Reported first by the Nairobi Star, Kenya could have their first futures and derivatives exchange licensed within the next quarter (by September), setting the stage for trading in standardized futures contracts for commodities and financial instruments, with FX and interest rate contracts being the fore-running products.
The exchange would most likely be based in Nairobi; a city which acts as a regional commercial hub. The economy of Kenya is the largest by GDP in Southeast and Central Africa. However, as of 2012 only maintains a GDP of $1,800 per capita. The exchange would be overseen by the chief financial regulator of the country the Capital Markets Authority.
Paul Muthaura, the Capital Markets Authority of Kenya’s acting chief executive, yesterday told the Star the regulator has seen interest from the Nairobi Securities Exchange and two other parties. “Certainly in the course of the next three months,” he said, in response to when the country is likely to have the first futures and derivatives exchange licensed.
Setting up of a futures market has been delayed by a year owing to “perceived disputes” between the Capital Markets Authority (CMA) and Nairobi Securities Exchange (NSE).
Mr. Paul Muriithi Muthaura
Muthaura said the CMA has set out “clear minimum requirements” in the law and regulatory framework based on lessons learned during the global financial crisis. “The NSE, notwithstanding a year of back and forth, has now come into substantial compliance with that standard and we are also seeing one or two others who are looking to bring in futures exchanges,” Muthaura said.
“For financial futures it’s just a matter of enhancing transparency and ensuring capital adequacy. Once you secure a futures and derivatives license, you then seek approval for the kind of contract to trade in, say single stock futures to improve liquidity in some listed companies,” Muthaura said.
Futures exchanges for commodities will be licensed subject to the right kind of warehousing infrastructure.
Kenya, with much of it’s economy still agriculturally based would surely benefit from the risk management of being able to hedge positions on a locally based exchange. “Such will pick on areas that Kenya has a genuine competitive advantage in certain commodities to become a world price-setting leader. We need to create some bit of a cushion and planning window for farmers at the lowest level, so that they only worry about warehouse receipts rather than about storing grains in the right standard.”
Muthaura concluded, “This will have a very significant impact at the grass-roots, making people address the massive losses incurred year after year due to weaknesses in storage and maintenance.”
Africa is not a place where very much FX activity is or ever will be the focus despite a push to engage the population by some brokers. Kenya approving a professionally based exchange is a step in the right direction towards a working 21st century economy. As far as retail FX goes, Numerous brokers and so-called IBs have looked to engage the wealthier nations of Africa in an attempt to find a new client base. South Africa has a commodities based economy and can potentially do well in the FX sector, a lot of affiliates are already working there, and a stable banking system makes it an attractive place for business. Amid the problems on the continent, Africa remains to the global economy a place with enormous potential and wealth to unlock. To view Capital Markets Authority of Kenya Paul Muthaura talk with CNBC about financial inclusion in Kenya, watch the video below: