Derivatives Trading – Participant Roles and Responsibilities

The Financial Securities Exchange (FINSEC) continues to be the torch bearer in deepening and broadening the local capital markets through product and service innovation. The Derivatives products that FINSEC is bringing will provide investors with more choices and will ensure Zimbabwe takes its rightful place in securities trading.

Derivatives are investment instruments that consist of a contract between parties whose value derives from and depends on the value of an underlying financial asset. Derivatives trading through FINSEC involves a number of specialist participants, each playing a crucial role in the transaction value chain as part of the risk management.

As the exchange, FINSEC will be the central market place where all contracts will be written, and trades undertaken. The exchange provides the Automated Trading Platform that will facilitate automated contract writing and matching. The FINSEC platform will be extended to offer central counterparty facilities to all trades and to manage positions of all open contracts.

The following are some of the key participants involved in the trading of derivatives and their roles and responsibilities;

Contract Writer

Contract Writer initiates the transactions by writing the Option contracts and making them available on the FINSEC Electronic Trading Platform. FINSEC requires contract writers to be fully aware of the rights and obligations before writing the contracts. Therefore, only approved contract writers with the relevant knowledge of Derivatives trading shall participate.

Clearing Participants
Clearing Participant is a Derivatives Trading participant who is a member of FINSEC. According to FINSEC rules, Option contracts shall only be written and traded on the FINSEC platform through Clearing Participants. The Clearing Participant shall clear and authorise all buy and sell orders and collects the appropriate collateral from the Contract Writer and deposit it with the Custodian Bank. This will be done upon confirmation of the availability of acceptable collateral.

For Futures trading, all investors shall take positions through the Clearing Participant. The Clearing Participant shall clear orders from their clients and manage the Margin Accounts for all open positions. It is the role of the Clearing Participant to authorise orders depending on availability and adequacy of the margins.

Custodian
Custodians can also register as Clearing Participants and they are responsible for the safekeeping of the underlying securities, that is, cash or equities deposited as collateral. They hold the collateral for trades placed for Option Contracts that are executed through the Clearing Participants. The collateral shall be released for liquidation when the Contract writer fails to meet their obligations. If the funds are sufficient to cover obligations, the Custodian shall be instructed to release the collateral back to the Contract Writer.

Settlement Bank
The Settlement Bank is responsible for the executing of the settlement instructions for the payments resulting from the Derivatives. It also maintains and monitors the Settlement Bank Accounts and provides clearing and other banking services. The Settlement Bank shall abide by the Delivery Versus Payment (DVP) Rules as a condition of its participation in Derivatives Settlement.

Derivatives, like any investment instrument, have a number of risks which require careful analysis and management. FINSEC has fully automated the end-to-end processes of derivatives trading – from contract writing to settlement – and has onboarded a number of specialist participants to provide expert advice and other services for the integrity of the market and protection of investors.

As part of FINSEC’s financial inclusion drive, the exchange will extend the C-TRADE mobile and online platform to derivatives trading. This will open up the market to retail and other small-scale investors intending to gain the experience and knowledge of trading derivatives. FINSEC will continue with a program of equipping market participants through online and where possible face-to-face tutorials.-newsday.c.zw