When the Bank of Mozambique, surprisingly, decided, through notice no. 5/GBM/2019 of March 22, to prohibit transactions using forward exchange rates, it did so with the clear conviction that there was a need to regulate this market, to define clear rules of action for the various players and price makers, and also to set limits on the pricing of these instruments.
In a way, they were right. No market can function without rules, without control and without clarity. On the part of the regulator, there was also the belief that these operations would be creating additional pressure on our metical, accelerating the devaluation of the currency, because they were taking place in a forward market that could hardly be distinguished from the spot market.
Therefore, the clear lack of transparency was the main reason for this decision which, at the time, created great dissatisfaction on the part of the financial agents and the private sector, who were used to having these solutions to cover their exchange rate risks.
The revolt was that the central bank was limiting the development of the market and leaving companies at the mercy of currency volatility. This lack of proper regulation led to the various variables used to stipulate the future exchange rate being done at the whim of each operator, many ignoring the international rules of market conduct and pricing of these instruments, which are the bible of any financial market.
With the recent approval of Notice no. 1/GBM/2021 of February 4, regarding financial derivatives, it is opportune to put under the spotlight the impacts of these instruments in the Mozambican financial market. Derivatives are negotiated in the form of a contract, which specifies the currencies involved, the amounts, the settlement periods and the form of quotation of the asset on which the respective negotiation takes place.
There is a need for each institution participating in the market to reinforce skills and knowledge to interpret and apply the international financial market standards, because I believe that as we develop we will apply other master agreements that are in use in the international markets.
Thus, whatever the price trend in the spot market may be, the players are guaranteed that on the future date they will have the previously agreed price. Derivatives are classified into Futures contracts, Call and Put Options, Swap operations, among others, each instrument having its own characteristics and specificities.
Like all markets, that of derivatives will also be constituted by regulations and of course some regulatory intervention that will, to a certain extent, determine the way in which the players may behave, and it remains to be seen whether the derivatives market will have a strict control as imposed in the spot market.
If there are no regulatory differences between them, we will probably not have the same scenario experienced in 2019, which forced the central bank to cancel transactions using forward exchange rate. Therefore, the action of the central bank is going to be relevant, not only from the point of supervision and oversight, but above all in its role as a market participant.
I have no doubt that these instruments represent a complex subject, with much still to be studied. But I am also certain that derivatives will, to a certain extent, protect our economic agents against adverse currency and interest rate variations, will allow the transfer of the risks arising from these fluctuations, and, at the same time, will allow all players to have a more predictable liquidity flow and, consequently, better treasury management planning.
At the same time we will also see a considerable increase in the number of trades, thus resulting in greater liquidity in the market. No less important will be the fact that our market will have more financial instruments to offer its clients, especially for large companies and investors that in the mining, oil and gas, and agricultural sectors, among others, were already used to having these instruments for their management.
Finally, a good news that this regulation brings is the need to standardize the contracts between the parties and also the fact that we can use the rules and principles of the International Swaps and Derivatives Association (ISDA), which will promote the confidence of investors, especially foreign investors, because we recognize the internationally accepted legal standards, which will create a more attractive investment environment.
However, there is a need for each institution participating in the market to reinforce skills and knowledge to interpret and apply the international financial market standards, because I believe that as we develop we will apply other master agreements that are in use in the international markets.
