NSE derivatives

On July 11, the suits, sophisticated capital market players met to launch the second derivatives market in the continent in at the Kenyan capital Nairobi.

The derivatives market was an 18-year effort since it was conceptualized in 2001 and took extensive work from a host of players some of whom did not live to see the launch.

The derivatives market is associated with the complex trades that infamously brought down the global financial market in 2008 in the United States and sweeping through the rest of the world. It is a market whose reality was always attracting skepticism.

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The approvals, the tests, the systems, the legislators to convince, the regulators to agree on, all show how complex and extensive the market development has been.

“MPs said we knew what we were doing when we told them we had a specialist with a Ph.D. in quantum chaos,”  Mr. Terrence Adembesa the Derivatives Market Director said.

But as Chief Administrative Secretary Nelson Gaichuhie rung the bell to launch the market, few really understand that the market may not be as ready, 18 years since it was pitched.

The derivative market requires two speculators buying and selling contractors for goods they do not own (stocks for Kenya’s case) but which they foresee a change in prices.

You use little capital to buy a contract that derives its value from the real share trading at the NSE, with a promise to pay the full amount at the end of the period.

If during the period the price goes up a buyer loses on the premium, but if the price declines one makes the difference. If the buyer makes money, the seller automatically loses money and vice versa.

But what if you have a contract which you are selling but do not have a buyer, NSE recruits market makers; usually investment banks who will match your trade. So who are the market makers?

So far NSE has not announced how the market makers that guarantee trades will be matched.

The trading members are also yet to be made public and only Cooperative Bank and Stanbic Bank have been announced as having gotten Central Bank of Kenya approvals to act as clearing members and help settle the contracts.

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