JSE to launch options, futures market
Published:Sunday | March 27, 2011 | 12:00 AM
Trading of derivatives likely this year
Sabrina Gordon, Business Reporter
Marlene Street-Forrest, general manager of the Jamaica Stock Exchange (JSE), said the trading of futures and options, two riskier classes of securities, on the JSE should begin by the end of this year.
Street-Forrest was reserved in disclosing detailed information, but said the JSE was "committed to seeing it established" and was working on putting the infra-structure in place.
She declined to provide details on what specifically was left to be done, but said that already a committee - comprising member dealers of the exchange, JSE internal staff, and others in the securities industry - had been established to oversee the project.
The JSE has already set up a new and improved settlement and trading platform to accommodate all the features required for the trading of futures and options.
"We are working out the nuts and bolts," Street-Forrest said.
Second try at creation of options market
This is the second time that Jamaica is making a try at the creation of an options market. The initial attempt was by Dehring, Bunting and Golding (DB&G) nine years ago, but the system requires counterparties to execute the two sides of the option contract - puts and calls - and the investment firm was unable to do as it vowed then to "drag the market kicking and screaming into the business".
At the launch of the service in April 2002, DB&G said it expected investors would be slow to enter the market. The investment bank, which changed ownership four years later, had hoped to act as a broker of the trades between counterparties, and not as a dealer.
Mayberry Investments Limited had showed initial interest, but the effort was not sustained.
Futures are contracts with an obligation to buy or sell a standardised asset at a pre-determined price and date in the future.
Both classes of investment, which are typically traded on exchanges, are used as hedges against foreign exchange and interest rate risk as well as volatile commodity price shifts.
The specified future price for the option is termed the strike price. A call option would be the right, but not the obligation, to buy an asset at a pre-determined price and date, while the put is the right to sell.
The JSE has been hosting workshops to sensitise and educate brokers on the trading of futures and options.
"Investors, both retail and corporate, will gravitate towards these products if in the marketing of them it can be shown how they can be of benefit," said Howard Haughton, managing director of Holistic Risk Solutions, speaking via email with Sunday Business.
Presenters
Haughton, along with Gregory Samuels, the associate director for client solutions at FirstCaribbean International Bank Jamaica, were presenters at the JSE workshop in Kingston on Thursday.
"Effective implementation of futures and options on the stock exchange requires commitment on behalf of the board of the exchange to actually spend the necessary monies required to invest in the human and technological resources required to get a futures market up and running," said Haughton.
"Since the member dealers make up the majority of the ownership of the exchange, the emphasis is really on them to commit for this strategic development, which would also necessitate potentially big changes in their respective institutions in terms of upgrading of skills and IT infrastructure," he said.
Street-Forrest said that the feedback from dealers has been positive.
She said that while there will be a wide range of selected product types in the long term, the market would start with equity-based instruments.
Haughton said Jamaica should start with single stock futures, equity index futures, and options on equity futures.
"Once this has been shown to be successful, then other products should be analysed for potential inclusion," he said.
"Given our dependency on imported oil and its subsequent effect on electricity prices, a product linked to fuel prices could relatively easily be created that could provide a partial hedge against rising fuel prices and help to reduce electricity costs."
FirstCaribbean Jamaica is already said to be in the market, offering derivative-type products to clients. However, efforts to speak with the bank about its offerings were unsuccessful up to press time.