FMDQ Clear Limited, a wholly-owned clearing and settlement subsidiary of FMDQ OTC Securities Exchange, and Frontclear, a Netherlands-based development finance company, are partnering to facilitate a clearing structure to strengthen the over-the-counter, OTC, market liquidity with the support of a settlement guarantee fund.
The collaboration, according to FMDQ, 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 through the International Capital Market Association, ICMA, of which FMDQ is a full member and Frontclear is a long-standing partner.
FMDQ Clear will be backed by Frontclear’s core financial guarantee product, thereby improving the credit worthiness of participating counter-parties and reducing initial set-up costs, FMDQ said in a statement.
“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-to-market losses incurred by any other counter-party 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 counter-party 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,” the statement added.