BY CHARLES ABUEDE
The journey which began in 2014 has become a reality as Access Bank, Zenith Bank, Dangote Cement, Guaranty Trust Holding Company and MTN Nigeria became the first set of stock futures contracts to be traded as Exchange Traded Derivatives (ETDs) in West Africa and on the Nigerian Exchange (NGX) after the successful approval by the Security and Exchange Commission (SEC) in 2021, supported by NG Clearing in the risk management process.
Clifford Akpolo, head, marketing and corporate communications, also revealed that the launch of West Africa’s first Exchange Traded Derivatives (ETDs) market with Equity Index Futures Contracts was consistent with the Exchange’s commitment to developing the Nigerian capital market by providing a market that thrives on innovation and responds to the needs of stakeholders in accessing and using capital.
ETDs are variants of derivatives traded on an organised securities exchange as against those other derivatives traded through informal over-the-counter (OTC) markets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indices, and stocks. Thus, derivatives are financial instruments most popularly used to reduce or hedge risks and are also believed to cover downside risks when large exposure exists in a portfolio long on stocks.
Access, Zenith, GTBank, DangCem, MTN pioneers
The introduction of Access Bank, Zenith Bank, GTCO, MTN Nigeria and Dangote Cement stocks to kickstart the futures has been attributed to the fact that these underlying stock instruments are highly liquid and easily traded, providing a capital-efficient way to gain exposure to underlying assets and creating greater volatility to amplify gains and losses. Also, derivatives allow investors to take advantage of price movements in the underlying assets and consequently serve as a tool for portfolio diversification and the added benefit of short-selling affords users the opportunities to benefit from downward price movements.
Per the launch, Temi Popoola, chief executive officer, NGX, commended the efforts of stakeholders who had successfully driven the completion of the Derivatives Market since 2014.
“I would like to specially acknowledge the work done under the previous management of the Exchange, led by Mr Oscar Onyema, whose contributions formed the foundation of our present gains and accomplishments made manifest through the launch of NGX ETDs market.
“NGX remains committed to building an exchange that can cater to the increasingly sophisticated needs of domestic and foreign investors.
“A strong pillar in our strategy is to enhance liquidity and expand market capitalisation to the end that we create value for stakeholders, and the introduction of ETDs is a critical step in the right direction.
“The platform will play an essential role in broadening and deepening the market, adding new impetus to NGX’s leading position as Africa’s preferred exchange hub.
“Our partnership with the best in class Central Counterparty, NG Clearing Ltd., further engenders confidence in the ETDs market segment amongst market participants, as the clearing infrastructure is capable of reducing systemic risks and enhancing market transparency,” he added.
Also, Tapas Das, chief executive officer of NG Clearing, said, “The launch of the derivatives market in Nigeria is a testament to the maturity of our market, a sign that the market had come of age and was ready to transition into a new era.
“The risks that come with the derivatives market would be managed through NG Clearings’ robust technology-enabled Clearing and Settlement, Collateral Management, and Risk Management offerings, as a critical Central CounterParty (CCP) Financial Market Infrastructure (FMI),” Das stated.
ETDs Market would start with trading activities by the first three trading licence holders – Cardinalstone Securities Limited, Meristem Securities Limited, and APT Securities and Funds Limited, said Akpolo, adding that that these trading licence holders already cleared by NGX Regulation Ltd., would facilitate transactions on behalf of investors on the NGX Derivatives Market.
The launch of the first sets of ETDs would further enhance the participation of domestic and international investors in Nigeria’s financial markets, which would positively impact the performance of the economy.