Still on West Africa’s first Exchange Traded Derivatives market

Just last week (Thursday, April 14), Nigerian Exchange Limited (NGX) launched West Africa’s first Exchange Traded Derivatives (ETD) Market with Equity Index Futures Contracts. Derivatives usher in a new asset class that will offer local and foreign investors new opportunities to hedge against market risks in Nigeria. Being a new asset class, knowledge and practical know-how of derivatives is low in Nigeria.

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.

Complementing existing asset classes

The launch of the NGX ETD Market is no doubt in line with the Exchange’s commitment to develop the Nigerian capital market by providing a market that thrives on innovation and responds to the needs of stakeholders in accessing and using capital.

Exchange Traded Derivatives are standardised, highly regulated, and transparent financial contracts listed and traded on a securities exchange, and guaranteed against default through the clearing house of the derivatives exchange.

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 actualisation of the Nigerian Capital Market Masterplan.

It also comes when economies are picking up after the setback of COVID-19 pandemic, which creates an opportunity for market liquidity and capital flows, potentially contributing to Nigeria’s post-Covid-19 recovery.

NGX ETDs market will complement existing asset classes, provide investors and other market players with the necessary tools for tactical asset allocation, as well as improve risk and cost management for effective portfolio management. It will further enhance the participation of domestic and international investors in Nigeria’s financial markets, which will positively impact the performance of the economy.

Pioneer trading and clearing members

The ETDs Market commenced with trading activities by the first three Trading License Holders – Cardinal Stone Securities Limited, Meristem Securities Limited and APT Securities and Funds Limited – who have been cleared by NGX Regulation Limited to facilitate transactions on behalf of investors on NGX Derivatives Market. The pioneer clearing members are Access Bank and Zenith Bank.

Two Equity Index Futures Contracts already listed

The launch of NGX ETD Market saw the listing of two Equity Index Futures Contracts – NGX 30 Index Futures and NGX Pension Index Futures –with more securities to be added in the future.

NG Clearing Limited to provide the clearing infrastructure

To promote clearing efficiency, stability, and confidence, the Exchange has collaborated with a premier Central Counterparty (CCP) in Nigeria, NG Clearing Limited, to provide the clearing infrastructure for NGX Derivatives Market and its clearing members. NG Clearing Limited serves as the Central Counterparty to clear, settle and guarantee the trades.

A central counterparty (CCP) 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.

Read also: Stock market rises further by 0.40%

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.

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.

Stakeholders comments

Temi Popoola, Chief Executive Officer (CEO) of NGX who commended the efforts of stakeholders who have successfully driven the completion of the Derivatives Market since 2014 said: “I would like to specially acknowledge the work that was done under the previous management of the Exchange, led by Oscar N. Onyema, 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”, Popoola said.

Tapas Das, Managing Director and CEO of NG Clearing Limited said: “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”.

“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,” he said regarding the role of NG Clearing.

“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,” Das said.

Lamido Yuguda, Director General of SEC had during the business launch ceremony of NG Clearing Limited in December 2021 noted that having NG Clearing as a CCP to serve the derivatives market is historic for the Nigerian Capital Market.

“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,” he said.

Benefits of exchange-traded derivatives

One of the benefits of Exchange-traded derivatives is its highly liquid. Exchange-traded derivatives have standardised contracts with a transparent price, which enables them to be bought and sold easily. Investors can take advantage of the liquidity by offsetting their contracts when needed. They can do so by selling the current position out in the market or buying another position in the opposite direction. The offsetting transactions can be performed in a matter of seconds without needing any negotiations, making exchange-traded derivatives instruments significantly more liquid.

High liquidity also makes it easier for investors to find other parties to sell to or make bets against. Since more investors are active at the same time, transactions can be completed in a way that minimises value loss.