Derivatives markets in Kenya

Get an overview of the derivatives market in Kenya, including its launch by the Nairobi Securities Exchange, regulatory framework, and purpose. It explains how derivatives such as futures contracts work, the instruments currently traded, the role of settlement banks, and the growth and challenges of the market, helping readers understand how derivatives are used for risk management and speculation.

Derivatives markets in Kenya was launched by the Nairobi Securities Exchange (NSE) in July 2019. They are regulated by the Capital Markets Authority (CMA), which offers a platform for trading. The market operates under the Capital Markets (Derivatives Markets) Regulations, 2015.

Primarily, derivatives market was established to provide sophisticated risk management tools, attract more liquidity to the Kenyan financial markets, and enable investors to shield their asset against price volatility.

The market currently facilitates trading in futures contracts based on the NSE 25 Share Index and a selection of single stocks from major Kenyan companies like Equity Group Plc, and Absa Plc

Derivatives allow investors to speculate on future price. Profit or loss is realized daily.

Commercial banks like the Co-operative Bank of Kenya and Standard Chartered Bank assist in the settlement process.

Since its launch, the derivatives market has seen steady growth in turnover, with a notable increase in activity, particularly in 2024, driven by increased retail investor participation. However, the market still faces several challenges: like Investor Awareness and limited range of products

Risk Considerations and Disclosures

Investments in fixed income securities carry risks common to debt instruments, including credit risk, liquidity risk, interest rate risk, and prepayment or extension risk. Bond prices move inversely to changes in interest rates, meaning a general rise in interest rates may cause bond prices to fall. Securities with variable or floating interest rates are generally less sensitive to interest rate movements than fixed rate securities, however, if interest rates do not change as expected or if they fall, variable or floating rate securities may not increase in value and may even decline. Credit risk arises when the issuer fails to pay interest or principal, and this risk tends to be higher for high yield or lower rated bonds. Prepayment risk occurs when the issuer repays principal sooner than anticipated, while extension risk occurs when repayment happens more slowly than expected. As a result, fixed income investments may be worth less than the original amount invested at redemption or maturity.

This material does not constitute an offer or solicitation in any jurisdiction, including Kenya, where such an offer or solicitation would be unauthorised or unlawful.

Prospective investors should familiarise themselves with any legal, tax or exchange control obligations that apply in Kenya or in their country of residence or domicile, as these may affect the investment.

This information is provided for educational and informational purposes only. It should not be interpreted as investment advice or as a recommendation to buy, sell, or hold any security. It is not a substitute for personalised guidance from a qualified financial adviser. The suitability of any investment depends on an investor's financial situation, objectives, and risk tolerance.

Past performance does not guarantee future results. The value of investments and the income generated from them can fluctuate and may go down as well as up. Loss of principal is possible.

This material may refer to general market, economic, industry, or sector conditions in Kenya or globally. It does not constitute research or financial analysis and should not replace independent due diligence.

Fintrust Securities Ltd, a licensed securities dealer regulated by the Capital Markets Authority of Kenya, applies internal risk management procedures. However, this does not imply that fixed income or other securities investments are low risk.

Any reference to a specific issuer, company, or security does not constitute a recommendation to invest in that issuer or security. There is no assurance that future investment decisions will achieve profitability or match the performance of any securities mentioned.

Views and opinions expressed in this material are current as of the date of publication and are subject to change without notice. This information may not reflect the most recent market or regulatory developments.