FINSEC pushes for increased participation in derivatives market

Michael Tome Business Reporter

Financial Securities Exchange Limited (FINSEC), says it will be pushing for increased participation in the derivatives market as it continues on a drive to diversify investment options on the local stock market.

sFinsec in 2022 commenced a derivatives trading platform as it sought to broaden local investment options offering risk management tools in line with global trends.

Derivatives are financial instruments that derive their value from underlying assets such as gold or a group of assets.

Generally, common underlying assets for derivatives include stocks, bonds, currency, commodities, interest rates and market indexes.

They are used to reduce the exposure of risk (hedging) and assist in countering financial risks associated with fluctuation of price, interest rate and currency exchange rate. They also protect sellers from loss due to price fluctuation which is a price downfall. According to Investopedia, the common derivatives include options, futures contracts, forwards and swaps

However, according to Finsec, the level of complexity and attendant risks from derivatives have been a deterrent factor to the investing public in the past but mechanisms have since been put in place to ensure security in their function.

As it stands, derivatives are now on the formal market, contrary to the previous approach when they were non-standardised and traded over the counter leading to a number of challenges.

The local derivatives market now also uses Derivatives Market Technology (DMT) to ensure efficiency, security and convenience.  Speaking during a webinar convened by the Securities Exchange Commission (SecZim) focusing on derivatives, Finsec product manager Mrs Tinaishe Chikwature, indicated that the firm had earlier initiated master classes to cover the knowledge gap amongst market participants and potential investors. She said as much as derivatives are high risk instruments, they provide useful risk management tools and Finsec saw it fit to introduce the simplest forms of derivatives to avoid complexity and risk issues.

“People have a history with derivatives and most people ask, does it work in Zimbabwe or it is a product for a developed market, that’s the reason why some people are just hesitant to participate to the maximum. It is understandable in a way but we hope people will fully understand the product as we go.

“We introduced derivatives on the formal market, in a different way than before when they were being traded over the counter and non-standardised, but now we have come on an exchange that is regulated, licensed, and monitored. So each time you see risk coming through, we mitigate before it becomes a full-blown risk,” said Mrs Chikwature.

She said Finsec could not be strict or hard on people on the recent introduction as it seeks to increase appetite and allow everybody to learn and try out the product.

She said people are beginning to warm up to the idea of derivatives and analysis show around 60 contracts were settled last year and around 20 that were in default and over 60 rejected orders.

Morgan & Co senior analyst, Mr Tafara Mtutu, said derivatives continue to be a viable investment option on the local stock market to allow variety.

“We are a market that has operated for decades with basic instruments like your stocks, here and there we get bonds and recently capital markets started exchange – traded funds. Derivatives are not entirely a new asset class but a different instrument, there is a bit of a slow uptake of derivatives because they are a bit complex than stocks,” said Mr Mtutu.

Zimbabwe has been benchmarking its derivatives performance with Kenya, which struggled in the first years but eventually managed to gain traction as the years progressed.

 

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