Aigboje Aig-Imoukhuede, the outgoing president of the Nigerian Stock Exchange (NSE) has said that plans are underway to introduce exchange-traded derivatives on the NSE. Aig-Imoukhuede said the move is in keeping with the NSE’s vision to become the leading securities exchange in Africa and one of the best exchanges in the world.
He made the pronouncement during his ‘President’s Statement’ on the 2016 Annual Report of the NSE.
He further added, “Affirming our market leader status, the Exchange is on track to launch the first exchange-traded derivatives market in West Africa.This strongly aligns with our strategic objective to facilitate order execution across five asset classes and offers our ever-increasing domestic and global investor base a greater array of products to diversify their portfolios and manage risk.”
A derivative is a financial instrument whose value depends on (is derived from) the value of one or more other instruments. It is usually a contract between two parties, based on securities such as shares, bills, and bonds.
Stakeholders have often lamented the absence of sufficient financial instruments that will help them unlock and capture value from the country’s capital market. They say that this situation, for instance, has made the country’s pension assets to be lopsidedly invested in government securities and equities.
The move to introduce derivatives on the NSE is a great one, said Rasak Ahmed, chief executive officer of CowryWise, a Lagos-based personal finance management platform. Derivatives are important financial instruments, Ahmed said. “To investors, derivatives provide additional tool to manage the risk-return profile of their portfolios.”
Analysts who spoke to BusinessDay on the development, said that the move will help to foster efficiency in the market. They said that enhancing the efficiency of the capital market has a direct bearing on the overall economy, especially through the asset of listed firms and the impact that has on the capital mobilisation.
Austin Ejola, vice president in charge of securities trading at Planet Capital Limited, a Lagos-based investment firm, said that with derivatives, any inefficiency will be corrected timely, as investors look to speculate on price movement (of financial assets) and exploit any mispricing in the market. Derivatives enhance overall market efficiency through asset price discovery, Ahmed said.
As at March 2017, the value of the global derivatives market for futures and options alone stood at USD84.29 trillion. The value of options traded across all markets stood at USD51.11 trillion; the value of futures across all markets stood at USD33.18 trillion, data from the Bank for International Settlements (BIS) has shown.
According to the data released by the BIS, an international financial organisation that seeks to serve central banks in their pursuit of monetary and financial stability, daily average turnover in the futures and options market across all exchanges rose to a 5-month high of USD10.08 trillion in march 2017.
Stakeholders said that the regulators of the Nigerian capital market need to step up and acquire the needed skills and knowledge to be able to regulate creation of, and trading in, derivatives.
“As at today, regulators don’t understand derivatives so they don’t give their approval when any one is created,” said Femi Ademola, executive director in charge of corporate finance and advisory at investment firm, BGL Capital. “This has made us (investment bankers) lazy, so the regulators need to wake up to the reality of modern day capital market regulation.”
Aig-Imukhuede also said in his President’s statement that the NSE has accelerated the timetable for concluding its demutualisation, in order to build on governance, compliance, and efficiency gains it made in recent years.
He noted that the demutualisation process is in keeping with his vision to position the NSE as a beacon of global best practise, given its unique position as Nigeria’s leading capital market platform and the need to fast-track the country’s transition from the status of a frontier market to that of an emerging market.
“The NSE’s current status limits its scope of operations and competitive strength.Our legal structure as a mutual entity increasingly constrains our ability to compete and offer services on par with leading exchanges around the world,” he said.
According to the IMF, demutualisation is the term used to describe the transition from the mutual association of exchange members operating on a not-for-profit basis, to a limited liability, for-profit company, accountable to shareholders. Essentially, demutualisation separates ownership and voting rights from the right of access to trading.
The London Stock Exchange Plc (LSE) and the Johannesburg Stock Exchange Limited (JSE) are examples of demutualised exchanges in the world; the shares of these exchanges are traded on the exchanges.
Members had approved the demutualisation scheme of The Exchange at an extra-ordinary general meeting (EGM) on March 30 2017, at the Stock Exchange House, Lagos.
Oscar Onyema, director-general of the NSE had in the past highlighted the benefits of a demutualised exchange to include facilitating the development of the capital market, improving corporate governance, and increasing availability of resources from capital investments.
The NSE has achieved remarkable success in the areas of market protection and business controls, relationship with critical stakeholders, and policy advocacy, despite its constraining operating environment.
The Exchange has been active publicly and privately, particularly on the need for a reversion to market-friendly foreign exchange policies, Imoukhuede said in the statement, adding that the recent policy introduced by monetary authorities in April 2017 enabling investors to buy and sell foreign exchange at market-determined rates has been well received by domestic and foreign stakeholders in the Nigerian economy.
“The reversion to market-based rate has increased market confidence within and outside Nigeria and NSE All Share Index has soared, outperforming other emerging markets thus far,” he concluded.
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