Delaying derivatives market could lead low investor interest

The Nairobi Securities Exchange (NSE) risks low investor interest in the proposed derivatives market as delays hamper approval of a maiden issue.

The launch of the derivatives market, which has been on the cards for over two years now, has been blamed on lack of preparedness by the regulator and other market players. Derivatives are financial instruments such as futures contracts or options, which are derived from other forms of assets.

The Capital Markets Authority (CMA) now warns continued delay of the launch could prove costly for market players who had hoped to participate and result in low investor interest when the derivatives are eventually launched.

The CMA’s Markets Soundness Report for the first quarter of 2016 notes that the delay in launching the derivatives market by Nairobi Securities Exchange (NSE) could be hurting investment firms and institutional investors that have committed huge resources preparing to participate in the planned market segment.

Committed resources

“The key risk remains the opportunity cost of delayed launch by the market organiser, particularly for intermediaries who have invested substantial time and resources preparing to participate in this market,” said the Capital Markets Sound Report launched Wednesday.

“Investors have suffered a delayed opportunity to hedge their investments and products against price volatility. The Authority continues to engage market stakeholders, particularly the Central Bank of Kenya, whose licensees will be key players in the derivatives market.”

Derivative markets enable investors to cushion themselves against sudden surges or dips in stock, bond, currency, index or commodities. CMA in January published the fees that investors will pay to participate in the derivatives market.

According to the fee structure, investors will be charged 0.14 per cent for equity index futures contract and 0.17 per cent for single stock futures contracts.

The Authority said in determining the fees, it had considered the need to manage the risk that the fees on transactions may affect the level of uptake of derivative instruments in the market. 

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