NSE taps into top stocks in safe-bet derivatives


NSE taps into top stocks in safe-bet derivatives
An investor looks through the trading board on the floor of the NSE PHOTO | COURTESY

In Summary

  • Dubbed NEXT, the new derivatives market will comprise of key NSE stocks among them Safaricom, KCB, Equity, KenGen, EABL, BAT and Bamburi in addition to a futures option on the entire NSE25 portfolio.
  • Stock-holders are expected to enter into contracts to protect against fluctuations in value while profiting from potential market movements in a playout that onboards a bi-directional perspective to the country’s financial markets.
  • The derivatives market will take-up a three tier structure comprising of a clearing house represented by the NSE, clearing members (Stanbic & Co-op Bank) and trade members who are made up of investment banks and other fund managers.

The Nairobi Securities Exchange (NSE) has picked seven of the best performing shares on its 25 index to kickstart the derivatives market whose launch is set for July 4.

Dubbed NEXT, the new derivatives market will comprise of key NSE stocks among them Safaricom, KCB, Equity, KenGen, EABL, BAT and Bamburi in addition to a futures option on the entire NSE25 portfolio.

The criteria for adoption has been anchored on a threshold made up of an average-six month daily turnover of Ksh.7 million.

In addition are stocks from firms whose market capitalization eclipses Ksh.50billion in what rounds off as the NSE’s check on liquidity for the new-born platform.

Hedging

The NSE has backed the prevailing financial markets characterized largely by increased volatility to asset prices to prompt more sophisticated risk management tools and strategies to end in the enlisting of players in the derivatives market.

Stock-holders are expected to enter into contracts to protect against fluctuations in value while profiting from potential market movements in a playout that onboards a bi-directional perspective to the country’s financial markets.

Like the derivatives solo purpose of sheltering exposure to risks, the NSE has taken a cautious approach choosing only the best performing stocks in a move which is likely to involve a similar calibre of investors and stakeholders as in the spot market.

“The existing clientele base will likely represent the early adopters of the derivatives market as they seek out options to hedge against their exposure positions. This are mainly individuals with the basic understanding of how the capital markets work,” a source who sort anonymity told Citizen Digital.

Further, the bourse has adopted an upfront settlement scheme with participants being required to put forward an initial margin equitable to a good-faith deposit to open a position.

Moreover, the NSE has adopted a day to day settlement to outstanding investor obligations to tame a potential build up of credit risks in addition to other buffers to incorporate a settlement guarantee and investor protection fund.

Elitism

The establishment of derivatives market follows the grant of licensing by the Capital Markets Authority (CMA) in addition to a six-month long pilot experiment with stocks, which if successful would signal the incorporation of other futures including commodity and currency exchanges.

Commodities which draw from an already existing pool of items to include Forex, crude oil and gold are notable absentees from the soon to be platform even as the Ministry of Trade reconfigure its deadline for the fruition of the Kenya National Multicommodity Exchange (Komex) to March 2020.

In spite of a renewed vigour of the securities market in recent years to diversify away from the primary trade in equities and bonds, industry stakeholders remain in the critique of the NSE over its lack of sufficient shareholder education informed by the continued lock-out of the masses from the ‘high net-worth individual’ industry.

“Derivatives are likely to remain a tool for sophisticated investors. It would be pivotal for the NSE and the CMA to educate retail investors on how to hedge against risks which may in the end entail price movements to essential commodities such as maize and coffee,” said Robert Ochieng, Abojani Investments founder.

The NSE has already struggled to onboard platforms such as the MSME targeted Growth and Enterprise Market Segment (GEMS) and M-Akiba with the latter already falling short of targets on two subsequent offerings in spite of its attractive tax-free fixed-income return.

The derivatives market will take-up a three tier structure comprising of a clearing house represented by the NSE, clearing members (Stanbic & Co-op Bank) and trade members who are made up of investment banks and other fund managers.

Investors have the window to enter into a three-month long contracts with the option to close on their exposure positions ahead of the expiry of contract through secondary market trading.

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