Home Stock exchange How Financial Derivatives Will Deepen Exchange Trading – The Sun Nigeria

How Financial Derivatives Will Deepen Exchange Trading – The Sun Nigeria


Through Chinwendu Obienyi

Financial derivatives are financial instruments commonly used to reduce or hedge risks and also hedge downside risks when there are significant exposures in a long equity portfolio.

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.

Indeed, market participants recognize that derivatives are essential to the development and growth of the economy thanks to their crucial role in price discovery, market comprehensiveness, risk management and market efficiency. . In addition, it is expected to attract foreign capital inflows, reduce the cost of capital, and deepen the market once introduced. Common underlying instruments include bonds, commodities, currencies, interest rates, market indices and stocks, the basic principle of a derivative contract being to make profits by speculating on value. of the underlying asset at a future date.

As such, derivatives are used as risk management instruments and are suitable for both professional and private investors who wish to hedge an open position or gain exposure to assets and markets without necessarily owning the underlying assets. ETDs are variations of derivatives traded on an organized stock exchange compared to other derivatives traded on an informal over-the-counter (OTC) market.

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As the Nigerian Exchange Limited (NGX) draws closer to launching Exchange Traded Derivatives (ETD) in Nigeria, it continues to prioritize market awareness of ETD trading on NGX in collaboration with NG Clearing (NGCL ). Through a multitude of engagement sessions with capital market participants, NGX has worked diligently to build a solid infrastructure to support a standardized ETD market.

In a few days, the exchange will host the 6th edition of its Market Data Workshop on the topic, How Market Data Fuels Investment Strategies Using Derivatives. The webinar scheduled for Wednesday, November 3, 2021 will facilitate open discussions on structured market products related to derivatives, fixed income (FI) and exchange traded funds (ETF), and provide information on the importance and the applicability of market data. as an integral ingredient of data solutions. It should be noted that the exchange began its journey towards launching ETDs in 2014 with a feasibility study which showed that the Nigerian capital market is indeed ready for the more sophisticated investment products that ETDs will introduce. Since then, several steps have been taken, including the “approval in principle” of the Securities and Exchange Commission, making NGCL the first central counterparty clearing house (CCP) in Nigeria.

Recently, NGX announced that it has received approval of seven derivative 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 NGX’s desire to launch derivatives, Jude Chiemeka, Division Manager, Trading Business, NGX, highlighted three main elements essential to the success of any derivatives market, namely efficiency and integrity. market, financial security 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 and there are rules governing the priority of orders. In addition, the Exchange has a robust market surveillance system – SMART – to monitor the market on a regular basis to ensure market integrity. Additionally, being the first line of contact for investors in the capital market, NGX focuses on educating market participants through workshops, webinars and conferences that will continue before and after the launch of the. product, ”Chiemeka said.

The derivatives market continues to be the largest segment of the global financial market and has been estimated to be more than five times larger than the global equity and bond markets.

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