Tunis — The Board of Directors of the African Development Bank (AfDB), approved a US $ 25 million equity investment under its private sector window, on Wednesday in Tunis, to create a ground-breaking fund to develop local currency products. This Currency Exchange (TCX) will be established with a transaction capacity of US $ 1.2 billion.
TCX is a Special Purpose Vehicle (SPV) that will offer its shareholders basic currency and interest rate derivatives in emerging markets. The derivatives will be simple products: forwards, forward rate agreements, and swaps. TCX's most popular product is expected to be the cross-currency interest-rate swap, which could be used by TCX investors, such as Banks, to source local currencies for on-lending where issuing bonds in the local markets is impractical or less cost-effective.
The Bank will play a multiple role in TCX. First, the AfDB will play the role of African regional partner in TCX. Second, the Bank will assist in disseminating information about TCX to other MDBs. Third, and most importantly, as an investor in TCX, the Bank will be in a position to use it as a funding alternative to finance its projects in local currencies.
An investment in TCX will strongly support the Bank's development objectives by providing local entrepreneurs with funding in local currency, thereby eliminating the currency mismatches that are typically created between local-currency revenues and foreign-currency liabilities. Furthermore, TCX's substantial and recurring hedging requirements will help deepen local financial markets and extend yield curves, thus facilitating the introduction of new asset classes.
TCX is also well aligned with the Bank's policies and strategies for financial sector and capital market development. It will be an important instrument in the implementation of the recently approved framework on local currency lending.
TCX will be complementary to commercial sources of local currency hedging as it will offer longer terms than otherwise available. The AfDB will work with TCX to build awareness of the importance of derivative instruments in the development of robust local capital markets. As the premier financial institution on the continent, the Bank is expected to be an important source of deal flow to TCX, which is a critical underpinning of its diversification model.
