Exchange Traded Derivates, panacea to boosting liquidity in Nigeria’s stock market

The objective of organised stock exchanges around the world is to provide liquidity which is the lifeblood of financial markets.

The objective of organised stock exchanges around the world is to provide liquidity which is the lifeblood of financial markets.

When the liquidity is high, more investors participate in the stock market and are ready to invest in assets of different risk classes. This is one reason a number of IPOs are floated in the market when the liquidity is high.

Currently, less than 30 per cent of listed equities are actively traded, while the Nigerian Stock Exchange (NSE) offers only basic products and in a bid to deepen the stock market, the nation’s bourse at its 2018 Annual General Meeting (AGM) recently, revealed that it was set to introduce the already heralded Exchange Traded Derivatives (ETDs) in the second half of 2018.

An exchange traded derivative is a financial instrument that trades on a regulated exchange and whose value is based on the value of another asset. They are derivatives that are traded in a regulated fashion and have become increasingly popular because of the advantages they have over over-the- counter (OTC) derivatives, such as standardization, liquidity and elimination of default risk.

It would be recalled that while the NSE was concluding arrangements to introduce the ETDs in 2017, its counterpart, Hanoi Stock Exchange (HSE) ,Vietnam, officially launched its derivatives market with stock futures contracts the first, to begin trading.

According to the HSE, “Derivatives trading was planned several years ago to help draw more investment to Vietnam’s capital markets and broaden the country’s finance industry.

The futures market would initially launch stock index contracts, and when fully operational, more instruments would be introduced and the launch will help attract more foreign investors, institutional investors in particular, and boost market liquidity.” While speaking recently at the NSE’s 57th AGM in Lagos, President, National Council of the Exchange, Abimbola Ogunbanjo revealed that the Exchange has made significant progress in its efforts to establish the first Exchange ETDs market in West Africa as it has achieved a number

of major milestones during the year. These according to him, include successful articulation of enhancements to legal and regulatory frameworks supportive of derivative instruments; drafting of a comprehensive Rulebook and exposure of same to the market and completion of development work on

enhancements to our trading engine. Others include delivery of training programmes tailored to the needs of the variety of professionals across the entire derivatives value chain; widespread stakeholder sensitization efforts to enhance prospective participants’ capacity and awareness; and the development of requisite specifications, pricing, and liquidity enhancement frameworks for the maiden ETDs.
He further said, “We have deployed a new four year corporate strategy that will reposition us as a more investor friendly and customer centric exchange hub in Africa. With this new strategy, we are poised to deliver superior performance for our multifaceted stakeholders especially issuers and investors who continue to access our market to raise and save capital respectively.” According to Ogunbanjo, derivatives are simple tools that allow market participants to efficiently manage their risks and it was this initiative that helped South Africa’s capital inflow and market participants to price, unbundle and transfer risks.

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