Photograph — Naija247News

Nigeria’s market regulator is turning attention to the development of an efficient derivatives trading market, which it outlines as one of its major objectives for the year.

Belonging to the realm of advanced investing and found in major markets across the world, derivatives are financial instruments whose values are reliant upon or derived from an underlying asset or group of assets.

Commonly used derivatives include future contracts, forward contracts, options, swaps, and warrants. They are based on a wide variety of transactions and can be based on a range of assets such as commodities (such as oil, gasoline, or gold), currencies, stocks, bonds, interest rates as well as treasury bills yield.

Derivatives are investable products which according to Mary Uduk, Acting Director-General of the Securities and Exchange Commission (SEC), are capable of boosting liquidity in the capital market.

Stating that it was high time the SEC introduced it in the local capital markets, the executive explained that derivatives are not new as they are currently traded in all the big markets around the world. They are used in risk management and as a hedge while trading in other securities.

“Now, we want to introduce exchange-traded derivatives so that people can now hedge their positions in the market,” Uduk was quoted as saying on Monday, January 6, 2020. “The number one advantage apart from risk management is that it gives traders and investors more instruments to invest in.”

Although derivatives are currently being traded in Nigeria’s capital markets, Uduk said that it was only over-the-counter and often conducted between “knowledgeable parties” who are able to protect themselves.

“The OTC transactions are just between one party and the other. So, the two counterparties meet, agree and design contracts as it suits them,” Uduk added. But for derivatives to be traded on the exchange, the SEC has rolled out a set of rules that puts in place a very robust risk management framework.

Apart from the registration requirements, the rules cover the derivatives contract and the participants in the derivatives market. The SEC has also specified the risk management framework it expects every participant in the market to have.

Speaking further, Uduk revealed that derivatives were originally part of the initiatives of the 10-year capital market master plan in 2019 which the commission had made a lot of effort into implementing some of them so far.

Similarly, the Nigerian Stock Exchange (NSE) last August entered a partnership with American investment banking giant, JP Morgan Chase to promote the development of derivatives and facilitate in-depth capacity building program on the market.

Other necessary requirements are expected to be put in place by the commission this year such as derivatives trading and strengthening the stockbroking segment of the market.

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