NSE to consider Exchange Traded Derivatives

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.

According to the Nigerian Bourse, the introduction of ETDs was 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.

In a note signed by the Tinuade Awe, General Counsel, Head of Regulation, NSE, it was observed that in the cash markets, investors were typically exposed to asset price risk, adding that in the absence of short selling and the supportive securities lending options, investors were 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 profit, 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.

The equities regulator further observed that the absence of derivatives products contributes to 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, among others.

Therefore, it noted that the draft Derivatives Rules would seek to create a regulatory framework for the purposes mentioned, as well as regulate the activities of the trading members and other market participants in the Exchange Traded Derivatives market.

Consequently, the Nigerian Bourse is proposing rules for The Exchange’s Derivatives Market, whose draft are set forth in eight chapters, which cover various broad areas from Definitions to General Provisions, Membership, Formation of Transactions and Trades, Trading Rules, Default Rules, Listing of Derivatives Products and Complaints and Enforcement.

Thus, the Exchange invites stakeholders participantion in its rule making process by way of reviewing the draft Derivatives Rules and providing comments.

According to the Exchange, participation would help to create public awareness and solicit the public’s feedback on the draft Derivatives Rules; improve the quality of the draft Derivatives Rules and thereby have a robust, well written set of rules; as well as provide an avenue for the exchange of ideas and opinions regarding a new area within the exchange space in Nigeria.