• Friday, March 29, 2024
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BusinessDay

NSE eyes 2019 for derivatives market takeoff

NSE-outlook

The Nigerian Stock Exchange (NSE) is optimistic that high-geared efforts put in to actualise its equities derivatives market will make it a reality this year.

The Exchange has, for instance, completed required technological enhancements for the launch of the equities derivatives products, while its Rulebook has been created and “is currently undergoing approval process alongside onboarding of dealing members”, said Oscar Onyema, its chief executive officer.

Derivatives are contracts whose values are based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks. An equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset.

Onyema, who cautiously gave the timeline, Monday, at the 2018 Market Recap and 2019 Outlook, told the market community present that the in-house structure that should enable the equities derivatives market take-off is already in place, adding that it remains the Central Counterparty (CCP) clearing house which is very important for efficient equities-derivatives market.

CCP-cleared derivatives are settled daily, which means that gains and losses from a day’s trading are deducted or credited to an investor’s account each day, leading up to the expiry of the contract.

Derivatives traded on the NSE will be cleared by a Central Counterparty (CCP) through a process known as novation. Novation is the replacement of the initial contract between counterparties matched in the trading engine with a new contract between the CCP and the investors, making the CCP the buyer to the seller and the seller to the buyer.
In the wake of increased level of voluntary delisting from the NSE and the bourse’s desire to attract more listing, Onyema said the management and National Council members continue to engage listed companies not to delist.

No fewer than 17 companies earlier listed on the NSE voluntarily delisted between 2002 and 2018, BusinessDay recent check shows. This is in addition to many others that were regulatory-induced or due to their M&A consummation.

“We will continue to ensure listed companies get value. The reality around the world is free entry and free exit. We are trying to work with companies to meet their post-listing rules. Some of the companies delisting are struggling to meet post-listing rules,” Onyema said.

“We engage with them (companies) at a very high level to know whether there are issues they face that we can address. Voluntary delisting is something that Exchanges around the world are continuously addressing because the market is free entry and free exit,” he said.

On the outlook for 2019, Onyema said domestically, the expectation is that market sentiments in the first half (H1) of the year will be driven by uncertainty in oil prices as well as the 2019 general elections.

“Accordingly, we anticipate volatility in equities market in H1’2019, with enhanced stability post-elections. We believe swift approval and implementation of the 2019 budget may have a positive impact on companies’ earnings as well as consumer spending. Therefore, we anticipate a return of listings during the year with an uptick in market activity during the second half (H2) of 2019,” he said.

On demutualisation of the Exchange, the CEO said the Demutualisation Bill which was signed into law has been assented to by the president.

“We are currently working on the final stages of the demutualisation process. The Act has already been gazetted, the copies are available,” he said.

Demutualisation is the process of converting the Nigerian Stock Exchange from an organisation which exists for the benefit of its members to one which is public and investor-owned.

The NSE equity market started last year on a high, with the All Share Index (ASI) reaching a 10-year peak of 45,092.83 in January 2018. This was largely driven by the positive performance of the ASI in 2017 which emerged the best in Africa.

As the market approached the second quarter (Q2), political risks, oil price volatility and rising global yields resulted in bearish sentiments that saw the ASI and equity market capitalisation fall by 17.81 percent and 13.87 percent, respectively, to close at 31,430.50 points and N11.73 trillion.

While listing activity remained relatively low during the year, (one listing and four delistings), equity turnover remained relatively stable, marginally declining by 5.45 percent to N1.20 trillion. Turnover velocity inched up 0.91 percentage points to 10.25 percent. Likewise, the size of volumes traded in the period increased by 0.96 percent to 101.43 billion, with the financial services sector being responsible for the highest traded volume and value.

In the year under review, foreign portfolio investments outpaced domestic participation by 1.73 percent, accounting for 50.87 percent of total transactions, while domestic transactions accounted for 49.13 percent. Within domestic institutional order flow was 56 percent while retail order flow was 44 percent.

Fixed income market capitalisation increased by 11.75 percent to N10.17 trillion in 2018, from N9.10 trillion in 2017. Capital raising on the NSE was dominated by the Federal Government which borrowed N1.16 trillion in a bid to finance fiscal and infrastructure deficits. State governments raised N125.59 billion in new debt capital, while corporates raised a total of N31.47 billion. The market also witnessed the listing of a N100-billion FGN Ijarah Sukuk designed to finance critical road infrastructure across the country.

Iheanyi Nwachukwu