The Nairobi Securities Exchange (NSE) #ticker:NSE is banking on the recently rolled out derivatives trading to deepen capital markets, where turnover and trading activity has remained flat in recent years.
NSE chief executive Geoffrey Odundo Thursday said the derivatives trading would boost liquidity at the bourse, which has 65 listed firms where telcos and banks dominate trade.
“The newly launched NEXT Derivatives Market will enhance investors portfolio performance by availing risk management tools in the wake of increasing asset price volatility in both domestic and international markets,” said Mr Odundo when the bourse officially launched the derivatives market.
Derivatives are an investment tool whose value is derived from an underlying asset like bonds, commodities, currencies, interest rates, market indexes and stocks based on the expected future price movement of the asset.
They allow investors to make a gain or hedge against losses by taking a bet on the future price movement.
The NSE, which has been grappling with the challenges of setting up a derivatives market for years, becomes the second exchange in Sub-Saharan Africa region after Johannesburg to launch trading.
To boost uptake, Mr Odundo said the bourse will undertake investor awareness.
“The launch of the NSE NEXT Derivatives Market is a momentous achievement towards the attainment of the Financial Services Sector aspiration of, creating a vibrant and globally competitive financial sector that will promote high level of savings to finance Kenya’s overall investments needs, as envisaged in the Vision 2030 blueprint,” said Treasury Cabinet Administrative Secretary Nelson Gaichuhie.
Kenya’s Stanbic Bank, part of Stanbic Holdings, and Co-operative Bank of Kenya have been licensed by the Central Bank of Kenya to handle clearing and settlement for the derivatives exchange.
The NSE will offer Index Futures and Single Stock Futures on selected indices and stocks respectively.
The bourse will initially offer index futures contracts on the NSE 25 Share Index and Single Stock Futures on Safaricom, Kenya Commercial Bank Group, Equity Group Holdings, East African Breweries, and British American Tobacco.
Futures contracts listed on the NSE will have quarterly expiry dates.
This will be the third Thursday of March, June, September and December of every year.
All NEXT futures contracts will be initially cash settled