I was jarred out of my temporary writing hiatus earlier today after reading a news report in Bloomberg which quoted the newly appointed CEO of the Nigeria’s Stock Exchange, Oscar Onyema as saying he plans to introduce trading in esoteric securities, including equity options and futures in a couple of years in order to deepen our markets. This on the face of it sounds very good, laudable, and welcome and tickles the soul. However, Mr. Onyema knows more than many of us that before he can venture into this arena, a lot of work needs to be done. We shall soon come to that.
If we’re to go into trading in derivatives, which futures, options and all manner of swaps are, we need to start by doing a serious house-cleaning first. And why is that?
Nigeria’s capital market has been growing in leaps and bounds since the 70s, and we have come a long way from the hey-days of call-over trading, which for some reason I loved as a participant and we’re now digital, technological and faster in trading, settlement, reporting and clearing trades. These are all good. We then have to do some things before Mr. Onyema unleashes derivatives trading on our market, as these instruments are not meant for players who are afraid, meek or ignorant.
We need to ascertain the issues of the strength of the underlying assets on whose backs these derivatives will be priced. Here you don’t own the underlying asset directly, but trade on them indirectly and make prices to buy or deliver at some future date. Are we talking about underlying assets like commodities, stocks, foreign exchange, credit or loan, cocoa, rice, yam and so on? There must be a relationship between the underlying asset I just mentioned and these instruments we want to create. The new instruments can be options, swaps, forward positions, etc. These are very fast-moving and high intensity contract swapping. I know about some of this stuff as a licensed trader in the United States. There are some other Nigerians like Mr. Sola Ojelade CFA who has relocated to Nigeria and who traded as former hedge fund player based in New York. Before we go this route, we need to do the following.
We need to clean the Augean stable in the market and weed out the nefarious and fraudulent players in the market. New capital requirements and I’m not only talking equity capital, but also a continuous running liquid capital which is tied to the amount of exposure and liability brokerages are exposed to. Furthermore, the CBN has to issue new and serious guidelines for margin trading and lending policies for practitioners. Laws must be made to provide for market activities that will include gearing, speculation, hedging and so on. The issues of licensing, education, continuous education, code of conduct including serious disciplinary measures have to be put in place.
Investors who need to be involved in these derivatives have to be very sophisticated, rich, willing and happy to maybe lose tons of money and not cry about it. There will be serious volatility and huge risks and rewards involved here for everybody. I also suppose there will be a separate body, another self reporting organization (SRO) that will be established or willed into creation by the CBN through the Securities & Exchange Commission.
In conclusion, I think the reasons why our market is thin now have been adduced by many people on this forum, and I think Mr. Onyema should call these smart people and seek their advice behind closed doors. Now is not the time for this manner of adventure.
Tayo Shenbanjo MBA CLU
May 19, 2011