltdown of 2008: “Erstwhile resilient markets crashed with unprecedented losses. In post-crisis examination aimed at mitigating future occurrence of the crisis, the G20 leaders agreed at the 2009 Pittsburgh summit that all standardized derivatives contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties (CCPs).

“A CCP is a financial institution that takes on counterparty credit risk between parties to a transaction and guarantees the settlement of trades between the parties. The emergence of NG Clearing is not only an indication of our collective growth as a market, but also a marker of the forward-looking intent of the Nigerian capital market.”

Babangida Ibrahim, Chairman, House Committee on Capital Markets, said market stakeholders had been waiting to have exchange-traded derivatives, but had delayed: “We have maintained that without the ideal infrastructure such as a qualified CCP, offering derivatives exposes our market to significant structural risk that could undermine market safety and stability. Also, before now, the legislative and regulatory frameworks for CCPs were not robust enough. Today, however, there is a better legislative and regulatory appreciation and the regulatory frameworks have been expanded to take care of the unique subtleties of derivative trading, clearing, and counterparty risk.”

Otunba Abimbola Ogunbanjo, Chairman NGX Group Plc: “The availability of derivatives as an asset class contributes towards the development of a country by providing links between cash markets, hedgers and speculators. The primary purpose of a derivatives exchange is to provide liquidity and price discovery mechanisms to transfer the underlying risks among players with varying roles in an economy. The experience of emerging markets such as Thailand, Turkey, South Africa, as well as markets like Korea, Malaysia, Brazil and India reveals that innovation and growth in derivatives activity over the past 20 years has yielded substantial benefits in terms of market expansion and overall economic growth.”

Second African CCP onto global stage

NG Clearing joined CCP 12, the Global Association of Central Counterparties, as an observer member on 15 September. Kevin McClear, Chairman of CCP12 and Teo Floor, CEO of CCP12, said: ”We are delighted to welcome the second CCP from Africa as an Observer Member of CCP12. NG Clearing will bring much value to CCP12, and we look forward to a successful collaboration.”

Tapas Das, Chief Executive Officer at NG Clearing, said; “Becoming a member of CCP 12 will provide NG Clearing the opportunity and platform to build and maintain good working relationships with global CCPs and exchange ideas on best practices in our industry. We are indeed very happy to be part of CCP 12.”

NG Clearing with the Nigerian Exchange (NGX) ran stakeholder training sessions from 8-10 November titled “Derivatives Clearing Demystified” for Clearing Members (licensed by the Securities and Exchanges Commission Nigeria) and Trading Licence Holders (licensed by NGX).  Attendees came from 8 prospective TLHs and 2 prospective CMs. This follows previous sensitization and training by NG Clear and NGX, including on 1 September.