Financial Securities Exchange Limited (Finsec) says it will soon launch an electronic trading system for derivatives on its securities platform. Finsec expects the system to enhance transparency, promote diversification as well as curb the dangers associated with existing methods. This is exciting news for those interested in investing in capital markets but before we understand why we must look at what derivatives are and why they need an exchange.
Derivatives are financial securities with a value that is reliant upon or derived (as the name suggests) from, an underlying asset or group of assets— we refer to this as the benchmark. Benchmarks can be anything from bonds, shares, commodities, currencies, interest rates, and market indexes. A quick example is the right to buy say fuel in the future (90 days time) at a given price, this is called a future and is the basis upon which the market for crude oil works.
Finsec is optimistic about the electronic trading system because it will possess special features that will diversify the way the derivatives have been traded over the years, allowing market players to make informed decisions easily, flexibly and openly. Derivatives have not been handled with transparency in the past but Finsec looks to change that by enabling transactions to be conducted on an automated platform.
The automated system that Finsec intends to deploy also has an option pricing calculator, which has guidelines that allow it to auto-calculate volatility, although the customers can calculate volatility on their own; input spot price and provide room for a risk-free rate. Expect a follow-up article to this that will explain derivatives in greater depth and why all of this is necessary for them.
“The thrust to provide alternative instruments, in this instance an alternative trading platform; to allow transparency and standardise the instrument used to trade, and to broaden investors’ participation, motivated us to develop a new form and manner on how derivatives should be carried out. The model is fully automated end to end to ensure transparency … and curb the negative impressions that have been associated with derivatives,” said Finsec general manager, Garikayi Munema speaking at a capital markets workshop on the launch of the derivatives market held at Royal Harare last week.
He said the model was a simple version, which focuses on premiums, thus making it cheaper. However, he said they plan to develop a more improved version once the first one is accepted and successful in the market. Mr Munema spoke positively of Government given the positive response they received from to the Reserve Bank of Zimbabwe after they appealed to it to authorise the system to make use of both local and foreign currency amid plans to also target foreigners. The development has come at a time local capital markets, ZSE included, are seeking to extend capital market products to new investors domestically.
In a nutshell, the launch of a derivatives exchange backed gives more people opportunities to be included in the investment world while catering to diverse needs. The ZSE has only possible positive gains in the long term for patient capital but there are many Zimbabweans with excess funds looking for quicker real returns which products such as options and futures can provide. Yes, there is the risk that it may draw more speculators to the markets but speculators are an integral part of any working market.