Developing inclusive money markets..

Case study

Frontclear, founded in 2015 by Cardano Development, focuses on building more stable money markets through inclusive interbank markets in developing countries where these markets are often fragmented, illiquid and lack sufficient legal and regulatory assurances.

By providing local banks with guarantees to cover counterparty credit and legal risks, the Amsterdam-based company provides access to global and local interbank markets. This, in turn, allows domestic financial institutions to make more efficient use of their local currency assets, to access local and international financing and to manage their risks more efficiently.

This lowers banks’ cost of capital and puts them in a position from where they can increase their lending to local businesses and at more favourable terms and conditions. An open, active interbank and money market is also a prerequisite for an effective monetary policy that can influence domestic lending.

Combining guarantees and market shaping

The company not only covers credit risks for investors but also offsets market, legal and operational risks. This includes providing credit guarantees for local banks in emerging and frontier markets, which cover a counterparty bank’s credit risk. The guarantee covers mostly Repurchase Agreements or repo’s (a short-term secured loan) and derivative transactions, including forward, FX and cross-currency swaps and securities financing transactions. These agreements are usually conducted against local currency domestically issued collateral. In case a local bank defaults, Frontclear guarantees repayment to investors on any remaining exposure.

It may take many years – eight to ten – to transform a fledging money market into a mature, inclusive market. That is why Frontclear is combining its guarantees with a strategy to shape the market. This is not just a supporting activity; it is central to Frontclear’s strategy.

Removing structural barriers by strengthening the legal and regulatory, knowledge and financial infrastructure frameworks can accelerate market development.

Market development takes centre stage

For each phase in creating stable and inclusive money markets, Frontclear offers the appropriate market-shaping support through its Frontclear Technical Assistance Programme (FTAP).

The programme offers a combination of local capacity-building activities, regulatory and infrastructure support to banks and regulators. It has built its own online training portal called the Frontclear Academy and the Money Market Diagnostic Framework Portal. This tool offers local regulators a comprehensive analysis of current market development and structured recommendations towards market development. In 2020, the FTAP disbursed $413K in funding, reflecting the importance of these activities. Overall, it has conducted 49 projects in 23 countries globally, including 9 in Africa.

From creating access to inclusive markets Especially in the first two to three years of opening and entering a market, Frontclear focuses on creating access and knowledge. It identifies barriers, offers basic training, reviews the legal and regulatory framework, and launches model transactions, typically still cross-border transactions. In the next three years, attention shifts to advanced training, legal and regulatory reform, and market infrastructure feasibility studies. The market is ready for domestic and multi-party guarantees. In the final phase, more advanced guarantees and central clearing are introduced. FTAP provides further training and advice for legal reforms and putting market infrastructure in place as more and more local and international banks participate in the inter-bank and money market.

Playing the long game

Knowing how to measure the tangible quantitative impacts of market development is still in its infancy. Nevertheless, evidence of an increase in investable and more efficient local financial markets is building, albeit still at a relatively early stage.

Although Frontclear is still a small player in the world of development finance, it has clearly shown its ability to close transactions and successfully develop local money markets in emerging and developing countries since its foundation seven years ago.

It reached a critical milestone in 2020 when the company was financially breaking even, with a net income of USD800K on the back of a higher volume in transactions and lower financing costs provided by a second funding round in December 2019. From its foundation in 2015 until 2020, Frontclear mobilised more than USD1 billion in funding across 15 countries, on the back of USD633 million in guarantees. It worked with 46 different local banks and 14 global and regional counterparties.

Frontclear is funded by a number of European development finance institutions and governments, including the European Bank for Reconstruction and Development (EBRD), Dutch entrepreneurial development bank FMO, Agence Française de Développement (AFD), Cardano Development, FSD Africa Investments (FSDAi), Proparco, The Currency Exchange Fund (TCX), the UK’s Foreign, Commonwealth & Development Office (FCDO), the German Ministry of Development Cooperation (BMZ). Frontclear’s guarantees are counter-guaranteed by KfW, a German development Bank.

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