Archive for the 'Futures' Category

Nairobi opens second derivatives market in sub-Saharan Africa

Nairobi Securities Exchange stockbrokers (photo credit: Nation Media Group)

The Nairobi Securities Exchange says the first trades on its new derivatives market NEXT went smoothly on 4 July, according to media reports. The NEXT market is set up to trade equity index futures and single stock futures. Initially trading is offered in 5 single stock futures and futures on the NSE 25 Index.

The NSE is the second exchange in sub-Saharan Africa after Johannesburg to launch derivatives trading. According to a Business Daily news report, this week’s launch is a soft launch restricted to a few investors, and the market will open to all investors after a week of trials.

Xinhua news agency reports a statement from NSE: “The NSE NEXT derivatives market has successfully conducted its first futures trades. The initial trades were executed by Standard Investment Bank and Kingdom Securities who cleared through the Co-operative Bank of Kenya.”

The market is mostly for individual and institutional investors looking to better manage risks, hedge, arbitrage and speculate over the future value of the participating stocks and the index.

Regulator approves

The Capital Markets Authority (CMA) regulator gave approval to the NSE to launch and operate the “Derivatives Exchange Market” in an announcement on 29 May. This paved the way for Thursday’s launch.

Paul Muthaura, CMA Chief Executive, stated: “‘The approval granted to the NSE to operationalize a derivatives market marks the achievement of a flagship project under the economic pillar of Kenya’s Vision 2030. The derivatives market will facilitate deeper and more liquid capital markets and position Kenya closer to becoming the heart of capital markets investment in Africa, as envisioned in the Capital Markets Master Plan”.

Other financial and commodity derivatives will be introduced later.

The launch follows a successful 6-month derivatives pilot test phase in July-Dec 2018, and resolution of key issues that arose. Stanbic Bank and the Co-operative Bank of Kenya have been approved by the banking regulator Central Bank of Kenya to provide clearing and settlement for the derivatives market.

NSE has been working with CMA and other stakeholders for years to prepare for the launch, as reported in this blog in December 2014.

What can you trade?

Investors are initially offered single stock futures targeting 5 liquid stocks: Safaricom, East African Breweries, Equity Holdings, Kenya Commercial Bank (KCB) and BAT. They can also trade equity index futures based on the NSE 25 share index, that represents the performance of 25 blue-chip listed firms. The index was launched by the bourse in October 2015 as part of preparations for the NEXT derivatives market.

Initially 7 stocks were targeted but the NSE requires that they have a minimum KES 50 billion ($487 million) market capitalization and minimum average daily turnover of KES7m.

According to a report on 4 July in Business Daily, state-run Kenya Electricity Generating Company (KenGen) with a market cap on 3 July of KES 39bn and Bamburi Cement (KES 41bn on Wednesday) have been excluded from futures trading after failing the minimum capitalization test.

The newspaper reports NSE chief executive Geoffrey Odundo’s statement: “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 cash settled.”

Trading fees have been pegged at 0.17% of the total value for single stock futures and 0.14% for index derivatives, compared to trading fees on equities ranging from 1% to 2%. According to an earlier Xinhua report, Rufus Kariuki, manager of derivatives at NSE, said that the derivatives will be settled at the end of each trading day to reduce risk of default by investors.

One contract will be equivalent to 1,000 underlying shares for stocks trading below KES 100 (Safaricom, KCB, Equity and KenGen), while for those trading above KES 100 (BAT, EABL and Bamburi), a contract will equal 100 underlying shares. One index point will equal KES 100 under NSE trading rules for derivatives.

The NSE has set aside KES 130m ($1.27m) for the settlement guarantee fund that will insure investors against counterparty default risk as part of preparations to operationalize the derivatives market.

The NSE expects derivatives trading will boost liquidity. There are 65 listed firms. Telecoms companies and banks are among the most heavily traded.

JSE number of equity trades up 19% in 2014, scores daily records

South Africa’s Johannesburg Stock Exchange (JSE) saw the number of equity trades soar 19% for the year 2014, compared to 2013. It also broke records for the highest daily value traded on 18 Dec when R53.7 billion ($4.6bn) worth of equities traded, and it hit the highest number of daily trades was 395,969 trades on 16 Oct.

