Institutional investors and sophisticated money managers at the Nairobi Securities Exchange (NSE) are set to have an alternative investment platform before the end of this year. This will happen when the bourse rolls out a derivatives market, which was to be in place by June 2015 but has had its introduction pushed to the end of this year.
The bourse has already been issued with an approval of derivatives exchange rules that allow it to draft regulations for the management of the futures market and handling trade disputes.
“This will not be a market segment for all but the more sophisticated institutional investors, money managers and owners of the underlying assets,” NIC Capital Managing Director Maurice Opiyo said while addressing financial journalists attending a Bloomberg Media Initiative Africa course at the Strathmore Business School.
He noted that since 2006, there has been a lot of regulation in place, including risk-based supervision, increased minimum capital requirements for stock brokerage firms and the need for brokers to report to the regulator on a monthly basis, enabling the picking up of any red flags.
According to Head of Research and Investment Analysis-Standard Investment Bank (SIB) Ltd Francis Mwangi, the derivatives market would be the preserve of those who can raise a minimum of Sh2 million and above per single trade and own the underlying asset.
A derivative is an asset the performance of which is based on an underlying asset. For example, an options contract gives the holder the right, but not an obligation, to buy an underlying asset such as a share or a currency. The value of the option contract will fluctuate depending on the value of the underlying asset.
Initially, the Nairobi derivatives market will deal in commodities such as tea and coffee as well as foreign exchange. A number of investment banks have already set up a derivatives wing such as African Alliance. Others are expected to follow suit.
Buy or sell
Unlike in the past when stockbrokers could receive instructions on the telephone from clients, it is now required that these buy or sell orders be put on e-mail as well as in hard copy. The idea is to reduce incidence of stockbrokers engaging in unauthorised deals using clients’ money.
“There are no more nominee accounts without regulatory approval. Previously, stockbrokers used to hide behind these nominee accounts but this loophole has now been sealed,” said Mr Mwangi. Introduction of automated trading systems at the NSE has boosted market capitalisation from Sh86 billion in 2001 to Sh2.4 trillion in 2014.