The Capital Markets Authority (CMA) has given the Nairobi Securities Exchange the nod to launch and operate the long-awaited derivatives market, setting the stage for introduction of new products this year.
The CMA said in a statement Wednesday that it is banking on the futures market to deepen Kenya’s capital markets, where turnover and trading activity has remained flat in recent years.
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 Nairobi Securities Exchange (NSE) has been grappling with the challenges of setting up a derivatives market for years.
“This (approval) follows the successful completion of a six-month Derivatives Pilot Test Phase conducted between July and December 2018, and resolution of key issues that emanated from the test phase,” the CMA said in a statement.
Investors will initially be offered single stock futures targeting five liquid stocks including KCB #ticker:KCB, Equity Holdings #ticker:EQTY and Safaricom #ticker:SCOM and equity index futures, the CMA said, before other financial and commodity derivatives are introduced.
The equity index futures will be based on the on the NSE 25 share index, that represents the performance of blue chip firms and was launched by the exchange in October 2015 with the derivatives market in mind.
The NSE reckons the derivatives trading would boost liquidity on the bourse, which has 65 listed firms of which telecoms and banks are some of the most heavily traded.
The NSE will be the second exchange in Sub-Saharan Africa region after Johannesburg to launch trading in derivatives.
Kenya’s Stanbic Bank, part of Stanbic Holdings #ticker:CFC and Co-operative Bank of Kenya #ticker:COOP, have been licensed by the Central Bank of Kenya to handle clearing and settlement for the derivatives exchange, the CMA said.