FMDQ, FMDA urge government, banks to embrace hedging

The FMDQ OTC Securities Exchange and Financial Market Dealers Association of Nigeria (FMDA) have advised the Federal Government, banks and other enterprises to embrace hedging to reduce the risk of exposures to unforeseen circumstances.

Hedging is a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.

Speaking at the financial markets workshop organised by the Swaps and Derivatives Workgroup of the FMDA in Lagos, Managing Director/CEO, FMDQ OTC Securities Exchange, Bola Onadele said that banks can hedge their foreign currency loans to reduce exchange rate risks and improve their operations.

Also, the Chairman, Swaps and Derivatives Workgroup and FMDA President, Samuel Ocheho, said the workshop with theme: Legal Documentation as Driver to introducing New Products and a Healthier Financial Market in Nigeria, was organised by the Swaps and Derivatives Workgroup of the FMDA to sensitize people, members of the FMDA and other market operators on the need for hedging products and proper documentation in the market.

According to Ocheho, FMDA is a partner in progress in developing the Nigerian financial and derivatives market adding that the programme was supported by FMDQ to impact positively on the derivatives market.

The International Swaps and Derivatives Association (ISDA) Africa Chairman, Brett Gallie and Partner at Clifford Chance, Derivatives and Structured Trades, Matthew Grigg were also at the event to support the Nigerian derivatives market.

Speaking further, Onadele said: “The banks that are borrowing dollars when they have to pay back, they have to pay back in dollars. They have to protect themselves.”

“Through hedging. Anyone that takes foreign currency loan should hedge, that is the opportunity the Central Bank of Nigeria (CBN) has provided. The rates are low in dollars, so you are tempted to borrow in dollars at four per cent instead of borrowing in naira at 20 per cent”.

Such loans, he added, could expose the borrower to exchange rate risk if the exchange rate becomes volatile at the period of repayment of the facility.

Continuing, Onadele said that pension fund managers also needed to understand the impact of hedging on their operations, especially as interest rate that was 17 per cent today could suddenly become 11 per cent in the nearest future.

“The CBN brought naira settled OTC FX futures and now everybody is able to hedge and plan. As the commodities market in Nigeria grows, all of us will understand that playing vanilla derivatives is good for risk management. What we are preaching now is plain vanilla derivatives to protect the pension and the price,” he said.

“There is need to have proper documentation for all the products that we are doing in the financial market. In Nigeria, we do not want to lose revenue.

“One way to ensure that our oil price remains high is by creating a hedge product for the oil price. Most governments don’t want to hedge because they believe the price is expensive.

“The level of adoption of hedging in Nigeria is still very low because most people do not understand why they need to hedge. I understand the reason is cost but hedging gives you a better way for planning,” Ocheho said.