NSE plans to launch exchange traded derivatives

In a bid to deepen the Nigerian Stock Exchange and re-position the bourse, the NSE is planning to launch Exchange Traded Derivatives, a move that could have a significant impact on the market. James Stone, former Chairman of the US Commodities Futures Trading Commission, shared insights on the benefits and risks associated with derivative trading in a recent interview with CNBC Africa. Derivatives, he explained, are powerful instruments that can enhance market dynamics by improving price understanding and enabling contingent determinations. However, he cautioned that an excessive use of derivatives could potentially unsettle markets instead of aiding their development, emphasizing the importance of striking a balance in their application. Derivatives, being relatively new in the market, require a gradual introduction to ensure that market participants, particularly less experienced traders, have the opportunity to understand and adapt to this complex financial tool. Stone highlighted that rushing into derivative trading without due preparation could leave the Nigerian market vulnerable to exploitation by more sophisticated players from other markets. Therefore, a cautious and methodical approach to the adoption of derivatives is crucial for the Nigerian market's successful integration into this arena. When it comes to risks associated with derivative trading, Stone outlined several key factors to consider. One significant risk for individual traders, particularly in non-exchange traded derivatives, is the possibility of unfair pricing due to the lack of transparency in setting prices. Additionally, he pointed out the three fundamental risks in derivatives trading: basis risk, counterparty risk, and human error risk. While these risks are inherent to derivative trading, Stone emphasized that with sufficient knowledge and experience, traders can effectively manage and mitigate these challenges. As the Nigerian market embarks on this journey into derivative trading, it is essential for market participants, regulators, and investors to collaborate in fostering a robust and well-regulated derivatives market. By maintaining a balanced and cautious approach, the Nigerian Stock Exchange can leverage the benefits of derivative instruments to enhance market efficiency and deepen liquidity. While the road ahead may be long and challenging, the potential rewards of a thriving derivatives market are well worth the effort and commitment required to navigate this complex financial landscape.