The Nigerian Stock Exchange (NSE) has concluded arrangements to introduce Exchange Traded Derivatives (ETDs) into the market to expand its various investment instruments.
Speaking at a training on legal and risk aspects of derivatives and central counterparty clearing in Lagos, First NSE’s Vice President, Mr. Abimbola Ogunbanjo, said the Exchange would launch the ETDs into the market later this year.
ETDs are variants of derivatives traded on an organised securities exchange as against those other derivatives traded through informal over-the-counter (OTC) market. Derivatives derive their values from their underlying assets, such as commodities, stocks, bonds, interest rates and currencies as well as other derivatives and indices.
The introduction of ETDs is expected to further enhance the complexity and breadth of the capital market, following the introduction and listing of an Exchange Traded Fund (ETF) in 2011.
Ogunbanjo said the development of new and intricate financial instruments such as ETDs will lead to exponential growth in the frontiers of the financial market.
He noted that derivatives hold great prospects for the market pointing out that with impressive yearly growth of about 24 percent over the last decade and about €457 trillion of notional amount outstanding in 2014, no other class of financial instruments has experienced as much innovation from its embryotic development to a fully developed and respected financial market than derivatives.
“We believe that Nigeria’s ETD initiative will eventually develop into a robust market place that can support our growth ambitions as a nation, using South Africa as an example of Africa’s first derivative market,” Ogunbanjo said.
He said the Exchange has taken a bold step towards providing a strong capacity base in anticipation of the launch of ETDs and to create a viable, efficient, innovative and risk absorbent derivatives market.
According to him, given the derivatives market’s global nature, users can trade around the clock and make use of derivatives that offer exposure to almost any “underlying” asset class across various global markets.
He, however, underscored the importance of effective trading and regulatory frameworks and adequate human capacity, noting that the imperatives for a truly functional derivatives market are safety, effective risk mitigation, innovation and efficiency.
He pointed out that risks, such as counter party risks, operational risks, liquidity risks, systemic and legal risks could be implicit in even the most developed markets citing the global financial crisis between 2007 and 2010 that was mainly fuelled by delinquent underlying assets.
“Such is the attendant risks that may rear its head in a derivatives market which can have far reaching impact on various global markets and economies. It is imperative that we learn from our past mistakes and ensure the proper construct for risk mitigation is adequately addressed via mechanisms like counterparty clearing (CCPs) transactions and their associated default waterfall structure,” Ogunbanjo said.
The NSE had in 2013 invited specialists to conduct feasibility study on the viability of ETDs in the market to lay a workable framework for the new product. Derivatives market is predominantly a professional wholesale market with individuals, corporations, institutions and governments as its main participants.
One derivative transaction may attract diverse levels of professional financial counterparts across the value chain. There are two competing segments in the derivatives market – the off-exchange or over-the-counter (OTC) and the on-exchange segments (ETDs). From a customer perspective in Europe, exchange trading is eight times less expensive than OTC trading.