NG Clearing steers clearing, settlement of first Exchange Traded Derivatives in Nigeria

The first-ever exchange-traded-derivatives (ETD) transactions in West Africa were executed on the trading platform of the Nigerian Exchange Limited on Thursday, April 14, 2012 with NG Clearing Limited serving as the Central Counterparty to clear, settle and guarantee the trades.

The first set of transactions were traded by APT Securities and Funds Limited and CardinalStone Securities Limited and Meristem Stockbrokers Limited, in their capacity as pioneer Trading Members with Access Bank and Zenith Bank as the pioneer Clearing Members, respectively. The contracts traded are the NGX30 Futures for June 2022, NGXPENSION for September 2022. Other listed contracts available for trading are NGX30 Futures for September 2022, NGXPENSION for June 2022.

The commencement of exchange traded derivatives in the Nigerian capital market comes after many years of anticipation by stakeholders and is a remarkable step towards the actualization of the Nigerian Capital Market Masterplan. This also comes at a time when economies are trying to grow after the setback of COVID-19 pandemic. This creates an opportunity for market liquidity and capital flows, potentially contributing to Nigeria’s post-covid recovery. Derivatives usher in a new asset class that will offer local and foreign investors new opportunities to hedge against market risks in Nigeria.

Speaking about the commencement of the derivatives market, Tapas Das, MD and CEO of NG Clearing Limited, stated that “The commencement of the exchange-traded-derivatives in Nigeria is a testament to the maturity of our market, a sign that the market has come of age and has transitioned to a new era. The risks that come with the derivatives market will be managed through NG Clearing’s robust technology-enabled risk management framework.”

Regarding the role of NG Clearing, he noted that “NG Clearing’s purpose is to ensure that Nigeria’s derivatives market is safe and stable. We have put in place the infrastructure to achieve this. NG Clearing as a CCP is designed to provide clearing services across multiple asset classes and trading venues. The initial trading venue NG Clearing will be serving is the Nigerian Exchange.” Mr. Das also mentioned that “While we have started with equity index futures, we will subsequently introduce single stock futures, stock options as well as other asset classes, including commodities.”

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Commenting on the launch, the Chief Executive Officer (CEO), NGX, Temi Popoola, commended the efforts of stakeholders who have successfully driven the completion of the Derivatives Market since 2014. “I would like to specially acknowledge the work that was done under the previous management of the Exchange, led by Mr. Oscar N. Onyema OON, whose contributions have 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 best-in-class Central Counterparty, NG Clearing Limited, further engenders confidence in the ETDs market segment amongst market participants, as the clearing infrastructure is capable of reducing systemic risk and enhancing market transparency,” he added.

Following its approval-in-principle in September 2020, the Securities and Exchange Commission (SEC), in June 2021, granted a final approval to NG Clearing as a Central Counterparty to clear, settle, as well as manage collateral and risk associated with derivatives in Nigeria. The SEC also approved 7 derivative contract listings.

During the business launch ceremony of NG Clearing Limited in December 2021, the Director-General of the SEC, Dr. Lamido Yuguda, asserted that having NG Clearing as a CCP to serve the derivatives market is historic for the Nigerian Capital Market. In his words, “the services of NG Clearing will help in deepening the market while placing it on the right path to achieving the required sophistication, depth, and breadth in terms of products and service offerings.”

Being a new asset class, knowledge and practical know-how of derivatives is low in Nigeria. In response to this, NG Clearing and the Nigerian Exchange Limited are committed to continue educating all market participants about derivatives trading, clearing, and settlement. Recently, a series of high-level market sensitization sessions to improve stakeholder knowledge and awareness of the intricacies of derivatives in Nigeria were held by NG Clearing and the Nigerian Exchange and they plan to carry out more sessions in this regard.

What are Derivatives?

A derivative is a contract that derives its values from an agreed-upon underlying asset, index, commodity, or rate. Common underlying assets include stocks, indices, bonds, commodities, currencies, and interest rates.

What a CCP Entails

A central counterparty is a critical financial market infrastructure that facilitates the clearing and settlement of derivatives and other securities as well as the management of counterparty credit risk.

About NG Clearing Limited

NG Clearing Limited (“NG Clearing”) is West Africa’s premier Central Counterparty (CCP) and serves as a market-wide Financial Market Infrastructure (FMI) in Nigeria. The Company was incorporated in May 2016. In September 2020, the Company received an approval-in-principle from the Securities and Exchange Commission (SEC) to provide CCP services in Nigeria, and final approval was issued by the SEC in June 2021. The establishment of NG Clearing is in line with its strategy to support the growth and development of the Nigerian capital market as the “gateway to African Markets”. NG Clearing will position the Nigerian capital market as a leader amongst emerging markets by facilitating greater market transparency, increase trading volumes, and overall improvement in the efficiency and competitiveness of the Nigerian capital market. NG Clearing will also pave the way for the smooth introduction of exchange-traded derivatives and other financial instruments in the market, by delivering best-in-class post-trade services that manage counterparty credit risk and reduce systemic risk in the Nigerian financial system.