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The Securities and Exchange Commission (SEC) has disclosed that one of its top priorities for the year 2020 is to develop an efficient derivatives trading market. This disclosure was made by the acting Director-General of SEC, Ms Mary Uduk.

Uduk, who described derivatives as some of the investable products capable of boosting liquidity in the capital market, said it was high time the SEC introduced it in the capital markets.

Although they were currently being traded in the capital markets, Uduk made known that it was only over the counter.

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She noted that derivatives were not new as they were traded in all the big markets around the world and were used in risk management. In addition, she said they were used to hedge the trade in other securities.

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“Now, we want to introduce exchange-traded derivatives so that people can now hedge their positions in the market. The number one advantage apart from the risk management one is that it gives traders and investors more instruments to invest in

 “The OTC transactions are just between one party and the other. So, the two counterparties meet, agree and design contracts as it suits them. Most of the time, these are contracts done between knowledgeable parties and they are able to protect themselves.

 “But for the exchange-traded derivatives, the commission has in place a very robust risk management framework and that is why it has rolled out these rules,” Uduk explained in an interview, Punch reported.

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More details: According to the SEC boss, apart from the registration requirements, the rules cover the derivatives contract and the participants in the derivatives market. She said that the risk management framework that SEC expected every participant in the derivatives market to have had been specified.

Speaking further, Uduk said that derivatives were originally part of the initiatives of the 10-year capital market master plan in 2019 which the commission had made a lot of efforts into implementing some of them so far. She hinted that 2020 would see more things being put in place by the commission such as derivatives trading and the strengthening the stockbroking segment of the market.

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Understanding Derivatives: Derivatives are securities that derive their value from an underlying security or asset. Simply put, they are financial products that derive their behaviour from the behaviours of their underlining instruments.

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