Canada’s derivatives markets are appealing to a broad range of domestic and international investors, with growing interest in using the country’s futures and options markets to generate income, make directional plays and manage risk exposures for fixed income and equity portfolios.
Although stagnant volatility and economic weakness in Canada’s natural resource and commodity sectors has caused trading in equity options to decline in recent years, Andy Nybo, a TABB principal, head of derivatives and author of new research, “Canadian Derivatives Markets: Co-Existing in the Shadow of a Giant,” says the reverse is true for their futures markets, benefiting from rising demand for fixed income exposure.
According to Nybo, rising options open interest in both options and futures suggests that considerable demand exists to use Canadian derivatives in longer term strategies, especially those intended to earn income or manage longer term risk exposures. These types of strategies tend to build open interest, he explains, and thus volume, over time. Options open interest increased by 20% from December 2013 to October 2014, while futures open interest increased by 10% over the same period.
TABB Group believes three factors will further expand Canada’s derivatives market trading:
• The nation’s conservative fiscal discipline: Fixed income market investors are attracted to its financial stability and growing role as an international reserve currency.
• The return of global economic growth: As growth reignites and price pressure on energy and commodities returns, their energy and natural resource sector will gain renewed international investor interest.
• Rising investor demand: Pension funds, mutual funds and portfolio managers are exploring the use of derivatives as part of strategies to provide investment efficiencies, enhance income and ultimately improve returns. Moreover, Canada’s small- and medium-sized investment managers are beginning to explore potential benefits of using derivatives in investment strategies.
Canada’s listed-derivatives markets are poised to significantly benefit from these trends, says Nybo. “Although a number of hurdles need to be cleared, both domestic and international investors are showing signs of playing a bigger role in Canada’s derivatives markets.”
