The Plain vanilla derivatives are seen to protect pension funds, which stood at N8.23 trillion as at second quarter (Q2) 2018, revenue flows and prices among others, and help to push financial stability.
Plain vanilla is the most basic or standard version of a financial instrument, usually options, bonds, futures and swaps. Derivatives are primarily risked management instruments that enable participants to price and transfer (“hedge”) financial risks such as market/price risk, foreign exchange risk, and interest rate risk.
The size of pension Assets Under Management (AUM) stood at N7.89 trillion as at December 2017. Fixed Income accounts for 85.05 percent of the fund, equity 10.33 percent, and other assets account for 10.18 percent according to a presentation by Bola Onadele Koko, managing director/CEO, FMDQ OTC Securities Exchange.
Top three Pension Fund Administrators (PFAs) account for 53.97 percent of the fund, top five PFAs 66.64 percent, and top 10 PFAs account for 88.0 percent.
According to Koko, inflation risk on held to maturity assets, as well as market risk on trading assets remains a challenge to preventing standard of living risk of contributors at their retirement.
However, he said exchange-traded derivatives market will go a long way in helping PFAs diversify and hedge pension portfolios, as well as create a fair basis for performance monitoring and benchmarking.
“What we are preaching now is plain vanilla derivatives to protect your pension, to protect your price, Nigeria can protect its revenue flow in future by buying futures or put options, come two years’ time, so the understanding of this product is not only for business, even Nigeria today can create system stability by having these products’, said Koko, said.
Koko spoke on ‘The Need for Derivatives in the Nigerian Financial Market and FMDQ’s Product Roll Out in 2019’ at a financial markets workshop organised by the Financial Market Dealers Association (FMDA) especially the Swap and derivative workgroup of the association, in Lagos.
He said the most liquid product in FMDQ market today is the treasury bills trading, adding that the FMDQ will by third quarter of 2019 launch the treasury bills features, while the interest rate features would be introduced into the market by 2020.
Samuel Ocheho, president of FMDA, said the level of adoption of hedging in Nigeria is still very low as most people don’t understand why they need to hedge.
“I understand the reason is cost. God also come to play. Nobody thinks about how to plan, hedging gives you a better way of planning”.
“In Nigeria, we do not want to lose revenue. One way to ensure that our oil price remains high is by creating a hedge product for the oil price”, Ocheho added.
Responding to why adoption of derivatives is low in Nigeria, Koko said, “we have to follow the evolution of the market. There are some basic elements of the market that are needed before you get to the derivative stage. People need appreciation of market risk factors – volatility.
“We need to have a repo market that is supported with collateral management and then the corporate, buying side, the corporate institutions buying foreign exchange must have that appreciation because they are the ones that will demand these products. Pension funds must understand the impact of interest rate that was 17 today and suddenly become 11. The regulators must be comfortable and must carry everybody along, all the stakeholders. Nigeria is getting to that point”.
He noted that Central Bank of Nigeria (CBN) brought naira settled OTC FX futures, which now everybody is able to hedge and plan.
“The CBN sells 12 month dollar naira today. If you want to buy February 2020 and know that that is the rate that will apply, can’t you see that the market is no longer nervous”.
Speaking further to journalists at the event, Koko said, “the Securities and Exchange Commission (SEC) who is the regulator of FMDQ is doing a lot on the derivative market. The CBN is supporting FMDQ, the PENCOM will support. When we start the market we will go to PENCOM to say for the stability of people’s pension, let this product be in place then the manager will know when to buy and when to sell”.
Source: Hope Ashike