Calls for derivatives market intensify

The Deputy Chief Executive Officer-National Pensions Regulatory Authority (NPRA), David Tetteh-Amey Abbey, has emphasised the urgent need for introducing a derivatives market.

He said this is important to prevent the domestic financial market from lagging behind its regional peers, and to ensure that it effectively fulfils its role in mobilising long-term capital for economic development.

This move, he said, is crucial to guaranteeing the market’s efficiency and enhancing its ability to contribute significantly to growth of the economy.

Financial derivatives are financial instruments that derive their value from the price movements of underlying assets, and have proven useful in managing risks and providing opportunities for investors and businesses.

It is different from the traditional ‘spot’ market, where actual assets are traded for immediate delivery and payment, as it involves trading contracts based on the future price of those assets without direct ownership. The derivatives market allows investors to speculate on price movements, hedge against risks, and gain exposure to various assets without owning them physically.

Speaking during a capacity building and sensitisation workshop on Phase 2 of the West African Capital Market Integration (WACMI) project, Mr. Abbey said the financial ecosystem has been constrained by the availability of only spot market products.

“Currently, all trading activities are confined to spot markets – which include equities, the GAX (Ghana Alternative Market) and the commodities exchange; but we have to create the future that we want, and the future of the market is derivatives,” he said.

The NPRA’s Deputy CEO argued that the necessary infrastructure for establishing a derivatives market is already in place, and called on all stakeholders – including market training institutions and self-regulatory organisations (SROs) – to treat its introduction with urgency.

“Imagine if someone had bought a call option on government securities; they would have come to the market to settle during the DDEP. So, let us not rely solely on spot traders and customers. Let’s include derivatives,” he urged.

To drive home the significance of embracing the new segment, the gross market value of outstanding derivatives – summing positive and negative values – surged from US$12.4trillion at end-2021 to US$18.3trillion at end-June 2022; a 47 percent increase within six months, according to the Bank of International Settlement (BIS).

While the market has witnessed growth across the continent, most notably in Northern Africa and South Africa, critics have expressed concerns about increased systemic risks on a continent with porous regulation.

However, in an interaction with B&FT, Managing Director-Ghana Stock Exchange (GSE), Abena Amoah, stated that the move aligns with GSE’s long-term roadmap and vision; aiming to provide a comprehensive range of investment opportunities. She added that it will ensure effective risk management within a well-regulated framework.

“The introduction of a derivatives market is crucial, because the GSE recognises the significance of risk mitigation tools in the financial landscape. It is necessary that we offer market participants a wide gamut of products catering to the diverse needs of investors seeking to manage their risk effectively. This will enhance the sophistication and variety of financial products available in Ghana’s market, showcasing its potential as a thriving investment destination,” she said.

Educating market participants about derivatives and building the capacity to effectively use these financial instruments has been a priority for the GSE, Ms. Amoah noted. In line with this objective, the exchange has already conducted two workshops aiming to foster a deeper understanding of derivatives and their role in managing risk.

The GSE boss also emphasised the crucial role of market participants, particularly brokers and their customers, in driving the adoption of derivatives trading. While the GSE is committed to providing the platform and framework for such instruments, it acknowledges that real uptake will depend on the demand from investors who see the value and opportunity in this market segment, she pointed out.

“We really listen to our investors and what they want. When our investors tell us that they are looking for a derivatives market, we have to listen. It is part of the GSE’s own work plan, and we will definitely introduce a derivatives market,” the MD said – adding that it will make the local market more attractive on the march toward regional integration.

During keynote remarks at the event – which had Director-General of the West African Monetary Institute (WAMI), Olorunsola Olowofeso, and president of the Ghana Securities Industry Association (GSIA), Winston Nelson, in attendance – Director-General of the Securities and Exchange Commission (SEC) Daniel Ogbarmey Tetteh said regional market integration affords West Africa an opportunity to move toward a progressive path.

“Integration can foster structural change by attracting investments in industries that promote value addition, innovation and technological advancement. Moreover, the integration of capital markets within the region holds potential to address the issue of unemployment in the sub-region by stimulating economic growth, creating job opportunities and encouraging entrepreneurship. Integrated capital markets provide businesses, including SMEs, with easier access to capital,” he explained.

It is crucial to complement the integration with supportive policies, inclusive growth strategies and investment in education and infrastructure, the DG noted.

“This ambitious initiative will require a concerted effort to successfully achieve this goal. Adequate infrastructure such as trading platforms, settlement systems and information dissemination mechanisms are necessary for seamless integration,” he added.

In 2013, the WACMI project was introduced to create a unified regulatory framework for issuing and trading financial securities. It also sought to establish a common platform for cross-border listing and trading of these securities within the sub-region.

The second phase, Integration of Qualified West African Brokers, aims to harmonise regulations; enabling qualified West African brokers (QWAB) to participate directly in markets across the sub-region.