In line with its strategic objective to increase the number of asset classes traded on its platform, the Nigerian Stock Exchange (NSE) has revealed plans to introduce Exchange Traded Derivatives (ETDs) in the Nigerian capital market.
Derivative instruments are financial contracts that are dependent mainly on a regulatory framework that supports their enforceability.
The proposal, the NSE said in its notification of the draft rules and invitation for comments signed by its general counsel and head of Regulation, Tinuade Awe, said the NSE seeks to introduce Exchange Traded Derivatives (ETDs) in the Nigerian capital market to boost transparency.
The rules, it said, followed the absence of the requisite framework for the creation, listing, and trading of derivatives products.
“The draft Derivatives Rules seek to create a regulatory framework for the aforementioned purposes. The framework will also regulate the activities of the trading members and other market participants in the Exchange Traded Derivatives market,” the statement added.
The proposed rules for the Exchange’s Derivatives Market, the exchange added, is “in line with its strategic objective to increase the number of asset classes traded on its platform.
“This is in recognition of the need and appetite for these risk management and investment products in order to facilitate hedging of investment risks and diversification of asset portfolios.”
The statement added that an Exchange Traded Derivatives market has become necessary following the realisation that in the cash markets, investors are typically exposed to asset price risk, saying 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,” it added
The absence of derivatives products contributes to the following persistent problems, the NSE stressed, often results in the inability of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices; lacklustre activity in the underlying cash market, particularly in times of stressed economic and market conditions, lack of confident market participants and volatility in Exchange revenues.
The draft Derivatives Rules are set forth in eight chapters, covering various areas such as, Definitions, General Provisions, Membership, Formation of Transactions and Trades, Trading Rules, Default Rules, Listing of Derivatives Products and Complaints and Enforcement.