Ahead of investors’ growing interest in derivatives products, Nigeria’s over-the-counter (OTC) market may be getting close to executing full derivatives market, BusinessDay trend watch has shown.
Though still embedded in the foreign exchange (FX) and unsecured products categories at the FMDQ OTC platform deals in FX and money market derivatives attracted over N5.5 trillion in the 10-month to October.
This development in derivatives market, according to financial analysts, will not only help address investors’ concerns around waters of investable assets in Nigeria’s financial market but will help attract more sophisticated investors to the country.
With the introduction of FX derivatives and money market derivatives at Nigeria’s OTC market, the OTC market turnover has risen from a monthly trading volume of N6.69 trillion as at January 2014 to eight-month high of N80.38 trillion as at October 2014.
Turnover on FX derivatives rose from N464.19 billion in January to N1.08 trillion as at October, while turnover on money market derivatives rose from January low of N10.39 billion to N18.54 billion as at September.
In the 10-month to October, foreign exchange (FX) accounted for N24.04 trillion at the OTC market, while foreign exchange derivatives accounted for N5.04 trillion; treasury bills, N20.84 trillion; FGN bonds, N6.17 trillion; other bonds, N227.194 billion; repurchase agreement/buy backs, N19.15 trillion; unsecured placements/takings, N4.84 trillion; and money market derivatives, N50.82 trillion.
“The readiness and improvement in OTC derivatives trading in the market is a good signal for the local market in terms of depth. Derivatives play a vital role in the development and growth of the market through price discovery and market efficiency, and it also attracts foreign capital flow, reduce cost of capital and deepen the market,” Kayode Omosebi, market analyst at UBA Capital told BusinessDay.
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He said, “The Nigerian market cannot be so deep without hedging mechanism to protect investors, and this is where derivatives come to play. With more activities in this space, our market will become fast, efficient in the transmission of monetary policy and also moderate reactions to monetary policy.”
Data collated from the weekly trade data submissions by FMDQ dealing members represent trades executed between dealing members and clients, and dealing members and the Central Bank of Nigeria (CBN). This is in line with the market’s mandate to provide transparency to the market when it was formally launched on November 7, 2013.
The trading platform is closing-in on achieving N100 trillion in market volume as earlier predicted by analysts, with the latest interest in FX and money market derivatives contributing to this trend.
“Investors, especially foreign investors always complain about the shallowness of our market. They complain of lack of investable assets and as such worry of overheating the market and the economy. This development (introduction of FX and money market derivatives) will fill that gap and attract many sophisticated investors to the country,” said Femi Ademola, head, research and intelligence at BGL Plc, a Lagos-based investment house.
“Although it has its risk and will require tighter regulation, it bodes well for us as a market and could solidify the country as an emerging market,” Ademola added.
