Kenya, Dec 21 – Kenya could have for the first time a currency futures and derivatives market, as early as February 2010 if proposed plans by an international consortium are fulfilled.
The Global Board of Trade (GBOT) is in talks with local stakeholders on the best ways to introduce the latest and most optimal instruments in foreign exchange (forex) investments in the country.
According to GBOT directors who met with Central Bank of Kenya officials in November, the GBOT complete asset class exchange which is established in Mauritius, will be the first exchange in the African continent to quote regional currencies including the Kenyan and Ugandan shillings against world majors.
“Currency derivatives are risk management tools used in the forex and money markets the World over.
These are devised for hedging risks and act as an insurance against unforeseen and unpredictable currency and interest rate movements,” said Joseph Hadrian Bosco, GBOT’s Chief Operating Officer.
GBOT will be partnering with DCDM, the leading Pan African consultancy firm, to build capacities of market participants in Africa. These include financial institutions, government entities, multinationals and even individuals who will be co-opted in as members to trade.
The firm through its clearing house has appointed three international banks for funds settlement and other fund management activities. Members shall in turn have settlement accounts with the designated clearing bank.
Trading in currency forms the largest financial market in the world. According to the Bank of International settlements (BIS), the average daily turnover in global currency markets is approximately US$ 5 trillion. Over US$ 1 trillion occurs in the cash market, with the futures/derivatives markets (both over-the-counter and exchange-traded derivatives) accounting for the remaining amount.
“Given the potential for economic growth in the Pan-African region, the introduction of exchange-traded currency futures could assume a significant role in the growth of local financial markets”, said Bosco adding that GBOT will initially introduce three futures contracts i.e. near month, middle month and far month.
Currency derivatives occur in two forms, Forward contracts which are traded Over the Counter (OTC) and Futures contracts that are mostly exchange-traded. Though the Exchange-traded futures serve the same economic purpose as OTC forwards, the two are different.
An entity entering into a forward contract agrees to transact at a predetermined (forward) price on a future date. On the maturity date, the obligation of the Bank equals the forward price at which the contract was executed. Only on maturity does the money change hands.
In the case of an exchange-traded futures contract, cash flows on a daily basis on account of the individual parties’ mark to market obligations. Marking the position to the market is a daily process of managing counter party risk. This is eliminated further by the presence of a clearing corporation, which, by assuming counterparty guarantee, eliminates credit risk.
A strong exchange-traded currency derivatives platform can be an effective dampener against any negative global events that may affect the country’s economic stakeholders especially in the current era of rapid globalization.
In an exchange-trade scenario where the market lot is fixed lower than the OTC market, equitable opportunity is provided to all classes of investors, whether large or small, to participate in the futures market. In addition the futures exchange allows for greater anonymity of participants, transparency, efficiency and accessibility.
“Importers, exporters, financial institutions, individual investors, corporations and government organizations will be able to hedge their currency risks at low transaction costs. These opportunities are to be extended to Kenyan market participants through the Global Board of Trade” explained Bosco.
Historically the currency futures markets were widely used by the large financial institutions such as banks, export–import houses, oil companies, shipping companies and State Trading Corporations.
However, in the recent past the currency futures market have witnessed increasing attention from businesses overly exposed in their day-to-day forex transactions.
The reason for this is that any individual or a Small Scale industry expecting to receive or pay certain amounts in foreign currencies at a future date can use exchange traded futures to opt for a fixed rate, in case the receivables or payments/expenditure are to be incurred in multiple currencies.
Major currencies traded across the globe
Symbol Country Currency Nickname
US$ United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi