NAIROBI, Kenya, Jul 4 – The much-anticipated NSE Derivatives Market (NEXT) futures started trading on Thursday providing new opportunities to local and international investors.
NEXT will enable market players to better diversify their portfolios, manage risk, and deploy capital more efficiently. Futures contracts also provide risk management tools in the wake of unexpected volatility in asset prices.
The Derivatives Market is expected to help the country to consolidate its position as a leading financial services hub offering a wide variety of investments products.
The official launch of the market is slated for Thursday, July 11, 2019.
Derivatives are an investment tool whose value is derived from an underlying asset like bonds, commodities, currencies, interest rates, market indexes and stocks based on the expected future price movement of the asset.
They allow investors to make a gain or hedge against losses by taking a bet on the future price movement.
NEXT will commence with index futures and single stock futures on selected indices and stocks, respectively.
The Exchange will initially offer index futures contracts on the NSE25 Share Index and single futures on Safaricom Plc, Kenya Commercial Bank Group Plc, Equity Group Holdings Plc, KenGen Co. Plc, East African Breweries Ltd, British American Tobacco Kenya Plc and Bamburi Cement Ltd.
The above single stock futures have been selected based on the following eligibility criteria:
The security underlying the futures contract must be a listed instrument on the Nairobi Securities Exchange.
The security underlying the futures contract shall be chosen from amongst the constituents of the NSE 25 Share Index.
The security underlying the futures contract must demonstrate a minimum average daily turnover of KES 7 million over the last six months before review.
The security underlying the futures contract must have a market capitalization of at least KES 50 billion.
All futures contracts listed on NEXT will have quarterly expiry dates; this will be the third Thursday of March, June, September and December of every year. All NEXT futures contracts will initially be settled in cash.
In line with global practice in safeguarding market infrastructure and investor interests, the Exchange has also established the Settlement Guarantee Fund (SGF) and the Investor Protection Fund (IPF).
The main purpose of the SGF is to settle specified claims by derivatives members arising out of transactions in derivative securities while the function of the IPF is to satisfy specified claims by the investing public arising out of non-settlement of obligations owed to them by trading members or losses incurred by reason of the default of trading members.
According to the Capital Markets Authority, Stanbic Bank and Co-operative Bank have been licensed by the Central Bank of Kenya to handle clearing and settlement for the derivatives exchange.
The NSE will be the second exchange in Sub-Saharan Africa after Johannesburg to launch trading in derivatives.