FMDQ Securities Exchange Limited will soon launch a standardised market for exchange traded derivatives, a move that will deepen the financial system. FMDQ said the implementation of its derivatives market development project is almost completed with possible launch this year.
As part of its market development mandate, and in furtherance of the enlightenment and capacity building on exchange traded derivatives, FMDQ organised training for capital market correspondents.
The training, under FMDQ Academy Derivatives Market Webinar series was themed: “Understanding exchange traded derivatives market’’.
An exchange traded derivative is a financial contract that is listed and traded on a regulated exchange.
It has become increasingly popular because of its advantages on over-the-counter (OTC) derivative. These advantages included standardisation, liquidity, and elimination of default risk.
Vice President, Market Architecture, FMDQ, Jumoke Olaniyan, said the derivatives project started about two and half years ago as the exchange saw the need to introduce derivatives into the capital market.
She outlined that exchange traded derivatives could be used to hedge exposure or speculate on a wide range of financial assets like commodities, equities, currencies, and even interest rates, adding that the global market is now moving in the direction of derivatives.
She noted that the gross market value of OTC derivatives which provides a measure of amounts at risk, rose from $11.6 trillion to $15.5 trillion during the first half of 2020, led by increases in interest rate derivatives.
She added that with the introduction of derivatives, government could leverage the products to hedge against fluctuation in crude oil prices.
“The exchange derivatives space remains to be tapped by the government. We have a 91 per cent focus on OTC derivatives while it is nine per cent on the part of the exchange-traded derivatives and the globe is now shifting to this aspect due to the fact that it performed impeccably well during the global financial crisis.
“It is this form of exchange that is being implemented by the FMDQ in which we have been working on its implementation status which is now in Phase II.
“Once it is introduced and it takes off, it would present an opportunity for our own government to leverage on traded derivatives and use it to hedge risks. In actual fact, the capital market needs derivatives to hedge against market volatilities,” Olaniyan said.
Group Head, Derivatives Market Group, FMDQ, Oluwaseun Afolabi, noted that with the introduction of the derivatives market, there will be an increased participation by local and foreign investors in Nigerian market as well as increased liquidity.
“Derivatives are needed in the market as it will bring an increase in the secondary market liquidity, efficient capital allocation and risk management, financial system stability, market transparency, market sophistication, human capital development and economic growth,” Afolabi said.