NSE is getting derivatives law spot on despite the slow pace

It is 54 years since the film version of Boris Pasternak’s sweeping novel about Doctor Zhivago hit the big screen. Who can forget the enchanting Omar Shariff, the doctor-poet revolutionary. And so I read this old review about the film—“the movie is so lush and so long that it becomes an irresistible wallow even when logic suffers; like Gone with the Wind before it and Titanic after”—and it got me thinking.

Thinking of a silly riddle. Like what’s a four-year old promise that has no end? Answer: the derivatives market. But all “seriousness” aside. There’s still reason to be hopeful. The Nairobi Securities Exchange (NSE) is shooting for the first half to finally launch the derivatives market. If everything pans out this time, it will become the second exchange in sub-Saharan Africa to take such an initiative after Johannesburg.

In today’s article though, I explain why NSE’s adherence to the standard Master Agreement of the International Swaps and Derivatives Association (ISDA) is a good foundation for the derivatives market. A plus on so many fronts. One, a standardised master agreement signals that NSE is mature enough to implement global standards. This means investors can worry less about standardised definitions and contractual terms, reducing the likelihood of disputes and providing guidance for resolution when necessary.

For international investors, this adds a degree of protection and provides assurance on property rights. Furthermore, this type of agreement improves perceptions around credit and legal risk besides reducing the costliness of entering a new market.

Two, being path of ISDA means NSE is not left behind as other African markets pace to make their markets more efficient. The ISDA master agreement is the most widely recognised financial agreement among the major African markets such as Johannesburg and Nigeria.

Matter of fact, according to the recent Absa Africa Financial Markets Index (AFMI) 2018 report, more than half the countries use ISDA. In nations where standard agreements are not commonly used and organisations are forced to use non-standard pacts, in most cases, such deals prove inadequate when tested in default scenarios.

Third, the ISDA sets the stage for two other important master agreements; the Global Master Repurchase Agreement (GMRA) and the Global Master Securities Lending Agreement (GSLA). The former was drawn up for repurchase agreements, while the latter was drafted for securities lending arrangements. According to the AFMI 2018 report, Kenya is ranked 10th under pillar six, which assesses the enforceability of financial agreements around Africa and their compatibility with global standards) simply because these two are either not standardised or non-existent. Only South Africa, Nigeria and Namibia employ the GMRA and the GSLA. The establishment of these two will complete the package.

No doubt, a standardised trading environment means the NSE is getting ready for the big leagues. Presenting an attractive option to international investors is a must not an option—it encourages new players to enter. And considering that these agreements are standardised by international financial associations, perhaps it pays to wade in slowly. Plus it’s a lot of work. So, for impatient ones like Rufus, here’s a rebuke; “You’re an impatient generation.” Words by Gen. Zhivago rebuking a young engineer who thinks he can build a bridge in two days.