How NGX’s New Exchange-Traded Derivatives Can Be a Magic Bullet for the Stock Market
The development of the Nigerian capital market crossed a significant Rubicon on the eve of Easter on April 14, 2022, with the launch of the NGX Exchange Traded Derivatives (ETD) market with Equity Index Futures.
Although it has taken so long, analysts say it is better late than never as the launch of the derivative aims to increase the depth and breadth of the Nigerian market, which many believe is too shallow for the size. economy.
With the launch of the derivatives market, NGX listed two equity index futures, NGX 30 index futures and NGX pension index futures, NGX indicated that it will roll out more products derivatives to diversify offerings in the near future, as it hopes to leverage this new asset class as an opportunity for portfolio managers to diversify their portfolios. Unlike exchange traded funds, exchange traded derivatives are imaginary portfolios, whose pricing and performance depend on the underlying assets.
NGX explained that ETDs are standardized, highly regulated and transparent financial contracts, listed and traded on a stock exchange and guaranteed against default through the derivatives exchange’s clearing house.
NGX further explains that the ETD market will complement existing asset classes, provide investors and other market participants with the necessary tools for tactical asset allocation, as well as improve risk and cost management for a effective portfolio management. It will further enhance the participation of domestic and international investors in the Nigerian capital markets, which will positively strengthen the market and support the drive to leverage the capital market as a lever for sustainable economic growth.
This development marked a step towards the Exchange’s dream of expanding the asset classes traded on its platform, with the aim of increasing liquidity and expanding investment opportunities for participants. With the launch of derivative product offerings, investors now have more risk management tools in their investment strategy toolkit. Until now, trading on the local stock exchange was limited to three asset classes: equities, fixed income securities (typically bonds, corporations, and governments), and exchange-traded funds. Stocks are known to dominate market capitalization and indeed account for up to 70% of market capitalization value and over 95% of trading activity. The introduction of derivatives should realign this imbalance.
Prior to its demutualization, the Exchange listed a gold ETF, NewGold, which is an example of a commodity exchange-traded fund. The question that some retail investors keep asking is how does a commodity ETF help an investor, said Isaac Olorunlogbon, CEO of Deep Trust Capital Limited, who said: “Investors who hold ETFs may benefit from price increases on the underlying assets held by the Fund. that tracks the Exchange Index or in the underlying commodities held by the Fund, in the case of commodity EFTs such as NewGold. As gold prices rise, Newgold ETFs can benefit from their exposure to gold through their holdings in the ETF. Interestingly, investors in Newgold’s case have also benefited over time from currency hedging, since gold is priced in foreign currency.
So, although investors in commodity ETFs do not own the commodities directly. By following the evolution of these commodities through their holdings in Funds invested in these commodities, investors have the possibility of profiting from these positive price movements.
NGX Managing Director Mr. Temi Popoola hailed the efforts of stakeholders who have successfully completed the completion of the derivatives market after diligent preparations over the past eight years. “I would like to particularly acknowledge the work that was done under the previous leadership of the Exchange, led by Mr. Oscar Onyema, whose contributions formed the foundation of our current gains and achievements made manifest by the launch of the ETD market. NGX NGX remains committed to building an exchange that can meet the increasingly sophisticated needs of domestic and foreign investors.
“A strong pillar of our strategy is to improve liquidity and expand market capitalization to create value for stakeholders, and the introduction of ETDs is a critical step in the right direction. The platform will play a vital role in broadening and deepening the market, further boosting NGX’s leadership position as Africa’s preferred exchange hub.
NGX added that to promote clearing efficiency, stability and confidence, the Exchange has collaborated with a leading central counterparty (CCP) in Nigeria, NG Clearing Limited, to provide the clearing infrastructure for NGX Derivatives. Market and its clearing members – Access Bank and Zenith. Bank. The ETD market will commence with the trading activities of the first three trading licensees – Cardinalstone Securities Limited, Meristem Securities Limited and APT Securities and Funds Limited – which have been authorized by NGX Regulation Limited to facilitate trading on behalf of investors on NGX Derivatives Market.
The reference to Onyema in the development of financial products on the Nigerian Exchange is quite significant. On April 4, 2011, Onyema assumed the post of Managing Director of the then Nigerian Stock Exchange, following the resolution of the crisis that had engulfed the Stock Exchange at the time. On that day, Onyema opened trading on the Stock Exchange by ringing the bell.
“I didn’t see Nigeria as a place I wanted to come, but when the opportunity presented itself, I thought it gave me a unique opportunity to build a legacy of change, a legacy of transformation, a legacy which positively affects the lives of millions of Nigerian investors,” Onyema said in an interview with this reporter on the 23rd floor of the Nigerian Stock Exchange building in Lagos on November 27, 2013.
When Onyema took over the management of the Nigerian Stock Exchange (now known as the Nigerian Exchange Limited) in 2011, the market was in dire need of guidance and leadership, and Onyema was ready to provide it. As he says, “there is really nothing new under the sun. You just need to replicate everything and make sure everything you do is perfectly suited to the local market.”
A key area with a gaping need was the introduction of products to deepen the market.
“We need to introduce derivatives – options and futures, so that we can benefit from the network effect,” Onyema said in the 2013 interview. investment in financial securities. So if you know you are trading on a company, say Nigerian Breweries and you can take an option contract on it to protect your downside, you would be taking bigger positions in the company.
The benefit will come to a typical investor this way: people’s expectations of how the market or a particular security will perform in the future will always differ and as such there are hardly any two people who will see a title evolve in exactly the same way. This is the basis of option contracts, which creates a margin of mutual benefit for both parties. Thus, in the example given by Onyema, the investor who owns shares of Nigerian Breweries will be ready to enter into an option contract with another investor who expects a rise in the price of the share higher than the his.
If you know you can buy a currency futures contract on the exchange, you are more likely to do your business with confidence if your business involves importing or exporting commodities, as you can hedge your currency risk. .
So, there are a lot of network effects that the exchange can derive from having all five commodities and all of these will lead to the march towards the trillion dollar market cap.
While experts believe the market needs a lot of education to effectively create liquidity from derivatives offerings, especially as some say it portends higher risk, compared to common stocks in species. However, NGX management believes this could be the silver bullet that would boost the market capitalization from just $61 billion to Oscar Onyema’s $1 trillion goal.