CMA sets tough rules for futures market shareholders

By James Anyanzwa

Plans to implement a Futures Market have gone a notch higher. This follows the Capital Markets Authority’s (CMA) unveiling of draft regulations to govern its operations.

CMA appointed a long term Futures and Derivatives expert in January. The technocrat will provide technical assistance in the development, operational and regulatory framework necessary for the establishment of a Derivatives and Futures Exchange. The new rules, which have been tabled for public scrutiny for 30 days seeks to control the conduct and activities of shareholders, market participants and investors. This will ensure success of the futures exchange in the country.

The Futures market, which had been scheduled to go live by mid last year, is a central financial market where people can trade standardised futures contracts.

The draft regulations recommend the demutualisation of the futures exchange and provide that the ownership structure for each group of shareholders. It must not exceed 25 per cent with at least 15 per cent shareholding held by Kenyan entities. According to the new guidelines shareholders of the exchange must have clear objectives and must also be equipped with business plans detailing why they need to become shareholders of the futures exchange.

Dominant shareholder

They will also be expected to have the necessary domain knowledge about the workings of the futures exchange or its business. The regulations dubbed Policy Framework and International Best Practices for Establishment and Operations of a Futures or Derivatives Market also provide that the futures exchange must have a single dominant shareholder.  This shareholder should ideally be a national level institution with domain knowledge and experience of the commodities business.

“The rationale for this is that in all likelihood, perhaps only a national level institution can take a long term view of the business of a futures exchange and its sustainability as opposed to prospective shareholders who are either pure investors or technology providers and are attracted to the venture only for short term gains,” said CMA.

  The draft regulation is the first in a set of which will include regulations for the business of futures contracts and regulations for futures market intermediaries.  “Additionally, any licensed futures exchange will be required to put in place rules covering a broad spectrum of areas related to the futures exchange business,” said Paul Muthaura, acting chief executive, CMA.

The proposed regulations also require the futures exchange to have qualified staff and sound procedures for implementing the regulations and its business rules.  “Therefore, speculation provides the much needed revenue to the futures exchanges,” said CMA.