Regulators Must Maintain A High Level Of Vigilance-CBN Gov’s Address



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Sanusi, Others, at FMDQ - 1
L – R: Aigboje Aig-Imoukhuede, MD/CEO of Access Bank and Chairman of Financial Markets Dealers Quotations (FMDQ) OTC Plc; Arunma Oteh, DG, Securities and Exchange Commission; Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria; Bola Onadele Koko, MD/CEO, FMDQ OTC; and Oscar Onyema, DG, Nigerian Stock Exchange at the launch of the FMDQ OTC Plc in Lagos … Thursday.

Sanusi Lamido Sanusi, Governor,Central Bank Of Nigeria’s Keynote Address delivered at the official launch of FMDQ OTC PLC, on Thursday, 7th November, 2013, at the Shell Nigeria Hall, Muson Center, Onikan, Lagos

..I am pleased to be here with you, and wish to thank the Board and Management of the Financial Markets Dealers Quotations (FMDQ) OTC PLC for inviting me to deliver the keynote address on this occasion of the official launch of the FMDQ OTC platform. I appreciate the honour given to me to be part of this important occasion that is meant to chart a course for the further deepening of Nigeria’s financial markets and supporting the Nigerian economy for growth and development.
2. The efforts of the Financial Markets Dealers Association (FMDA), a professional body for banks, discount houses and other relevant financial institutions, in fostering financial markets development in Nigeria is commendable and has complemented the efforts of government and regulatory authorities. The launch of the FMDQ OTC PLC is yet another indication of the association’s persistence and quest to play a catalytic role in the development of the Nigerian financial markets, and I commend the association for this initiative aimed at extending the frontiers of the Nigerian financial markets.
3. The importance of the launch of the FMDQ OTC is anchored on the complementary role of bringing the activities of financial securities transactions outside of the official window under the regulatory purview. The activities of the FMDQ is expected to complement existing securities exchanges and provide the governments, issuers and investors, both globally and domestically with world class market governance for capital transfers. FMDQ will provide a centralised governing and information disseminating platform where the interest of operators and investors can integrate.
4. This is expected to bring about increased liquidity in the instruments of unlisted securities, increased attraction and flow of resources to small and medium-sized enterprises, price discovery and enhanced financial inclusion potentials, amongst others. All these would ultimately lead to a vibrant private sector development and increased contribution to economic activities.
5. Distinguished ladies and gentlemen, I am delighted to note that the primary focus of the FMDQ over-the-counter transactions is on inter-bank markets for funds intermediation, foreign exchange dealings, repurchase transactions and government securities (treasury bills and bonds). I expect that, in the very near future, other instruments would be riding on the back of the achievements that would have been recorded from this undertaking today.
6. You may recall that the National Association of Securities Dealers (NASD) OTC platform has also been established, focusing on unlisted securities of companies. The NASD platform provides for the capital market operators while the FMDQ OTC complements by offering similar opportunities for operators in the money market.
7. To highlight the importance of having an OTC platform which is being , that is provided by the FMDQ being launched today, it is expedient to review some of the developments in the global financial markets.

