The Nigerian Exchange Limited (NGX) formally launched West Africa’s first Exchange Traded Derivatives (ETD) market Wednesday, eight years after stakeholders proposed it.
The idea is a new asset class that will give domestic and international investors new ways to protect themselves against market risks in the country.
ETDs are financial contracts that are standardised, highly regulated, and transparent. They are listed and traded on a securities exchange and are guaranteed against default by the derivatives exchange’s clearinghouse.
It is a contract between two or more parties in which the value of the contract is determined by an agreed-upon underlying financial asset, such as bonds, commodities, currencies, interest rates, market indexes, or stocks.
Speaking at the launch of the platform, Chief Executive Officer (CEO), NGX, Temi Popoola, said the derivatives risk would be managed by NG Clearing Limited, a premier Central Counterparty (CCP) infrastructure capable of reducing systemic risk, alongside Access Bank and Zenith Bank as clearing members.
Popoola said the launch is consistent 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 long-term capital.
According to him, the platform will be critical in widening and deepening the market, bolstering NGX’s leadership position as Africa’s preferred exchange hub.
“The derivatives market will supplement existing asset classes, give investors and other market participants tactical asset allocation tools, and improve risk and cost management for successful portfolio management,” according to the report. It would also increase domestic and international investor engagement in Nigeria’s financial markets, which will have a favorable influence on the economy.”
He disclosed that the ETDs market will commence with trading activities by Cardinal Stone Securities Limited, Meristem Securities Limited and APT Securities and Funds Limited as the first three Trading License Holders, which have been cleared by NGX Regulation Limited to facilitate transactions on behalf of investors on NGX Derivatives Market.
The NGX boss also stated that the launch was executed with the listing of NGX 30 Index Futures and NGX Pension Index Futures, even as more securities are expected to make up the list in the future.
He said: “I want to commend 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 Oscar N. Onyema, whose contributions have formed the foundation of our current 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. Our partnership with best in class Central Counterparty, NG Clearing Limited, further engenders confidence in the ETDs market segment among market participants, as the clearing infrastructure is capable of reducing systemic risk and enhancing market transparency.”
Also speaking at the event, the Chief Executive Officer of NG Clearing, said: “The launch is an indication that the market has come of age and is ready to transit into a new era.
He said the risks that come with the derivatives market would be managed through NG Clearings’ robust technology-enabled clearing and settlement, collateral and risk management offerings as a critical Central Counter Party (CCP) Financial Market infrastructure (FMI).
On how trading in derivatives and the market would accelerate market growth, the Head, Research, FSL Securities, Victor Chiazor, said the introduction of derivatives will greatly impact the market positively, as it will bring significant liquidity to the market.
He also stated that the new platform would help to attract foreign investment, as foreign investors and investment fund managers seem to prefer more sophisticated and financially rewarding investment products like derivatives.
