OTC Derivatives in African Sovereign and Public-Sector Markets

Introduction

Across Africa, sovereign and public-sector bodies face a persistent gap between the capital and risk-management solutions they need and the channels readily available to deliver them. Governments and state entities are seeking to unlock capital tied up in existing assets, manage currency and interest rate exposure more efficiently, and structure balance sheets in ways that support public-sector operations and monetary objectives.

International appetite for African sovereign and quasi-sovereign risk exists. What is often missing is the legal, documentation and operational infrastructure that connects that appetite to usable solutions. This chapter of the guide examines how that gap is being bridged, the structural innovations that have made certain transactions possible in markets where standard frameworks do not yet apply, and the challenges that remain.

Over-the-counter (OTC) derivatives are already being used for familiar sovereign and public-sector functions, including:

• interest rate and foreign exchange risk management;
• commodity hedging;
• short-term liquidity support; and
• the conversion of the currency or rate profile of liabilities.

They are also being adapted for broader balance-sheet optimisation and asset-based financing. The challenge is that the infrastructure needed to deploy these products is not always available, consistent or sufficiently developed across the relevant markets.

This chapter of the guide focuses on Nigeria, Egypt, Angola, Senegal and Côte d’Ivoire, and on transactions between international counterparties and African sovereign or public-sector bodies rather than broader corporate or interbank activity. South Africa is excluded because its derivatives infrastructure and legal framework are already comparatively advanced.

Channels for international participation

While project finance, syndicated loans and Eurobond issuances all provide means for international capital to reach African sovereigns and public bodies, derivatives let a sovereign manage risk or raise liquidity without issuing new debt or waiting for a bond-market window to open.

A cross-currency swap can convert the currency profile of an existing liability without touching the underlying bond. A repo-style transaction can utilise a securities portfolio for short-term liquidity without a permanent disposal. For a sovereign balancing fiscal constraints, established channels cannot replicate that flexibility.

The most established applications mirror their use in developed markets. Two things stand out:

• deliberate steps by some jurisdictions to establish enabling legal frameworks; and
• the growing willingness of public-sector bodies to use derivatives more strategically, including to mobilise existing assets, manage issuance-related exposures and create financing options when conventional channels are constrained.

That innovation requires capacity building, disciplined risk governance and market knowledge transfer – areas in which multilateral development banks (MDBs) play a central role.

Currency and interest rate hedging

Cross-currency swaps allow a sovereign to convert the currency profile of external debt into its functional currency, while interest rate swaps can convert floating-rate obligations into fixed-rate liabilities and improve budget certainty. These remain the foundational sovereign derivative use cases and are increasingly present, though not yet routine, in the more sophisticated markets covered here.

Angola illustrates the point. Its debut Samurai issue, re-guaranteed by Africa Finance Corporation, gave it access to Japanese yen funding from a deep investor base. Yen proceeds do not match its US dollar revenue and expenditure profile, so a cross-currency swap converts the proceeds and debt service into US dollar equivalents, thereby managing the resulting currency mismatch. Egypt and Côte d’Ivoire have also issued similar bonds in the past year but it is not clear whether cross-currency swaps were used, which may reflect strategies focused on debt-portfolio diversification rather than currency conversion.

Commodity hedging

For commodity-dependent economies, derivatives can protect sovereign revenues or import costs from price volatility. Egypt provides one of the clearest examples among the five markets, having used options and swaps with major international banks to manage oil-price volatility.

Angola and Nigeria face comparable oil-price exposure on the revenue side, although sovereign commodity hedging has been less consistent. Senegal’s emerging oil sector may present a future case for structured commodity-risk management, but it is likely that pricing, credit and market-depth constraints will determine the appropriate solution.

At the project level, hedging is already a familiar bankability tool: lender-driven gold hedging strategies in mining financings, for example, illustrate how commodity derivatives can support debt sizing and revenue predictability even where a broader sovereign hedging market is not yet developed.

