By Nkiruka Nnorom
The Nigerian Stock Exchange, NSE, said it would soon introduce guidelines for creation, listing and trading of derivative products on its platform.
The Exchange disclosed this in a notice signed by Tinu Awe, General Counsel/Head Regulation of the NSE. The Exchange said the framework would also regulate the activities of the trading members and other market participants in the Exchange Traded Derivatives market.
According to the Exchange, the plan is in line with its objective of increasing the number of asset classes traded on its platform and in recognition of the need for risk management.
It noted that the creation would facilitate hedging of investment risks and diversification of asset portfolios within the market.
It said: “In the cash markets, investors are typically exposed to asset price risk. In the absence of short selling and the supportive securities lending options, investors are highly susceptible to significant diminution in portfolio values once there is a reversal of a bull trend.
“Thus, investors engage in aggressive efforts to lock-in unrealised profits – thereby resulting in a self-reinforcing market downturn, which negatively impacts investor confidence, and trading volumes. Derivative instruments enable investors to hedge their portfolios against adverse price movements which can result in unexpected losses”.
Highlighting some of the disadvantages of absence of derivatives instruments in a stock market, the Exchange said that the absence contributes to persistent inability of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices and leads to lacklustre activity in the underlying cash market, particularly in times of stressed economic and market conditions.
The NSE added that absence of derivatives products also result in lack of confident market participants and volatility in Exchange’s revenue.
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.