The Nigerian Exchange Limited (NGX) has stated that the global derivatives market is expected to experience significant growth, with a projected increase from $21.98 billion in 2020 to $39.17 billion by 2027, at a compound annual growth rate (CAGR) of 8.6 per cent.
Jude Chiemeka, executive director of capital markets at NGX, made this statement during a virtual workshop on the exchange’s Single Stock Futures product, where he noted that 90 per cent of the world’s 500 largest companies across 26 countries use derivatives as a strategic risk management tool.
According to the NGX, the derivatives market is a key pillar of the global financial system, providing access to price discovery and risk management, as well as greater portfolio diversification and more effective cash management.
Industry analysts define Single stock futures (SSFs) as a type of derivative instrument that allows buyers and sellers to transact on a single stock at a predetermined price and date in the future. This provides investors with several options for leveraging, speculating, hedging, pairs trading, and cash equitisation.
Chiemeka emphasized the importance of derivatives in providing risk protection and facilitating the development of robust and liquid capital markets, which ultimately stimulate economic growth. He stated that product and technology innovations by exchanges, intermediary firms, and other service providers around the world have been essential to the growth of the derivatives market. Chiemeka noted that NGX is dedicated to increasing access to a diverse range of asset classes and building investor confidence in the capital market.
According to Chiemeka, the introduction of the NGX’s Single Stock Futures product reflects the exchange’s commitment to providing a wide range of investment opportunities to investors
On his part, Farooq Oreagba, the managing director and CEO of NG Clearing, discussed the function of Central Counterparties (CCPs) in derivative transactions.
According to Oreagba, CCPs play a vital role in ensuring that all parties involved in a trade fulfill their obligations,adding that CCPs require participants to deposit a margin, which is a form of collateral used to cover potential losses.
Two derivatives experts from East and South Africa shared their experiences during a fireside chat at the event. Justus Ogalo, derivatives manager at the Nairobi Securities Exchange, and Kgabo Molabe, a specialist in structured products at the Johannesburg Stock Exchange, both acknowledged that liquidity was a key challenge facing their respective markets.
They also discussed the importance of investor education and awareness, as well as the need for effective regulation to promote the growth of the derivatives market.
During the workshop, Abdulkadir Abbas, director of registration, exchanges, market infrastructure, and innovation at the Securities and Exchange Commission (SEC), emphasised the need for collaboration and capacity building in order to support the growth of the derivatives market.
Abbas stated that the SEC is actively working with various stakeholders to develop regulations and standards to strengthen the market. He also highlighted the importance of investor education and awareness in promoting the use of derivatives.