Liquidity management – repos

Repo is the most established collateralised financing instrument across the five markets. It allows central banks and sovereigns to raise short-term liquidity against government securities or other high-quality liquid assets while retaining economic exposure to those assets. Central banks in Angola, the West African Economic and Monetary Union (WAEMU) region and Egypt use repo or repo-style operations as part of monetary policy implementation. For sovereigns and public bodies, repo-style structures can also support balance-sheet optimisation by mobilising securities portfolios without permanently disposing of the assets.

Liquidity management – structured and bespoke arrangements

Where public-sector needs do not fit market-standard terms, more structured arrangements have emerged. These transactions may use a sovereign’s high-quality liquid assets or issued securities to access liquidity, manage currency exposure or support debt issuance through cross-border derivative structures. MDBs and international financial institutions are particularly important in this segment because they can accept longer tenors, more tailored settlement mechanics and public-sector approval processes that many commercial counterparties would find difficult to accommodate.

The underlying logic is consistent: an existing or issuable asset position is mobilised to access liquidity or manage exposure on defined terms, with the transaction unwound at maturity. The legal architecture – title transfer, calibrated termination rights, long-dated scheduled maturities and bespoke collateral mechanics – reflects the adaptations required in markets where standard repo arrangements do not fit local market realities. These structures are therefore as much about adapting to the legal and operational infrastructure as they are about pricing market risk.

Where the risk sits: credit exposure and the balance sheet

The structures described in the preceding sections share a feature that is easy to miss when the analysis begins with the instrument rather than the risk. What makes them work, or not, is less about the derivative and more about who can carry the credit exposure it carries.

The exposure these structures leave behind is difficult to lay off. A cross-currency swap with a sovereign of this kind is frequently uncollateralised, or collateralised only one way, because the sovereign cannot or will not post variation margin. The counterparty is then left carrying unmargined credit exposure to the sovereign for the life of the swap. A commercial bank must both price this exposure, through a credit valuation adjustment, and hold capital against it; at sub-investment-grade spreads over a long tenor, that charge is often enough to make the trade uneconomic on a bilateral basis. Where the structure is collateralised instead, as in the repo-style and total-return-swap arrangements described above, the collateral tends to be the sovereign’s own paper. Its value therefore moves with the sovereign’s own credit, and a call for further security can arise just when the sovereign is least able to meet it – a form of wrong-way risk. Either way, the exposure is a concentrated, long-dated claim on the sovereign that has to sit on someone’s balance sheet.

That is largely why the economics of these structures favour multilateral and development-finance institutions over commercial banks. Such institutions are better placed to hold the exposure through the cycle and to absorb the timing mismatch that mark-to-market collateral creates. They can also agree margining on bespoke, negotiated terms suited to what a sovereign counterparty can realistically operate, rather than the daily variation margin that a standardised regime assumes.

The pattern is consistent – where the risk can be moved to a party whose balance sheet and mandate accommodate the exposure, the transaction happens and reaches international investors. Where it cannot, no amount of structuring around the instrument closes the gap. The binding constraint is intermediation, and the instrument is the last step, not the first.

Risks and challenges across jurisdictions

While the covered jurisdictions have taken positive steps towards enabling cross-border derivatives, an international counterparty looking to transact directly, without a local presence or specialised advice, still faces certain hurdles. Legal enforceability, regulatory clarity, collateral mechanics and market infrastructure all vary significantly by jurisdiction, and each of these variables affects how a transaction needs to be structured, priced and documented.

The following sets out what some of those challenges look like on the ground.

Close-out netting

Close-out netting is a core building block for any OTC derivatives market. It allows counterparties to combine all outstanding obligations into a single net amount if one party defaults, directly reducing the regulatory capital a bank must hold against its exposure. Across Egypt, Nigeria, Angola, Senegal and Côte d’Ivoire, the legal enforceability of close-out netting varies considerably, ranging from explicit statutory support to largely untested civil-law frameworks.

Nigeria currently has the clearest statutory framework among the jurisdictions covered. The Companies and Allied Matters Act (CAMA) 2020 explicitly legitimises contractual netting provisions, materially improving legal certainty for international banks. However, transaction-specific analysis is still required, given complex collateral-enforceability rules and public-sector approval mandates.

