On the inception of sound derivative products in emerging markets: Real-world observations and viable solutions

Purpose - Since, the early 1990s, emerging markets have started to play an important role in the trading of derivatives products. Despite the fact that these markets are characterized in general as illiquid, segmented, politically unstable, with lack of regulations and historical financial databases, they do have some advantages for markets’ participants. This paper aims to discuss some of the main obstacles to the inception of successful derivative products in emerging economies and to provide a number of viable solutions. Design/methodology/approach - The objective of this paper is to share with financial markets’ participants, regulators and policymakers some of the author’s real-world experiences and observations as a derivatives trader and later as a trading risk manager in emerging economies. The endeavor here is to provide several robust guidelines that can assist emerging markets in the establishment of sound derivative markets within a prudential framework of rules and policies. Findings - To this end, key risk management rules and procedures that should be considered before dealing with derivative products are examined and adapted to the specific needs of emerging markets. The suggested viable solutions can be implemented in almost all emerging economies, if they are adapted to correspond to each market’s initial level of sophistication. Practical implications - The real-world guidelines and observations that are discussed in this work will be of value to financial entities, regulators and policymakers operating within the context of emerging markets. Originality/value - This paper fills a gap in the risk management literature, especially from the emerging markets perspective, by providing a practitioner’s views on how to set-up sound and effective derivative products markets in emerging economies. The paper will be of value to those interested in founding a successful and sound trading environment of derivative products in emerging markets.