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NSE gets green light to trade derivatives

In Summary

•This is after the completion of a six-month Derivatives Exchange Pilot Test in between July and December 2018

•The Derivatives Market will offer investors Equity Single Stock Futures (SSF) and Equity Index Futures (EIF)

Capital Market Authority chief executive Paul Muthaura at the Authority sensitization seminar program
Capital Market Authority chief executive Paul Muthaura at the Authority sensitization seminar program
Image: ENOS TECHE

The Capital Markets Authority has given a go-ahead for the trading of Derivatives at the Nairobi Securities Exchange.

This is after the completion of a six-month Derivatives Exchange Pilot Test in between July and December 2018 which allowed the bourse to resolve key issues emanating from the test.

This will make NSE the second exchange in Sub-saharan Africa to introduce such an initiative after the Johanesburg Stock Exchange (JSE).

Plans to incorporate a Derivatives market date back more than six years with the project stalling longer than expected due to a lack of required infrastructure.

“The approval granted to the NSE to operationalize a Derivatives Market marks the achievement of a flagship project under the Economic Pillar of Kenya’s Vision 2030,” CMA chief executive Paul Muthaura said.

The Derivatives market can be broadly classified into over-the-counter instruments and exchange-traded instruments.

OTC traded instruments are already traded in Kenya mostly by banks and large corporations since they are contracts privately negotiated and traded between two parties without having to go through the bourse.

On the other hand exchange-traded instruments are standardised and transparently traded at the bourse.

Initially, the Derivatives Market will offer investors Equity Single Stock Futures (SSF) and Equity Index Futures (EIF) and later introduce other financial and commodities derivatives.

“The Derivatives Market will facilitate deeper and more liquid capital markets and position Kenya closer to becoming the Heart of Capital Markets Investment in Africa, as envisioned in the Capital Markets Master Plan,” Muthaura said.

Co-operative Bank and Stanbic Bank have been approved to provide clearing and settlement for the Derivatives exchange market.

“A robust infrastructure has been set up to facilitate trading, risk management, clearing and settlement,” Derivatives unit manager Matthew Mukisu said.

Under its 10-year Capital Markets Master Plan, CMA has been keen on diversifying its portfolio through products offered at the NSE to boost investor sentiment and increase market participation.

This has seen the introduction of Exchange Traded Funds and government’s retail infrastructure bond, M-Akiba.

The authority also approved rules for the listing of global depository notes and receipts.

Last month, there was a call by the Trade ministry for investors to subscribe to the equity shareholding of a commodities exchange, showing increased efforts to further diversify products offered at the NSE.

According to the Capital Markets Authority, Kenya is ripe for the introduction of structured commodity markets, and derivatives market.

“Kenya’s financial market have reached the level of sophistication from which the country can move to the next stage,” CMA said in its 10-year master plan.