Angola represents a middle case. It lacks a standalone statutory close-out netting regime. While general civil law principles support basic payment netting outside insolvency, this falls short of the protections that a formal statutory framework would provide.

In Senegal and Côte d’Ivoire, payment netting and contractual set-off are generally supported by civil law principles and freedom of contract, although the position remains largely untested in the derivatives context and public accounting rules may add complexity where the State is a counterparty.

Currency and capital controls

Managing derivative risk also requires reasonably free capital flows and currency stability – conditions that regional markets do not uniformly provide. Foreign exchange controls, approval requirements and documentation obligations in some jurisdictions may restrict the movement of funds associated with derivatives transactions and can reduce market participation and liquidity.

In Côte d’Ivoire, international parties to a derivatives contract requiring inbound and outbound currency flows may be subject to declaration and approval requirements imposed by the Ministry of Finance and the Central Bank of West African States (BCEAO). Interest or sale proceeds must be processed through a licensed intermediary (a local bank) and supported by extensive documentation.

Cross-border and settlement delays

Angolan law recognises derivatives as hedging instruments, but executing cross-currency swaps or bespoke transactions with state entities, such as debt management offices, requires separate regulatory approval. In the absence of a comprehensive derivatives framework, cross-border transactions may be delayed by legal uncertainty surrounding sovereign debt authorisation.

Operational friction further extends settlement timelines across West Africa. In Côte d’Ivoire and Senegal, transactions require local intermediaries, brokers or custodians to facilitate local-currency and securities operations. Local exchange rules limit the speed of these transactions, requiring global counterparties to navigate the narrow operational mandates of regional custodians holding the underlying securities. The Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Act on Security Interests prescribes legal formalities for specified collateral arrangements, which must be taken into account when taking security under derivatives contracts.

Currency volatility

Currency architecture heavily influences a transaction’s risk profile. Nigeria, Egypt and Angola each operate independent floating or tightly managed currencies. Sharp macroeconomic devaluations – the Egyptian pound’s devaluations in 2022 and 2023 being recent examples – can quickly erode the value of locally denominated collateral through exchange-rate movements alone, independently of the counterparty’s underlying credit profile.

By contrast, Senegal and Côte d’Ivoire share the West African CFA franc (XOF), which is pegged to the euro and backed by convertibility arrangements with France. This gives transactions in those markets a materially more predictable currency risk profile.

Valuation

Valuation remains a live issue even where the peg holds. In WAEMU markets, local currency instruments used as collateral trade in thin secondary markets, and in times of financial stress, the gap between screen prices and realisable bids can widen considerably, reflecting delayed pricing data and a narrow pool of local market participants. Inconvertibility and non-transferability risk can quickly reduce the practical liquidity of collateral, forcing institutions to hold local securities until maturity and increasing liquidity and valuation risk.

Sovereign margining and the operational reality

While global derivatives regulation typically exempts sovereign entities and central banks from mandatory margin requirements, this exemption in African markets reflects an operational reality as much as preferential treatment.

Many regional sovereigns lack the automated collateral management infrastructure, specialised systems and immediate reserve liquidity required to process daily margin calls. The rapid collateral transfers that standard margining regimes expect are difficult to reconcile with existing bureaucratic approval timelines and liquidity constraints.

Market participants have generally bridged this gap by replacing standard daily margin exchanges with bespoke credit protections: over-collateralisation, fixed independent amounts and valuation haircuts, alongside carefully drafted cross-default triggers.

The practical path forward

The most persistent hurdle across these jurisdictions is building a clear picture of a specific counterparty’s rights, obligations and legal exposure under fragmented and, in places, still-developing local law. Given that these markets generally respect freedom of contract, parties are typically free to choose English law to govern the International Swaps and Derivatives Association’s ISDA Master Agreement itself, and most cross-border transactions with African sovereign and public-sector counterparties are documented on that basis.

That choice resolves the private contractual questions between the parties, including interpretation, remedies and close-out mechanics, but it does not displace the mandatory regulatory requirements that apply to a sovereign or public-sector counterparty by virtue of its own jurisdiction, such as public debt authorisation, exchange control consent or procurement rules and, in some cases, the risk that a derivatives contract may be invalidated as a gaming contract. Those requirements still need to be identified and satisfied on their own terms, whatever law is chosen to govern the contract.

