NIGERIA Law and Practice Contributed by: Fred Onuobia, Michelle Chikezie, Chima Uzochukwu-Obi and Anita Ebbi, G Elias
3.1.4 Position Limits The Derivatives Trading Rules (paragraph 9) mandate all exchanges to set position limits in order to prevent participants and clients from holding positions large enough to control and/or manipulate the underlying asset. Exchanges are also required to set stringent position limits on participants and clients related to issuers whose securities represent the underlying asset or determine the price of the underlying asset. Additionally, exchanges are required to notify the SEC of prescribed position limits ‒ as well as methodologies and rationale used for determining the limits ‒ and are to monitor compliance with position limits and sanc - tion any defaulting participants. Where a participant or client owns up to 5% or more of total open interest in a particular contract, the exchange is mandated to report such participant or client to the SEC. Further, the FX Derivatives Guidelines (paragraph 3.0) provide that the CBN’s financial policy and regula - tion and banking supervision departments will devel - op detailed prudential guidelines that will include ‒ among other things – spot-hedge position limits in the absence of a developed interbank options mar - ket. Also, the CBN Prudential Guidelines for Deposit Money Banks 2010 (paragraph 3.18) (and a later 2019 exposure draft of revised guidelines) provide that all banks must comply with FX trading position limits as advised by the CBN from time to time. This require - ment is reiterated in the Revised FX Guidelines (para - graph 5.0 (e)). 3.1.5 Reporting First, all exchange-traded derivatives contracts must be pre-approved by the SEC. Additionally, every exchange has reporting obligations to the SEC. Also, participants in the derivatives market (that is, every dealing member and clearing member) are required to disclose their outstanding derivatives exposures to the SEC on a quarterly basis (paragraph 11 of the Derivatives Trading Rules), including such matters as the estimated maximum loss that could be incurred from proprietary outstanding positions and its effect on the financial position of the participant. There are also reporting obligations required to be made by participants in their financial statements as well as disclosures to their clients.
However, as mentioned in 2.2 Swaps and Security- Based Swaps , with regard to OTC derivatives, the Derivatives Trading Rules (paragraph 15) require all participants (dealing members or entities performing clearing services) and other registered capital market operators to report all OTC derivatives transactions to a trade repository or an exchange (as the case may be) in accordance with guidelines to be issued by the SEC from time to time. The report shall contain – among other things ‒ details of the entry into of an agreement or contract for the sale or purchase of a derivatives contract or product, however concluded by the parties and however described. There are also reporting obligations imposed on finan - cial institutions by the CBN. For example, the CBN Guidelines on Liquidity Monitoring Tools 2021 ‒ one of the six guidelines the CBN issued in its adoption of Basel III ‒ provide that reporting banks should include in their reports information on possible cash flows arising from derivatives such as interest rate swaps and options to the extent that their contractual maturi - ties are relevant to the understanding of the cash flow (paragraph 3 (9)). Also, the CBN Guidelines on Lever - age Ratio 2021 (another of such guidelines) provide that the total exposure measure for the leverage ratio shall be computed as the sum of on-balance sheet exposures, derivatives exposures, securities financing transactions exposures and off-balance sheet expo - sures (paragraph 10). Furthermore, the Revised FX Guidelines provide that all foreign exchange transactions completed by authorised dealers must be recorded by the dealers on a processing system and reported to the CBN within ten minutes of the transaction. 3.1.6 Business Conduct In addition to the reporting obligations of the partici - pants in the Nigerian derivatives market, the Deriva - tives Trading Rules (paragraph 12) require participants to have risk management units within their organisa - tions, include a risk management report in their annual financial statements, and have comprehensive risk management frameworks and investment policies for managing derivatives-related risks. The framework must include, at a minimum:
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