By Peter Egwuatu
FMDQ Securities Exchange Limited has disclosed that the federal government could leverage derivative product to hedge against crude oil price volatility, just as the global gross market value of Over the Counter, OTC derivative market hits $15.5 trillion in first half 2020, H1’20.
FMDQ Securities stated this at the one day virtual workshop for capital market correspondents on Tuesday with the theme” Understanding Exchange Traded Derivatives Market”.
The Exchange noted that the implementation of its derivative products which was development project on its platform is at the conclusion stage.
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 at the workshop, the Vice President, Market Architecture at the FMDQ, 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 said ” 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.”
According to her” 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.”