Oil discoveries brighten prospects for futures market
The acting CEO for the Capital Markets Authority Paul Muthaura. FILE
What you need to know:
Nairobi eyeing status of East Africa’s futures trading hub for commodities.
Recent discovery of oil and minerals in Kenya and the wider East Africa region have strengthened the case for setting up of a futures market, the capital markets regulator has said.
Paul Muthaura, the acting Capital Markets Authority (CMA) chief executive, said on Wednesday that the possibility that East Africa will soon become a petroleum, natural gas and mineral exporter makes plans for setting up a futures market even more urgent, as such commodities are best traded in an organised exchange.
Nairobi is eyeing the status of the region’s futures trading hub for agricultural produce, oil, natural gas, precious metals and similar commodities.
“In the recent past we have witnessed the discovery of commercially viable deposits of minerals and energy products not only in Kenya but across the African continent.
“We are therefore very confident that with right policy, regulatory and institutional framework in place, it will soon be viable to introduce futures with agricultural produce, minerals and energy products as the underlying assets,” said Mr Muthaura on Wednesday at a workshop hosted by Strathmore Business School.
Talks on setting up a futures market have gained traction since September 23 2010 when Futures Market Committee (FMC) was set up.
The agriculture sector has been the main focus on the need for a futures market due to the expected gains in helping famers and consumers sail through the annual wild swings in commodity prices.
Since then the chances of Kenya becoming a petroleum exporter have been increasing, as more potential discoveries are made and reassessment of current finds showing that more oil can be pumped out than what was initially found.
On Tuesday the Canadian-based Africa Oil announced that Lokichar Basin in northern Kenya has a potential of producing 368 million barrels. The company said that more oil could be discovered in the basin, a fact that will be known with certainty after further tests are carried out.
In August Tullow Oil said that the Turkana exploration basin had reserves in excess of 300 million barrels of oil after it discovered an additional 50 metres of reserves in Etuko-1, surpassing the commercial production threshold of 250 million barrels.
The FMC is expected to incorporate other arms of government in its planning due to the timing of discoveries and the new governance structure that came after the General Election.
“With the changes in government it is clear the team will need to be expanded to include representatives from the Ministries of Agriculture, Energy and other institutions with underlying assets that could support the development of futures contracts,” said Mr Muthaura.
Oil, natural gas and mineral exploration is still in its early stages which leaves agricultural products, currencies and other assets as the first probable goods that will be traded on the proposed exchange.
Mr Muthaura however said there is need to develop storage facilities for the trade commodities to make the futures markets viable.
“Financial futures, particularly currency and interest rate derivatives do not require actual delivery and in the absence of a well-developed warehousing infrastructure, these are the preferred types of contracts for initial trading in the Kenyan market,” said Mr Muthaura.
The draft laws for a futures exchange is pending debate by Parliament. The CMA has proposed that the company to run the exchange should have a minimum of Sh1 billion paid up capital, which the brokerage community wants reduced.
The Kenya Association of Stockbrokers and Investment Bank said if the CMA insists on Sh1 billion, then it would only be fair if it gave a period for local players to raise the money in tranches as opposed to a one-off payment.
Both the NSE and the CMA have made presentations to Parliament on the exchanges Licensing Requirements.
