FMDQ says market development for derivatives nears completion

FMDQ Securities Exchange Limited has revealed that the implementation of its derivatives market development project on its platform is nearing completion.

The exchange disclosed this to capital market correspondents during its Academy Derivatives Market Webinar series themed; Understanding Exchange Traded Derivatives Market which was held in Lagos on Tuesday.

An exchange traded derivative is a financial contract that is listed and trades on a regulated exchange and have become increasingly popular because of the advantages they have over over-the-counter (OTC) derivatives, such as standardization, liquidity, and elimination of default risk.

Speaking during the event, the Vice President, Market Architecture at the FMDQ, Ms. Jumoke Olaniyan, said the project started about two and half years ago as the exchange saw the need to introduce derivatives into the capital market.

Olaniyan noted that exchange traded derivatives can be used to hedge exposure or speculate on a wide range of financial assets like commodities, equities, currencies, and even interest rates while 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 said with the introduction of derivatives, the government could leverage the products to hedge against 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 9 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 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.

Also commenting, the Group Head, Derivatives Market Group, FMDQ, Oluwaseun Afolabi, noted that with the introduction of the derivatives market development project, there will be an increased participation by local and foreign investors and market 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”, he said.