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Third time lucky for equity derivatives?

NZX is hoping it’s third time lucky for equity derivatives in New Zealand, its head of business strategy and sales says.

Wednesday, May 8th 2013, 6:00AM

by Susan Edmunds

It will launch an equity derivatives market in the third quarter of this year, with futures contracts on the NZX 20 Index along with exchange-traded options contracts over an initial three NZX stocks.

Sam Stanley said the strength in the markets over the past few years meant equity derivative products were as relative as they had ever been. “There’s volatility in stocks. Movement generally has been up but there are ups and downs. That’s a good reason to hedge yourself if you’re looking for a toll for risk management.”

He said equity derivatives futures would provide that. There would be a combination of retail and institutional products on offer.

Equity derivatives were popular in the early 1990s but fell out of favour. In 2003, the market was sold to the Sydney Futures and Options Exchange in a five-year deal that did not see out its term.

Stanley said the market was different this time in that there was a lot more participation. Events such as the Mighty River Power float had raised the profile of the sharemarket and its participants. KiwiSaver had also boosted the amount of liquidity in the market and the level of equity investment that was going on.

This time, equity derivative futures contracts will be trading on the back of the NZX20, which has a 99% correlation with the NZX50. In previous attempts at a derivatives market, it was tied to the NZX15, which at the time was brand new and untested compared to the benchmark.

Traders in the early incarnations of the market also had to post cash, whereas in 2013 they will be able to hold stock as collateral for covered calls and buy rights.

“Now we have a clearing house so we have the capability to accept that, we don’t have to send money to Australia.”

BNP Paribas has confirmed its intention to become a general clearing participant. Stanley said that was a positive sign for the market.  He was talking to a handful of New Zealand brokers, although he said it was too early to disclose who. “I’m trying to get all the different pieces of the puzzle together.”

Stanley said some would-be participants had hinted they would sit back and wait for the market to build liquidity before becoming involved. “But this is about growing capital markets for all of us. Difficulty with liquidity is a huge issue in New Zealand. It’s improving but equity derivatives should improve it as well.”

Institutional investors might use the market for asset allocation, hedging and transition management while retail investors would probably see it as an option to generate income and provide some hedging, he said.

Investors will be able to buy contracts of 100 shares each.

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