The die is cast in leveraging derivatives to support the growth of the Nigerian economy and boost market investment, writes EHIME ALEX
Market data, as well as digital technology, is key to leveraging the Exchange Traded Derivatives, stakeholders re-echoed at the 2021 Market Data Workshop organised by the Nigerian Exchange Limited.
The workshop, themed ‘How Market Data powers investment strategies using Derivative Products’, was used to share thoughts to improve understanding of market data, as Nigeria becomes the first country in West Africa to launch ETDs.
As a multi-asset exchange hub, NGX had, in June 2021, received the approval of the Securities and Exchange Commission for seven derivatives contracts. Access Bank Stock Futures, Dangote Cement Stock Futures, Guaranty Trust Bank Stock Futures, MTN Nigeria Communications Stock Futures, Zenith Bank Stock Futures, NGX 30 Index Futures, and NGX Pension Index Futures made the list.
“The launch of the derivatives market aligns with our commitment to build a market that thrives on innovation and responds to the needs of stakeholders in accessing and using capital,” said the Chief Executive Officer, NGX, Mr Temi Popoola.
Growth of Nigeria’s capital market
According to Bloomberg, the Nigerian equity index is the world leader among the 93 stock indices the company tracked in 2020. The country’s domestic bourse had closed in December last year with 50 per cent gain at 40,270.7 points, the most since December 2007.
As the challenging macroeconomic landscape impacted performance of the equities market, the NGX All-Share Index posted a negative return of -5.87 per cent in the first half of 2021, PricewaterhouseCoopers reported recently. However, market activity on Tuesday, November 9, showed that the NGX ASI largely stood at 43,730.55 points.
With the growth recorded in the second quarter of 2021, Nigeria marked three consecutive quarters of economic growth. Real Gross Domestic Product grew Year-on-Year by 5.0 per cent in Q2 2021, according to the National Bureau of Statistics.
Understanding the derivatives market
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset or group of assets, Its commonly underlying instruments include bonds, commodities, currencies, interest rates, market indices and stocks, NGX stated.
Derivatives as hedge funds
According to the NGX, the basic principle behind a derivative contract is to earn profit by speculating on the value of the underlying asset at a future date. As such, derivatives are used as a risk management instrument and are suited for professional and private investors, who wish to hedge an open position or gain exposure to assets and markets without necessarily holding the underlying assets.
“NGX is excited about the prospects of deepening Africa’s position in the global financial markets through ETDs, as well as enhancing liquidity and mitigating against price, duration and other financial risks that may arise from sophisticated financial transactions,” Popoola also stated.
The market plays a crucial role of price discovery, market completeness, risk management and market efficiency. The ETDs are also expected to attract foreign capital flow, reduce cost of capital and deepen the market when introduced.
NGX is introducing derivatives to hedge against risk in the capital market, Group Head, Data Excellence at Reliance Infosystems, Eniola Joseph, said while explaining how to unlock the potential in data as an innovation driver in the financial market, at the NGX workshop. “The innovations driving the market include fixed trading, ETFs, bonds, digital currency and derivatives.”
Global derivatives market
The gross market value of over-the-counter derivatives increased by $300bn to $15.8tn during the second half of 2020, a BIS statistics, compiled in conjunction with central banks and other national authorities, has shown.
The global derivatives market had grown tremendously in the last two decades, despite the economic crisis in 2008. The NGX CEO attributed this feat to rapid development of digital technology in finance along with innovation, financial engineering and regulatory influence.
According to Popoola, data from the World Federation of Exchanges shows that the global derivative market saw a 40.4 per cent increase in trading volume in 2020, more than three times larger in 2019 where the market witnessed 11.4 per cent growth, the highest seen in the last 15 years. “The growth is attributed to the increasing need of risk management under the heightened level of uncertainty and volatility produced by the Coronavirus Disease.”
Explaining that trading activity by asset classes saw the highest number of growth, he said, “To deliver maximum benefit to users and the economy, the derivatives market must meet three prerequisites.”
The derivatives trading requirements must be safe, the market must be innovative and efficient, Popoola said. The market includes speculators, hedgers and arbitrageurs, Head, Market Services at NGX, Olufemi Balogun, added.
Derivatives is believed to play a significant role in improving the financial market’s efficiency, the CEO, InfoWARE, Mr Uwa Agbonile, said.
As per using derivatives to bring about two million retail investors into the Nigerian capital market, Agbonile added.
Hope for NGX
Digital acceleration, managing risk, transformative technology and banking on change are underpinning everything that is going to be happening in the financial sector in the coming years, participants echoed at this year’s Sibos Conference.
“On the domestic front, macroeconomic signals would be key in shaping the direction of the market, especially against the backdrop of the negative stock market returns in the first half of the year. In the equities market, activities by domestic investors would also play a major role, with foreign capital importation down in the first half of the year,” PwC stated in its report.
Answering question on how using market data can help in hedging against risk, the Chief Operating Officer, NG Clearing, Mr Ayokunle Adaralegbe, said, “Data is our oil. It is central to what we do.”
Agbonile also contributed that technology was necessary to mitigate risk in derivatives trading. “It is a multi-facet approach one has to use in mitigating risk, and all of it depends on market data. Risk is really important, especially when it comes to this derivatives ecosystem.”