8. Losses on financial derivatives notably at the AIG, Citigroup and Lehman Brothers were key events that contributed to the financial crisis of 2007 – 2009.
9. As a result, there were calls for increased regulations of the over-the-counter (OTC) markets. In response, more and more rules are being put in place aimed at protecting market participants and promoting fair and organised trading.
10. Consequently, important reforms underway in many markets that will address some of these issues. They include:
• The Establishment of trade repositories – an entity that maintains a centralised electronic record or database of OTC trade data
• Creation of central counterparties to reduce the amount of counterparty risk that market participants are exposed to. This will also help increase financial system stability, reduce price volatility and diminish defaults
• The increasing use of derivatives as a risk management tool. Derivatives are widely appreciated for their utility as risk management products. The value of derivatives have therefore grown in many developed markets for example in the US, annual derivatives trade is approximately 10% of GDP
10. However, for them to be embraced across all markets, some of the key issues facing OTC derivatives need to be addressed. These challenges include absence of standardised products & accounting treatment; lack of transparency of market data, and opaque clearing arrangements, amongst others. With some of the more sophisticated/complex derivative products, there are also challenges with education and understanding of both market participants and the general public.
11. Yet, regulators must maintain a high level of vigilance as can be seen from the incidence of abuse in other jurisdictions
The governance arrangements of financial markets and their support infrastructure have been heightened in recent times in the light of more recent events such as the LIBOR crisis. This brought to light the fact that even well-established indices could be manipulated by players in the financial markets. The fallout of this include such practices as the miss-selling of hedging instruments, and the imposition of Major fines on banks engaged in those practices.
12. At the CBN our vision is to become the model central bank, and as the lead agency driving the implementation of FSS 2020, the CBN is keen to see that the strategic objectives are achieved. Of immediate relevance is the objective that relates to the strengthening and deepening of the domestic financial markets – money, bond, currency and derivatives.
13. In order to improve on the governance of money market operations, the CBN executed the Nigerian Master Repo Agreement (NMRA) – an adaptation of Global Master Repo Agreement (GMRA) with banks and discount houses accessing funds at its repo window. This has motivated the banks and discount houses to adopt the same standards in their inter-bank operations. The inter-bank interest rate benchmark (NIBOR) definitely remains an area for development. FMDQ is expected to look at this in light of IOSCO’s standards on benchmarks.
14. The FMDQ should also look at the revival of the Commercial Paper market and its regulation. With FMDQ, a fixed income securities exchange, the registration process is expected to be established to kick-start this segment of the money market which is useful in promoting the culture of companies in the issuance of instruments and securities
15. The FGN bond market must remain liquid and effective to establish a credible risk-free yield curve. Corporate debts should be priced on the back of this curve and such credible price information is key for institutional investors’ efforts in striking the right balance between risk and return
16. The CBN has supported the state bonds by granting liquid asset status to those that met the requirements.
Currently, the CBN has invested in Scriptless Securities Settlement System (S4). This will improve the settlement of transactions to ensure a seamless delivery v. payment (DvP) and delivery-by-value (DvB) to support the expected volumes in the securities trading and repo markets. It is expected that the advent of the FMDQ will increase the velocity of transactions in this segment of the market.
17. The CBN has ensured stability in the spot market in recognition of the absence of liquid hedging products – forwards, futures, swaps and options. The CBN in 2011 issued Guidelines for FX Derivatives and Modalities for CBN FX Forwards and also commenced FX Forwards auctions to support the inter-bank forwards market.
19. In line with the objectives of FSS2020 the CBN is sponsoring a bill for the establishment of an international financial centre. The launch of the FMDQ platform is therefore consistent with other reform initiatives that CBN has initiated to develop Nigeria’s financial markets.
20. CBN has huge expectations of FMDQ to further restructure and give depth to the Nigerian Financial Markets.
The listings and trading of money market instruments and bonds on the same platform presents opportunities for the much desired integration of money and capital markets. To achieve this, it is imperative that domestic markets should become more transparent, liquid and efficient. It is also expected that the activities of FMDQ’s will enable the determination of fair values for other off-the-run securities, as well as those securities which hitherto were infrequently traded.
21. In recognition of the important role to be played by the FMDQ OTC the Central Bank of Nigeria provided the necessary support for its formation. CBN will continue to collaborate with FMDQ on strategic initiatives that will support Global competitiveness, Operational excellence, Liquidity and Diversity (GOLD) of the market. We are also keen to see that FMDQ upholds the highest standards of market governance.
22. I want to further assure you that the CBN would always be prepared to support developmental initiatives that are beneficial to monetary policy objectives and the good of the national economy and its operating agents – the households, intermediaries and firms.
23. I would like to use this opportunity to implore the FMDQ to uphold its commitment to ensure that its operations are continuous and transparent to ensure the flow of liquidity; as well as ensure that appropriate risk management measures and systems are put in place. It should also provide acceptable conditions for the admission of other securities such as commercial papers, banker’s acceptances, negotiable certificates of deposits, etc.; and, foster adherence to rules and regulations by participants at all times in order to maintain and sustain market integrity and confidence.

Thank you for your kind attention.


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