COMMODITIES MARKET

Tough regulations for companies willing to operate commodity exchange

The new regulations have set high propriety risks requiring the companies to have to liquidity valued at 50 per cent of total operating costs

In Summary

• Companies looking to expand their activities to the commodities exchange will have to register as separate entities, according to the Capital Market Authority.

• The companies to the exchange will also be limited to those with shareholders.

Packaged tea for export at warehouses in Shimanzi, Mombasa. Photo/FILE
Packaged tea for export at warehouses in Shimanzi, Mombasa. Photo/FILE

Companies looking to expand their activities to the commodities exchange will have to register as separate entities, according to the Capital Market Authority.

In the draft Capital Markets (Commodity Markets) Regulations, 2019, this trade regulation will also apply to Nairobi Stock Exchange which was recently granted approval to launch and operate a derivatives market.

“A securities exchange or derivatives exchange intending to operate a commodities exchange shall set up a separate legal entity to conduct the business of commodity exchange,” it added.

A commodities exchange is a market, where products especially agricultural products and other raw materials are traded.

Globally, most commodity markets traded include wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil and metals.

Trading may include futures contract offered under the derivatives market to protect sellers especially farmers from price fluctuations.

In this, for instance, a farmer may sell a futures contract for his maize still in the farm in a guarantee to get a price he will be paid when he delivers. An investor buys the contract on a guarantee that the price will not go up when it is delivered.

“It is a new market segment targeting players and will require a new and separate license,” CMA head of corporate communications Anthony Mwangi said.

Some of the institutions targeted in the market include banks which for a long time provided finance for companies wishing to produce and trade commodities.

However, in the new markets are expected to join in, offering their clients both broking and market-making services in markets.

This to allow producers or consumers of commodities to hedge their potential exposure to unexpected falls or rises in the price of a wide range of commodities.

In return, they gain interest other than equities.

However, the new regulations have set high propriety risks requiring the companies to have to liquidity valued at 50 per cent of total operating costs of the commodity exchange for the next one year period.

“A commodity exchange shall maintain, at all times, liquid net worth amounts of a type acceptable to the Authority, which shall be adequate in relation to the nature, size and complexity of the business of that commodity exchange to ensure that there are no significant risks that liabilities may not be met as they fall due."

“A commodity exchange shall, on a quarterly basis within 30 days after the end of every quarter, submit to the Authority an audited liquid net worth certificate from an auditor,” it added.

These are just drafts still going through public participation. Once we close after 30 days, we will look at the comments and incorporated to law,” Mwangi said.

The companies to the exchange will also be limited to those with shareholders.

“In considering an application for a licence to operate a commodity exchange an applicant shall be required to be a company limited by shares and be demutualised,” it added.

The companies are expected to, deliver, manage various commodities traded, give and take-up transactions, position transfers, transaction separations, open or close transaction designations and adjustments and average pricing.

This is part of the regulations set to clear out brokers in the value chain who exploit farmers and remove the government the from market where it is forced to purchase for instance maize from farmers.

It comes ahead of the awaited Kenya National Multi Commodities Exchange (Komex) expected to be ready by December.

The development of a regulatory framework for commodity exchanges will augment the government’s efforts on enhancing food security and making the commodities market competitive, improving efficiencies in the value chain and meeting international standards,” CMA added.

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