The Kenya capital markets are gearing up for the launch of the derivatives trading at the Nairobi Securities Exchange (NSE) scheduled to start at the end of June 2015.

The NSE hopes to initially introduce single currency contracts and index contracts which are easier to start with and later on introduce agriculture commodity contracts.

The exchange is being modelled on Johannesburg Stock Exchange’s Derivatives Market, one of the largest derivatives exchanges in the world.

Trades on NSE will initially have settlement in cash, rather than requiring the delivery of an underlying asset since the former easier.

The NSE has already procured a derivatives trading system and is running simulations with other stakeholders such as trading members, dealers and clearing banks.

The capital markets regulator, Capital Markets Authority (CMA) has already announced the rules to govern derivatives trading.

It has also provided NSE with a provisional license allowing it to open a derivatives exchange.

NSE on its part is in the process of setting up derivatives market oversight board, which will advise the NSE board on risk, strategic issues and oversight roles relating to the NSE’s derivatives market and the NSE clearing house.

In addition to derivatives, CMA, NSE and other stakeholders are working on introducing Exchange Traded Funds (ETFs) as a means of further diversifying available capital markets products and improve Kenya’s capital markets attractiveness.

Michael Kimondo, Head of Treasury Operations at Fusion Investment Management, said Kenya hopes that the introduction of derivatives will offer diversification of financial markets products and help promote Nairobi in its quest to be an international financial center.

“It hopes to attract foreign direct investment from investors angling a piece of frontier market as a diversification strategy. Derivatives will also offer investors an instrument to hedge against risks further improving Kenya’s attractiveness as a frontier market,” he said.

According to the Bank of International Settlements (BIS) quarterly review to December 2014, the gross market value of global derivatives as at June 2014 stood at $17.4 trillion.

This indicates that the derivatives market has potential for Kenya to exploit, and attract a piece of that investment.

Kimondo said that risks do exist in derivatives trading, which will need to be addressed by the CMA and NSE.

“The global financial crisis of 2008- 2009 was triggered by collapse of big banks due to exposure to mortgage backed derivatives. This spells the need to ensure that there is proper supervision in Kenya’s derivatives market to avoid such a scenario happening,” he said.

“In addition, there is need to ensure that the public is informed of and understands the risks involved so as avoid risky bets and risky trading strategies,” he added.