NSE brings six banks on board ahead of derivatives market launch
An investor at the Nairobi Securities Exchange offices. PHOTO | FILE
What you need to know:
NSE said the banks have been brought on to handle the Central Counter Party (CCP) clearing system that the bourse will use to trade derivatives.
As clearance and settlement agents, the banks are the intermediary between two trading participants in the market, guaranteeing that the obligations of the seller and buyer will be met and therefore cutting down risk of default.
The lenders will be required to have adequate levels of liquidity.
The Nairobi Securities Exchange (NSE) has signed up six commercial banks to act as clearing members ahead of the upcoming trade in derivatives.
The exchange said Wednesday that Barclays Bank, Co-operative Bank, CFC Stanbic Bank, NIC Bank, Chase Bank and Commercial Bank of Africa have been brought on to handle the central counter party (CCP) clearing system that the bourse will use to trade derivatives.
“Since the NSE Derivatives contracts will be exchange traded, clearing members will be essential constituents of the central counter party (CCP) clearing ecosystem. They will, by performing the central tasks of clearing and settling transactions, bolster the NSE’s capabilities to start the trading of derivatives,” said the NSE in a statement.
As clearance and settlement agents, the banks are the intermediary between two trading participants in the market, guaranteeing that the obligations of the seller and buyer will be met and therefore cutting down risk of default.
The lenders are thus required to have adequate levels of liquidity, with the NSE derivatives rules require that the clearing members each have a capital adequacy of at least Sh1 billion.
In addition, they pay an initial membership fee of Sh500,000 and an annual fee of Sh100,000.
The system being used by the NSE is the opposite of the over the counter derivatives market, in which buyers and sellers negotiate trades amongst themselves without going through an exchange or other intermediaries, meaning that there is no fall back if one is unable to cover their obligation.
A derivative is a financial instrument whose value depends on the value of an underlying asset, usually a commodity, bond, equity or currency.
The Capital Markets Authority licensed the NSE to operate a derivatives and futures market in October last year.
