Capital Markets

NSE puts up fight over new laws for futures exchange

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The Nairobi Securities Exchange. The bourse has expressed concerns over a proposed law on futures market and asked Parliament to amend it. FILE

Summary

  • The NSE has asked to be exempted for at least five years from the requirement to apply afresh for a futures licence.
  • A key licensing requirement for the futures exchange is a minimum capital base of Sh1 billion.
  • The NSE has plans to self-list on the Alternative Investment Market Segment, which may offer it a chance to raise more capital.

The Nairobi Securities Exchange (NSE) has petitioned MPs to drop a new law proposed by the Capital Markets Authority (CMA) which if passed will require the bourse to apply for a fresh licence to operate the lucrative futures market.

In a presentation made to Parliament’s Finance, Planning and Trade Committee, which has powers to recommend amendment of the proposed law, the NSE asked to be exempted for at least five years from the requirement to apply afresh for a futures licence, arguing that it would put the bourse at a disadvantage if it is to compete with international exchanges.

A key licensing requirement for the futures exchange is a minimum capital base of Sh1 billion.

The NSE, in a presentation to the committee chaired by Ainamoi MP Benjamin Langat, proposed an amendment to allow it “to commence carrying out the business of a futures exchange for a transition period until it is able to conform to any regulations made pursuant to the Act.”

The draft Capital Markets (Futures Exchanges) (Licensing Requirements) Regulations 2013 dated April 30 proposed a number of regulations for futures markets, including the requirement for a separate licence for any party wishing to set up a futures market.

Further, CMA set a requirement of a minimum authorised ordinary share capital of Sh2 billion and a minimum paid up share capital of Sh1 billion for any investor wishing to set up a futures exchange in Kenya.

(Read: NSE tests new system with eye on futures market licence)

The proposed amendment put forward by the NSE reads in part: “Notwithstanding the provisions of this Act or any regulations made hereunder in relation to futures exchanges, any securities exchange duly approved by the authority shall be entitled to conduct the business of a futures exchange, whether by itself or through a wholly owned subsidiary, for a period not exceeding five years by the end of which time it shall be required to fully comply with such provisions.”

The capital requirement in particular would leave the field open for a foreign investor with deep pockets to come in and take control of the futures exchange, and along with the new licence requirement, the NSE sees a possibility of the entire futures market being left only to foreign firms.

The NSE has plans to self-list on the Alternative Investment Market Segment, which may offer it a chance to raise more capital.

“This is a policy issue. It is not in Kenya’s best interest to have a foreigner come in and take over a key institution like the futures market,” said Standard Investment Bank (SIB) executive director for corporate finance, Job Kihumba. “To grow the domestic economy is to encourage local participation.”

(Read: Nairobi bourse targets seven new companies for listing)

NSE contends that its current licence as a securities exchange allows it to list and trade futures contracts, despite the new regulations, by virtue of the definition of securities and securities exchange in the Section 2 of the current CMA Act.

“The recently gazetted Futures Exchanges (Licensing Requirements) Regulations 2013 conflict with these provisions of the Act. We propose that this be clarified through the Amendment Bill,” said NSE in the presentation to the parliamentary committee.

The parliamentary committee noted that the amendment Bill was drafted without involvement of key stakeholders.

“The Capital Markets (Amendment) Bill 2013 was drafted without involvement of the key stakeholders like the NSE. This is contrary to Article 118 of the Constitution,” the committee said.

NSE has, in the meantime, already started preparations to trade in the futures market by testing a new IT system similar to the one used at the Johannesburg Securities Exchange for trading currencies and other commodities, partnering with a South African firm that designs trading systems, Securities Trading & Technology, to customise a system that could be used by local brokers.

“To date the exchange has invested over Sh17 million in the software and hardware. On July 4 – 5, 2013, the NSE held a futures market participants forum geared at enhancing financial literacy on the futures market. We shall shortly run a market simulation exercise,” said NSE chairman Eddy Njoroge on July 15 during the Home Afrika listing ceremony.

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