Johannesburg Stock Exchange (credit: JSE)

Johannesburg Stock Exchange (credit: JSE)


There were a total of 24 new listings for the year, which added R86bn in market capitalization, including a record 8 new listings in December. In the same month, the value of trades reached a monthly record of R345.5bn, a 45% increase compared to trading in Dec 2013. In 2014, the net inflow from foreigner investors was R13.4bn.
The JSE Equity Derivatives Market, which provides traders and private investors with a platform for trading futures, exchange-traded CFDs (contracts for difference), options and other derivative instruments, saw value traded up 18% to R6 trillion. This was largely driven by the JSE flagship equity derivative futures products, index futures and single-stock futures (SSFs), which both increased by 19%.

Growth for 2015
Donna Oosthuyse, Director Capital Markets at the JSE, comments in a press release (not yet available at www.jse.co.za): “Going into 2015, a key focus for us will be to sustain these positive growth levels for the Equity and Equity Derivatives Markets. For the Equity Market our priority will be to ensure that the JSE remains an attractive venue for participation in the capital markets. For the Equity Derivatives Markets, our key focus will be to remain responsive to the needs of the market by offering investors with innovative products that provide global exposure and an ability to weather the prevailing economic environment.”
Looking back on a busy year and particularly December, she said: “The JSE Equity Market is the bedrock of the exchange and we are pleased with the performance of this segment of the market for the year, driven mainly by renewed positive US economic sentiment and a rapid decline in oil prices.
“The performance of the Equity Derivatives Market is also pleasing as it signals to the improving appetite of local and foreign investors to participate in this segment of our capital markets.”
Oosthuyse added that foreign participation in index futures had increased compared to 2013, from 31% to 37%: “This is a promising development as any increase in foreign participation can only breed more liquidity and galvanize our status as a first world exchange.”
The Johannesburg Stock Exchange has operated as a market place for trading financial products for 125 years and is one of the top 20 exchanges in the world in terms of market capitalization. It offers a fully electronic, efficient, secure market with world class regulation, trading and clearing systems, settlement assurance and risk management. It is a member of the World Federation of Exchanges (WFE).

Nairobi securities exchange prepares for derivatives market launch

The Nairobi Securities Exchange is pushing ahead with plans to launch a derivatives market, including preparing product and contract specifications, and public education and stakeholder engagement meetings.
This follows the news on 19 Dec that the Capital Markets Authority granted NSE a provisional licence to set up and operate a derivatives exchange and approved the NSE’s Derivatives Exchange Rules and related documentation.
According to a press release put out by the NSE, acting Chief Executive Andrew Wachira said: “The NSE will now establish a globally competitive derivatives exchange that will enable spot and futures trading of multi-asset classes including equities, currency, interest rate products as well as varied forms of agricultural commodities contracts. The exchange has invested in the development of the derivatives market to ensure that it will meet global standards including mechanisms for trading, clearing and settlement of the instruments traded.”
NSE’s derivatives market is modelled on the derivatives market at the Johannesburg Stock Exchange (JSE), which offers trading in futures and options on equities, bonds, indices, interest rates, currencies and commodities.
The latest move is in line with the strategic plan of the NSE. According to a report on Bloomberg earlier this year in February this envisages market capitalization soaring fourfold to KES 7.2 trillion ($79 billion) by 2023 from KES1.85 trillion.

Nairobi Securities Exchange (credit: Diana Ngila, Nation Media Group)

Nairobi Securities Exchange (credit: Diana Ngila, Nation Media Group)


NSE Chairman Eddy Njoroge noted in the press release: “Derivatives are among the most affordable and convenient means companies can cushion themselves against interest-rate fluctuations, exchange-rate volatility and commodity prices. Derivatives also boost liquidity in the underlying assets. The establishment of a derivatives market is a step towards growing the NSE brand and shareholder value and is also in line with Kenya’s Vision 2030 of deepening our Capital Markets and making Nairobi the financial services hub of East Africa.”
According to Bloomberg, a system for trading derivatives has already been installed. The law to allow creation of the futures market was passed in Dec 2013 and rules were submitted for approval by mid-February.
“Derivatives” get their name because their value is derived from another asset class such as a share, a physical commodity or an index. The JSE was ranked the 6th largest exchange by the number of single stock futures traded and 9th by the number of currency derivatives traded in 2012 in the World Federation of Exchanges Annual Derivatives Market Survey, according to the press release.

