Capital Markets

NSE gets approval to launch futures exchange

The Nairobi Securities Exchange (NSE) on Tuesday announced it had received formal approval from the Capital Markets Authority (CMA) to operate a derivatives market.

Following the approval, the Exchange said it is in the process of finalizing the membership of market participants (clearing and trading members) and ongoing regulatory requirements while enhancing industry and investor awareness on the products to be rolled out.

It added it will announce the launch date of the Derivatives Market at a later date.

“The approval of the Futures Exchange marks a great milestone for the financial markets in East and Central Africa. This is a firm commitment towards deepening of our Capital Markets,” said NSE CEO Mr Geoffrey Odundo.

Mr Odundo said he believes the derivatives market will provide advantages such as minimal upfront investment, lower transaction costs compared to investing in the underlying assets and risk mitigation given the increased volatility in asset prices, making this market attractive to investors.

Counterparty risk

“Market participants will find higher preference in such a market, given its ability to mitigate counterparty and credit risks fuelled by the need for greater transparency and security in trades, increase in liquidity and advancements in clearing and settlement technologies,” he said in a statement.

Globally, there has been significant growth in the volumes in exchange traded derivatives contracts in currency, equities, debt and other asset classes – with compound annual growth rates in excess of 32 per cent, on account of what is believed to be superiority in terms of transparency, accessibility, growing economies and efficiency over other market segments.

A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying asset, typically a commodity, bond, equity or currency.

A derivatives market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

READ: CMA gears up for launch of derivatives exchange