Derivatives trading at Nairobi bourse to start, banks sign up

The Nairobi Securities Exchange (NSE) will work with three banks to set up a clearing house for its planned offering of derivative instruments from the second quarter of this year, its chief executive said on Friday.

New Chief Executive Officer Geoffrey Odundo told the Reuters Africa Investment Summit the new products would boost liquidity at the bourse, as it seeks to become the third biggest exchange on the continent, up from fifth currently.

"We have three banks that have signed up to become what we call clearing members and seven trading participants," Odundo said at the exchange. He said two of the three banks were international and one was local, without offering further details.

The Capital Markets Authority (CMA) issued the NSE a provisional licence allowing it to open a derivatives exchange in December, paving the way of listing of instruments like futures contracts and options which hedge against risk.

NSE will start the trading of derivatives, including stock index and currency futures, to deepen liquidity.

Most African exchanges' ambitions to offer trading in derivatives are often frustrated by the lack of clearing houses, which usually require significant investments.

The Kenyan bourse serves as an entry point for foreign funds looking to tap into fast economic growth rates in east Africa but it currently ranks behind South Africa, Nigeria, Egypt and Morocco in terms of market size.

Number three

"We should actually be at number three in the next couple of years," Odundo said, adding that the current market capitalisation stands at Sh2.3 trillion. "We have a vision to take it to about 4 trillion in about three year's time," he said.

Average daily trading volumes at the bourse fell 40 per cent in January from a year earlier after a new capital gains tax, but had recovered to Sh800 million a day, Odundo said.

The Government re-introduced the 5 per cent tax that was suspended in the 1980s to increase its revenues to pay for development projects. The measure has been challenged in court by stockbrokers unhappy with a requirement that they collect the tax on behalf of the Government.

"Our preferred outcome would be a quick resolution," Odundo said, adding the Nairobi Securities Exchange was not a party to the ongoing court case.

On initial public share offer, Odundo said he expected some major listings in the next five years mainly due to the government's drive to build ports, roads, railways and power plants, using a public-private partnership model in some cases.

A requirement that company's in the country's oil and gas sector have 40 per cent local ownership will also boost listings. "We are definitely going to see big transactions," he said.