JSE launches futures trading for 3 African currencies

South Africa’s Johannesburg Stock Exchange (www.jse.co.za) has launched currency future instruments which will help investors and businesspeople looking to hedge against African currency movements. The 3 new currency futures are the first to track exchange rate between the rand (ZAR) and Nigeria’s Naira (NGN), Kenya Shilling (KES) and Zambia Kwacha (ZMW).
The move will allow investors, importers and exporters to protect themselves against the currency movement in the foreign country. The JSE has partnered with Barclays Africa and specialist brokers, Tradition Futures, to bring this new offering to market.
A press release from the JSE quotes Andrew Gillespie of Tradition Futures: “It is a groundbreaking development to have a transparent, independent, well-regulated platform to mitigate or assume FX (foreign exchange) risk in these African countries, against any other currency of their choice – that does not prejudice anyone, irrespective of size, domicile or nationality.

Representatives of JSE, Reserve Bank, Kenya and Zambia open trading in African currencies (credit: JSE)

Representatives of JSE, Reserve Bank, Kenya and Zambia open trading in African currencies (credit: JSE)


“The ability to transact anonymously, through specialist brokers such as Tradition Futures, and to have access to full and fair, timeous price discovery is an international benchmark requirement for a developed market. This allows for a level and fair playing field, where the best price is available to all, without bias or favour, which is a significant facet and feature of this market in African FX on the JSE.”

Guide to African currencies (see www.charterresource.org/african-currencies)

Guide to African currencies (see www.charterresource.org/african-currencies)


The JSE already offers futures against the ZAR in: USD (contracts of $1,000), Euro, Sterling, Australian dollar, Japan Yen, Canada dollar, New Zealand dollar, Chinese Renminbi, Swiss Franc, Botswana Pula and a couple of custom instruments. See the helpful brochure available here.

How they work
A currency futures contract is an obligation to buy or sell an underlying currency at a fixed exchange rate at a specified date in the future. For example, a futures contract can give an investor the right to buy USD at ZAR10 per USD1 at the end of December. One party to the agreement is obligated to buy (longs) the currency at a specified exchange rate and the other agrees to sell (shorts) it at the expiry date. A futures contract is therefore an agreement between two investors with different views on the way or extent a currency will move.
The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the South African rand. The value of the futures contract moves up and down with this exchange rate – the level of the exchange rate determines the value of the futures contract. Currency futures contracts therefore allow participants to take a view on the movement of the exchange rate as well as to hedge against currency risk. Currency futures are used as a trading, speculating and hedging tool by all interested participants.
The new JSE futures contracts will provide the market participants with the ability to get exposure on the JSE to the exchange rate between the USD and the Zambian, Kenyan and Nigerian currencies through trading synthetic cross-currencies. For example, investors can get exposure to the exchange rate between the USD and the KES by trading both against the ZAR. To promote cross-currency trading the JSE will charge trading fees on only one of the foreign trade logs and not both.

Boosting African trade
The currency futures were launched on 3 October. The press release quotes Warren Geers, General Manager: Capital Markets at the JSE: “The JSE is very excited about this new groundbreaking initiative as we have been working on this strategy for 2 years. With Africa being a global investment destination it makes sense for the JSE as a major exchange player in Africa to be involved in providing appropriate products to mitigate currency risk and exposure when dealing in Africa.”
Trade statistics from the South African Revenue Service (SARS) show trade between South Africa and Nigeria totalled R34.4 billion, between South Africa and Zambia was nearly R18bn, and between South Africa and Kenya amounted to R4.6bn for for January-July 2014.

For more information, look at the currency futures details on the JSE website.