Daily Quotations List (DQL)

Transcription

1 Daily Quotations List (DQL) FMDQ DQL Methodology Version 1.0 January 2014 FMDQ Daily Quotations List (DQL) 1.

2 Contents 1.0 Introduction Valuation of Sovereign Bonds (FGN Bonds) Trading Sovereign Bonds Non Trading Sovereign Bonds Standards Valuation of Non Sovereign Bonds (Agency, State Government, Corporate & Supra National Bonds) Trading Non Sovereign Bonds Non Trading Non Sovereign Bonds Risk Premium Valuation of Treasury Bills & Foreign Exchange (FX) Treasury Bills Foreign Exchange (FX) Standards Money Market Fixings NIBOR, NITTY & NIFEX Definition of Terms and Abbreviations... 6 FMDQ Daily Quotations List (DQL) 2.

3 1.0 Introduction FMDQ OTC PLC (FMDQ) is an over the counter (OTC) securities exchange with a mission to empower the OTC financial markets to be innovative and credible, in support of the Nigerian economy. This mission would be achieved by providing the secondary market with world class market governance and market development service to the benefit of market participants and in support of the objectives of the financial services regulators. FMDQ launched the FMDQ Daily Quotations List (DQL) on November 7, 2013 to upgrade the market transparency in the OTC markets. FMDQ DQL covers USD/Naira products, Federal Government of Nigeria (FGN) bonds, Supra national bonds, Agency bonds, State government bonds, Corporate bonds, Nigerian Treasury bills (T.bills) and other money market instruments e.g. Commercial Papers. The DQL provides closing prices for all products trading and model prices of non trading fixed income securities calculated by applying a derived risk premium on the sovereign risk free yield curve. The DQL also provides market indicative rates/prices for products trading but with low liquidity. FMDQ DQL will equally be the official source for the Nigerian OTC market indexes and fixings, namely the Nigerian Inter bank Offered Rate (NIBOR), Nigerian Inter bank Treasury Bills True Yields (NITTY) and Nigerian Inter bank Foreign Exchange Fixings (NIFEX). Articulated below are the construction rules (assumptions and market standards) applied in the closing prices, model prices and the market indicative rates/prices contained in the FMDQ DQL. FMDQ Daily Quotations List (DQL) 3.

4 2.0 Valuation of Sovereign Bonds (FGN Bonds) 2.1 Trading Sovereign Bonds The closing price of a trading security is the mode of the sample quotes. Where the quotes indicate a dual modal price, the better bid (i.e. the higher of the two quotes) is selected as the closing bid price. The offer price is derived by adding a spread on the bid. 2.2 Non Trading Sovereign Bonds Yields are derived by interpolating for the corresponding Term to Maturities (TTMs) off the FGN bond theoretical spot rate curve. TTMs are derived based on the underlying features of the bond as follows: Bullet Principal Repayment: TTM = Bond Maturity Date Valuation Date Amortising Principal Repayment: TTM = Weighted Average Life 2.3 Standards Benchmark 2Y, 3Y, 5Y, 7Y, 10Y & 20Y *Spread <1Y 3Y >3Y 0.50% 0.15% 0.30% *Above spreads are applied for trading and non trading bonds. 3.0 Valuation of Non Sovereign Bonds (Agency, State Government, & Corporate Supra national Bonds) 3.1 Trading Non Sovereign Bonds Closing prices are derived by taking the mode of the sample of firm bid quotes shown by FMDQ Bond Specialists. Firm quotes are bid prices maintained for at least thirty (30) minutes during trading hours. Where the selection indicates a dual modal price, the better bid (i.e. the higher of the two quotes) is selected as the closing bid price. 3.2 Non Trading Non Sovereign Bonds Non trading Agency, State Government & Corporate bond prices are model prices derived from a modelled yield. The modelled yield is calculated by adding a risk premium to the valuation yield (corresponding TTM yield interpolated off the FGN bond theoretical spot rate curve). This is used to calculate the bond bid price Risk Premium Yields on non sovereign bonds are typically higher than the yields demanded by investors of sovereign bonds due to the higher risks on non sovereign bonds. The methodology appreciates the need to factor a risk premium due to the higher credit and liquidity risks in the calculation of the model prices on bonds. The methodology for the derivation and order of application of risk premium for all model prices of non sovereign bonds is detailed below: First choice: apply risk spread on latest acceptable trade for the respective bonds i.e. determine the spread between the bond yield on the latest acceptable trade and the FGN bond spot rate of comparable TTM. Latest acceptable trades are transactions of N25.00mm minimum trade size for bonds with outstanding values of N20.00bn and above or 0.10% trade size for bonds of outstanding values below N20bn. FMDQ Daily Quotations List (DQL) 4.

5 Second choice: apply risk spread at issuance i.e. determine the spread between the bond yield at issuance and the FGN bond spot rate of comparable TTM. However, where the risk spread at issuance is less than 1% (100 basis points), a base risk premium of 100 basis points is applied. 4.0 Valuation of Treasury Bills & Foreign Exchange (FX) 4.1 Treasury Bills These are closing prices based on a modal selection process (ref sec 2.1) *Bills with seven (7) days to maturity (DTM) are delisted from the T.bills valuation template which implies that the bill has stopped trading on a two way quote basis. **Non trading T.bills (outstanding value less than N50bn) are not listed on the DQL. 4.2 Foreign Exchange (FX) Spot rates are closing rates based on a modal selection process (ref sec 2.1), while FX Forwards closing rates are derived by taking a simple average of the market indicative quotes obtained. 4.3 Standards o Benchmark: Product T.bills FX Forwards Benchmark 1M, 3M, 6M & 12M 7D, 14D, 21D, 1M, 2M, 3M, 6M, 1Y o Spreads: T.bills FX Tenor All Tenors Spot Spread (%) Money Market Money Market and Repo closing rates are derived by taking a simple average of market quotes obtained. 6.0 Fixings NIBOR, NITTY & NIFEX All fixings are derived by sorting quotes obtained from the pre selected reference banks in descending order. Outliers are thereafter eliminated (highest and lowest 20% of quotes) and a simple average of the resultant 60% quote is determined. The result for each fixing is derived in four decimal places. FMDQ Daily Quotations List (DQL) 5.

6 7.0 Definition of Terms and Abbreviations D DQL FGN FX M NIBOR NIFEX NITTY T.bills TTM USD Valuation Yield Weighted Average Life Y Day Daily Quotations list Federal Government of Nigeria Foreign Exchange Month Nigerian Inter bank Offered Rate Nigerian Inter bank Foreign Exchange Fixings Nigerian Inter bank Treasury Bills True Yields Treasury Bills Term to Maturities United State Dollars Valuation yields are derived by interpolating for the corresponding TTMs off the FGN bond theoretical spot rate curve The average number of years for which unpaid principal remains outstanding derived using the amortisation schedule extracted from the bond indenture Year FMDQ Daily Quotations List (DQL) 6.