The Nairobi Securities Exchange (NSE) has embraced a new era of financial market sophistication with the introduction of the NSE Derivatives Market, known as NEXT. Regulated by the Capital Markets Authority (CMA), NEXT is a platform designed to facilitate the trading of futures contracts, addressing the evolving needs of the Kenyan financial market.
Let’s explore the factors that led to the establishment of NEXT and delve into the specifics of trading Equity Index Futures on this innovative platform.
Genesis of NEXT:
- Integration with Global Markets:
- NEXT is a response to the increased integration of the Kenyan financial markets with international counterparts. This integration necessitates the adoption of advanced financial instruments to align with global market practices.
- Volatility Management:
- Growing volatility in both local and international asset prices highlighted the importance of having a platform that offers sophisticated risk management tools. NEXT, in this context, serves as a crucial mechanism for managing and mitigating risks effectively.
- Sophisticated Risk Management:
- NEXT addresses the need for more sophisticated risk management tools and strategies. As market dynamics become more complex, having instruments like Equity Index Futures becomes essential for market participants to navigate uncertainties.
- Market Deepening:
- The establishment of NEXT is a strategic move to deepen and broaden the Kenyan financial markets. By introducing derivatives trading, the NSE aims to enhance market liquidity, attract diverse investors, and foster a more resilient financial ecosystem.
Trading Equity Index Futures on NEXT:
- Overview:
- NEXT Equity Index Futures are derivative instruments providing investors with exposure to price movements on an underlying index, initially based on the NSE 25 Index.
- Contract Details:
- Contract months: Quarterly (March, June, September, and December).
- Expiry dates: Third Thursday of the expiry month.
- Expiry times: 15H00 Kenyan time.
- Contract size: One index point equals one hundred Kenyan Shillings (KES 100.00).
- Minimum price movement: One index point (KES 100.00).
- Settlement methodology: Cash settlement.
- Trading Hours and Fees:
- Market trading times: 09H30 to 15H00 Kenyan time.
- Market fees (Percentage): NSE Clear (0.02%), Clearing Member (0.02%), Trading Member (0.08%), IPF Levy (0.01%), CMA Fee (0.01%).
Benefits of Trading NEXT Equity Index Futures:
- Risk Mitigation:
- NEXT Equity Index Futures allow investors to mitigate risk by providing a form of “insurance” for their stock portfolios. This protection shields portfolios from potential price declines.
- Transparency and Liquidity:
- These contracts offer price transparency and liquidity. They can be sold and bought with ease, providing investors with flexibility in their trading strategies.
- Lower Transaction Fees:
- Trading Equity Index Futures incurs lower transaction fees compared to buying or selling the entire basket of securities constituting the index. This cost efficiency is attractive to market participants.
- Reduction of Counter-party Risk:
- Trading on NEXT reduces counter-party risk as transactions occur through the exchange, ensuring a secure and regulated environment.
- Centralized Clearing:
- The platform provides centralized clearing, streamlining the settlement process and contributing to market efficiency.
In conclusion, NEXT represents a significant advancement in the Kenyan financial landscape, offering investors and market participants innovative tools for risk management and portfolio optimization. The introduction of Equity Index Futures on NEXT is a testament to the NSE’s commitment to fostering a resilient and globally integrated financial market. As investors embrace these opportunities, NEXT stands as a cornerstone for the future evolution of the Kenyan financial ecosystem.
