Back to the futures

Equity futures trading will be up and running on the NZX next year, says Mark Weldon.

The exchange operator's chief executive says the Wellington-based company has met fund managers and other market participants to gauge the appetite for stock futures, which are very common overseas.

"The volatility in global markets over the past few years has really convinced a lot of fund managers out there that they can serve their clients' interests very well by using stock futures to hedge that volatility," Weldon said.

Kevin O'Sullivan, director of derivatives and commodities at OMF, one of the companies involved in the talks with the NZX, said the service would be another tool major market participants, such as hedge funds, could use to invest in New Zealand. He said it could also be used by individual speculators.

Weldon said investors would initially enter contracts based on an index made up of a number of stocks, but the plan was to also make single stock options available.

That would allow investors to enter a contract based on, for example, Fletcher Building's share price.

A futures index consisting of the 10 biggest listed firms would be too heavily biased towards the energy sector after the partial listings of state-owned assets, such as Meridian Energy and Mighty River Power, took place, Weldon said.

He said the index would be made up of the top 15, 20 or 25 NZX-listed stocks.

Brian Gaynor, an executive director of fund manager Milford Asset Management, said stock futures would be a welcome addition to the local market, as the availability of such financial instruments was very limited in New Zealand.

"The problem is getting the liquidity to make it work," Gaynor said. "We've had numerous attempts over the last 20 years to do things like this, but you actually need enough people who are willing to participate in the market."

New Zealand had a futures and options exchange in the 1980s and 1990s, which was sold off to an Australian buyer.

NZX's success with its Dairy Futures market, which was launched in 2010 and was last week celebrating the milestone of having traded 10,000 lots, illustrated the potential for derivatives trading, Weldon said.

Gaynor said Dairy Futures had been successful because of the participation of major companies such as Fonterra, Nestle and other overseas manufacturers.

"It's going to be much more difficult for a stock exchange futures to work, but I hope it does because it would be great for the market."

O'Sullivan said having stock futures available would help New Zealand catch up with the rest of the world.

"We're so far behind it's unreal."

O'Sullivan said derivatives such as stock futures had an undeserved reputation, particularly in New Zealand, for being high-risk.

"Futures are less risky than [regular] stocks," he said.

"It's easier and cheaper to get in or get out and go short or long ... You've just got to understand that it is a leveraged product."
How it works

* Two parties enter into a stock futures contract to buy or sell a specific amount of shares for a certain price at a set date in the future.

* Unlike regular shares, the buyer of a stock futures contract does not take an equity stake in the company and does not receive dividends.

* Stock futures are common in the United States, Australia and Europe.