NSE becomes the second African market with derivatives

The Nairobi Securities Exchange Derivatives Market futures will start trading today, with the official launch of the market slated for 11 July 2019, becoming the second market after Johannesburg Stocks Exchange to offer the product.

NSE has selected 7 counters and the NSE25 benchmark index to debut the market including Safaricom, KCB, KenGen, Equity Bank, East African Breweries, British America Tobacco and Bamburi.

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The selection was made on condition that the counters had a daily turnover exceeding Sh7 million by and over the past six months. They had to trade in the NSE25 index and had to have a market capitalisation of over Sh50 billion.

NSE will continue to review the list to ensure only liquid assets are traded at this market where you do not need to buy shares but use little capital to buy a contract that derives its value from the real share trading at the NSE, with a promise to pay the full amount at the end of the period.

If during the period the price goes up a buyer loses on the premium, but if the price declines one makes the difference.

As risky as it is, the Nairobi Securities Exchange has set aside Sh130 million in a settlement guarantee fund if a player is to default.

Additional measures put in place include the fact the trading will be pre-funded where you have to put in money first before you are allowed to play.

Settlement between positions will also be done on a daily basis and not wait until the contract matures, this means that is you are holding a losing position you will have to provide an avenue to settle over and above the margin set aside and if you do not you will be kicked out.

Currently, the market has derivative contracts which are mostly private boardroom issues that do not involve the larger public like the Kenya Airways hedge on the price of fuel.

Unlike over the counter derivatives, exchange-traded derivatives will increase market transparency and give a product the optimum value to allow for anyone to participate in the hedge.

The market regulator has already approved 8 brokers, and investment bankers to set up derivative funds in preparation for the market.

Cooperative Bank and Stanbic Bank have also gotten Central Bank of Kenya approvals to act as clearing members and help settle the contracts.

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