A big step forward for Kenya’s derivatives market NEXT, a part of the Nairobi Securities Exchange (NSE), as it moves to introduce options derivatives trading. These will be options on the existing NEXT securities, which are futures contracts for single stocks and indices offered by the NSE.
The Capital Markets Authority Kenya has approved the development. The NSE has plans to introduce a wider variety of financial derivatives in future.
According to a press release (see here on African Markets website): “The introduction of options contracts is aimed at developing and deepening the derivatives market in Kenya by expanding the suite of financials instruments available to investors. Options are financial derivatives contracts that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
“NSE plans to introduce a wider variety of financial derivatives to provide investors with more investment opportunities that complement their strategies and investments in other exchange-traded products to support enhanced returns and risk management.
All contracts will be cash-settled using existing infrastructure of NSE Clear and supported by our network of clearing members and trading members.”
Frank Mwiti, CEO of the NSE, says: “The introduction will provide investors new instruments to support efficient capital deployment whilst offering advanced risk management tools enabling hedge against adverse price movements in the underlying contracts.
“In advance of the rollout, the NSE will conduct extensive investor education and run additional trade and settlement tests with clearing and trading members. Equally, the NSE will monitor various risk management control measures to limit potential defaults thus ensure the derivatives market continues to attract high level of trust from both investors and trading participants.”
“The proposed introduction is designed to meet growing market demand and is equally in line with our commitment to build a world-class market infrastructure anchored on a wide array of investment products that meet current and future investor’s needs”.
Soaring derivatives trading
The excellent Kenyan Wall Street website, reporter Zainab Hafsah, reports that turnover on the NEXT derivatives market had reached KES 128.4 million ($996,800) for the nine months to September 2024. This is more than the full-year turnovers of 2023 (KES 64.3m) and 2022 and is reportedly driven “by increased appetite from retail investors capitalizing on price movements of listed companies”.
Turnover had already beat 2023 by the end of May at KES 64.7m for the five months, according to another article on Kenyan Wall Street.
NSE launched NEXT in July 2019 to become the second exchange in Africa to offer exchange traded derivatives. Initially it took time to gain use but trading volumes have been picking up steadily.
Traders on NEXT buy and sell equity index futures and single stock futures. They do this to make a trading gain or to hedge against losses by taking a bet on the future price movement. The price moves in line with the price of the underlying securities and their indices. For example single stock futures mean that parties agree to exchange a specified number of stocks in a company for a price agreed today (the futures price).
Find out more about NSE derivatives and NSE Clear in this helpful FAQ page.
Photo: Deposit Photos credit Jan Medhi 33300