Solutions and market responses

Regulatory reforms

Some of these challenges are already being addressed through domestic regulatory reform. Nigeria’s CAMA 2020 netting framework is a clear example of legislative modernisation improving the legal basis on which international counterparties can transact. Egypt’s central bank has taken an active role in supporting reform aligned with derivatives and repo market development, reflecting a broader policy direction towards more disciplined market infrastructure. Progress is uneven across the five markets, but the direction of travel in several of them is towards greater legal clarity rather than away from it.

Margin and collateral initiatives

The margin rules prevalent in developed markets are underpinned by liquid and robust OTC derivatives infrastructure. Imposing similar requirements on African counterparties, including sovereigns and state bodies, can create liquidity and operational burdens that are currently impractical in some cases. Apart from South Africa, uncleared margin rules of the type seen in developed markets have not yet become a central feature of derivatives regulation in the covered jurisdictions. The development of such rules is likely to depend on the continued growth and liquidity of local derivatives markets.

International counterparties subject to margin rules and trade-reporting obligations may reasonably require African counterparties to comply with those rules and classify themselves accordingly. Without equivalent and targeted development of the frameworks that support margin, reporting and clearing requirements for international counterparties, onboarding and agreeing an ISDA Master Agreement and Credit Support Annex can take longer and require technical support and further education in some local markets.

Intermediation and risk transfer

Risk-participation structures and synthetic-exposure-transfer arrangements, such as credit-linked notes, allow institutions to redistribute credit exposure to international counterparties without disturbing the underlying sovereign lending relationship. These structures matter because they allow capital to move to where risk appetite exists, even in markets where the legal and operational infrastructure for a commercial bank to transact directly with the sovereign is not yet fully developed.

The same structures also move exposure a bank already holds. Where the counterparty credit charge on a long-dated sovereign swap becomes too costly to carry, the bank can novate it to a development-finance institution, which steps into its place as the sovereign’s counterparty for the remaining life of the trade, or achieve the same relief synthetically by keeping the swap and passing on the credit risk. These are capital-relief trades: the bank exits, the sovereign keeps its hedge, and the exposure moves to a balance sheet better able to carry it.

A novation is not only a balance-sheet exercise: because it substitutes one counterparty for another, it requires the consent of all three parties and fresh documentation with the sovereign, which for a public-sector counterparty can reintroduce the same authorisation steps as a new trade.

Conclusion

The multifaceted nature of the jurisdictions covered requires bespoke and considered solutions. Sovereigns are increasingly interested in local currency derivative structures that reduce hard-currency liability exposure rather than adding to it. Reliable overnight reference rates, such as Egypt’s CONIA, are essential to domestic interest rate swap markets, and demand for CFA franc, naira and EGP-denominated structures is likely to grow.

The bottleneck is largely one of supply: counterparties willing and able to take on local currency risk need deeper local bond markets and more reliable exit routes before that demand can be met at scale.

Multilateral and regional development finance institutions have played a growing role in making derivatives usable in these markets ahead of full domestic infrastructure being in place. As regulatory and netting reforms progress, technical capacity building and education will remain crucial to ensuring that derivatives are used on sound legal, operational and risk-management foundations, even where local regulatory frameworks are still developing.

That infrastructure gap is also the subject of active institutional attention. The International Swaps and Derivatives Association’s memorandum of understanding with the World Bank Group, announced in July 2026, establishes a framework for co-operation on close-out netting frameworks, derivatives market infrastructure, risk-management practices and technical capacity building across emerging and developing markets. Initiatives of this kind, alongside the continuing work of regional development finance institutions, suggest that the gap between market demand and available infrastructure is increasingly being treated as a solvable, active problem rather than a permanent constraint.

The transactions being executed today across these five markets are the evidence that this gap is closable. How quickly it closes will depend on the continued engagement of the institutions, regulators and practitioners who understand both what these instruments can achieve and the conditions under which they work well.