By Chinwendu Obienyi
Financial derivatives are financial instruments popularly used to reduce or hedge risks and are also cover downside risks where large exposures exist in a portfolio long on stocks.
It is believed that a well-developed derivatives market in the Nigerian capital market will undoubtedly support the growth of the economy and the stock market as a whole.
This is because market players recognise that derivatives are critical in the development and growth of the economy through its crucial role of price discovery, market completeness, risk management and market efficiency. Furthermore, it is expected that it will attract foreign capital flow, reduce cost of capital and deepen the market when introduced. The common underlying instruments include bonds, commodities, currencies, interest rates, market indices and stocks as the basic principle behind a derivative contract is to earn profits by speculating on the value of the underlying asset at a future date.
As such, derivatives are used as risk management instruments, and are suited for both professional and private investors who wish to hedge an open position or gain exposure to assets and markets without necessarily holding the underlying assets. ETDs are variants of derivatives traded on an organised securities exchange as against those other derivatives traded through an informal over-the-counter (OTC) market.
As the Nigerian Exchange Limited (NGX) inches closer to the launch of Exchange Traded Derivatives (ETDs) in Nigeria, it continues to prioritise market awareness on trading ETDs on NGX in collaboration with NG Clearing (NGCL). Through a host of engagement sessions with capital market stakeholders, NGX has worked assiduously to build a strong infrastructure to support a standardized ETDs market.
In a matter of days, the exchange will host the 6th edition of its Market Data Workshop with the theme, How Market Data Powers Investment Strategies Using Derivatives Products. The webinar scheduled to hold on Wednesday, 3 November 2021, will facilitate open discussions on structured market products tied to derivatives, Fixed Income (FI) and Exchange Traded Funds (ETFs), as well as provide insights on the importance and applicability of market data as an integral ingredient for data solutions. It is worthy to note that the exchange began its journey to launching ETDs in 2014 with a feasibility study which showed that the Nigerian capital market is indeed ready for the more sophisticated investment products ETDs will introduce. Since then, several milestones have been achieved including the ‘Approval-in-principle’ from the Securities and Exchange Commission making NGCL the premier Central Counterparty Clearing House (CCP) in Nigeria.
Recently, NGX announced that it received approval for seven derivatives contracts from the Securities and Exchange Commission (SEC). The approved contracts are Access Bank Plc Stock Futures, Dangote Cement Plc Stock Futures, Guaran-ty Trust Bank Plc Stock Futures, MTN Nigeria Communications Plc Stock Futures, Zenith Bank Plc Stock Futures, NGX 30 Index Futures and NGX Pension Index Futures.
Speaking on the readiness of NGX to launch derivatives Divisional Head, Trading Business, NGX, Jude Chiemeka, highlighted three main elements critical to the success of any derivatives market and these include market efficiency and integrity, financial safety and integrity, and customer protection (fair treatment of customers).
In light of these, “The Exchange trading system, X-Stream has been configured to trade derivatives products and there are rules governing order priority. Also, the Exchange has a robust market surveillance system – SMART – to monitor the market on a regular basis to ensure market integrity. Furthermore, being the first line of contact for investors in the capital market, NGX is focused on educating market participants through workshops, webinars and conferences which will continue pre and post-product launch,” Chiemeka stated.
The derivatives market continues to be the largest single segment of the global financial market and has been estimated to be more than five times larger than global equity and bond markets.