Trading on the derivatives market begins today a move which deepens the capital markets by offering alternative products to investors.
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.
The FINSEC Derivatives Market, an automated platform for writing, holding, trading, clearing, custody and settlement of derivative contracts, is the brainchild of the Financial Securities Exchange.
FINSEC chief executive officer Collen Tapfumaneyi said the launch of the derivatives market is a culmination of enormous amount of collaborative work done by his team but supported by the regulator, the Ministry of Finance and Economic Development, various market players, the Harare Institute of Technology (which designed the product) and investors.
He said institutional investors were investing mainly in securities that trade spot only. As such, they are exposed to both contingent liabilities and income which is difficult to manage with the spot market.
Tapfumaneyi said retail investors were exposed to price risk and would want to maximise returns. He said they are too small and have little to no access of the over the counter. Capital market intermediaries were mainly exposed to the equities class and there was concentration risk.
The commodities market, Tapfumaneyi said, was unpredictable as farmers plant commodities and hope by the time they harvest and sell the price will be right while buyers wait until harvest hoping for a good price.
He said the contract system was bilateral and that investors hardly participated in the commodities market as it is insecure resulting in the market becoming illiquid.
“That initiated us to come up with a solution. The solution that we have designed caters for all market players in the ecosystem,” Tapfumaneyi said.The derivatives market debuts with three types—stock futures, stock options and index futures.
The stock futures and stock options have Simbisa, Econet, Innscor, Delta and EcoCash. The index futures has the Morgan & Co Consumer Index, M&C Industrial Index, M&C Technology; Media & Telecommunications Index and M&C All Share Index.
Post launch, a six months rigorous pilot window will be opened to allow the participants and investors to get acquainted with the product. The maximum position limits of ZWL$3m for institutional investors and ZWL$100 000 for retail investors have been set. The limits will be lifted after 6 months and more underlying assets will be added to allow a fully-fledged Derivatives Market.
Gerald Dzangare, Securities Exchange Commission of Zimbabwe acting CEO, said the launch of the derivatives market is a welcome step as Zimbabwe moves toward matching international standards in issuing, listing, trading and settlement of diversified securities for the benefit of retail, institution, local and foreign investors.