The Nairobi Securities Exchange has announces it is preparing to launch ETF and derivatives add-ons in an effort to encourage liquidity and greater local investor involvement.
The Nairobi Securities Exchange has announces it is preparing to launch ETF and derivatives add-ons in an effort to encourage liquidity and greater local investor involvement. The move makes the NSE only the second sub-Saharan exchange to permit ETF trading, after Johannesburg.
The announcement comes less than a month after the NSE revealed plans for a securities lending facility allowing short-selling on the exchange.
The launch of a new exchange, which enables investors to hedge against risk, has been put off. The derivatives exchange was to be rolled out last month.
Nairobi Securities Exchange (NSE) chief executive officer, Mr Geoffrey Odundo, said the derivatives exchange would be operational before the end of the year.
Being a new product in Kenya, Mr Odundo said, the derivatives market is not well understood and more time and training for the participants are required before its launch.
“It is imperative that prior to launch of this product, the market understands clearly the positive impact of derivatives as tools to manage investment risks,” Mr Odundo told Smart Company.
“It is also imperative that the systems and the risk management framework both fits our domestic market and are framed on international best practice.”
In Africa, it is only South Africa which has a derivatives market. It is managed by the Johannesburg Stock Exchange.
The NSE, which received regulatory green light to unveil the derivatives exchange in December last year, said it was “building an understanding” of what derivatives are and what they will do for the Kenyan market.
At the moment, the bourse is training trading personnel, asset managers, bankers, risk managers and operations team on how the new exchange works.
The process of setting up the NSE Derivatives Settlement Guarantee Fund and the NSE Derivatives Market Investor Protection Fund is also ongoing.
SUBSTANCIAL PROGRESS
A total of 10 trading participants and five clearing members have so far been approved to support trading and offer financial settlement services.
“We have made substantial progress towards the development of this market and are optimistic of launching fairly shortly,” Mr Odundo said.
The derivatives markets enable investors to diversify their investments from the current products in the capital markets and hedge against risk.
Analysts say the derivatives market can help investors make a predictable assessment of risk and returns on their investments in comparison to trading, say in shares, in the securities exchange.
The derivatives market is considered one of the most affordable and convenient means for investors to cushion themselves against interest rate fluctuations and volatility in exchange rate as well as seesaws in commodity prices.
The local derivatives exchange will support spot (immediate) and futures trading of multi-asset investment products such as equities, currency and interest rates.
Trade in a range of agricultural commodity contracts is set to be introduced at a later stage to enable investors cushion themselves against volatile prices.
In February, the securities exchange incorporated NSE Clear, which would settle trades as well as collect and maintain funds in the transaction.
A clearing house is a financial entity that stands between two traders and its purpose is to reduce the risk of one or more clearing members failing to honour its trading settlement obligations.
Once a trade has occurred between two parties on the exchange or over the counter, it is handed over to the clearing house, which steps in between the two original traders to finalise the financial settlement.
