(Bloomberg) -- Kenya's central bank blocked plans to introduce foreign-exchange derivatives in the country as it determines how the instruments may affect the nation's currency, according to the Nairobi Securities Exchange.
The regulator has also yet to approve the use of banks as clearing members for derivatives trades, delaying the introduction of single-stock and equity-index futures, Geoffrey Odundo, the bourse's chief executive officer, said in an emailed response to questions. The central bank is conducting a viability study on currency futures with the help of the International Monetary Fund, he said.
The exchange was planning to introduce the instruments this year to help improve liquidity, cut the cost of investing and enable hedging in East Africa's biggest market. Kenya's Capital Markets Authority estimated that exchange-traded derivatives could reach $200 billion in value by 2023, or about three times the country's gross domestic product.
“While we would have wanted to start with currency futures, we do believe that the current hold on currency derivatives will not be detrimental to having a successful derivatives market,” Odundo said. “The operating infrastructure for the derivatives market is ready, all participants are fully prepared and continuous training and market forums are ongoing as we await the Central Bank of Kenya's approval of banks' participation” as clearing houses, he said.
Kenya's shilling has weakened 1.3 percent this year as the central bank intervened to keep the currency steady amid quickening inflation and demand for dollars from importers. It traded unchanged at 103.80 per dollar by 9:44 a.m. in Nairobi, the capital.
Central banks in other countries, including India, also had reservations about the introduction of currency derivatives, though those proved groundless, Odundo said.
“Currently we have a unidirectional market, and this creates scenarios where any bearish sentiments are coupled with a lot of capital flight,” Odundo said. “The launch of equity futures will shift this sentiment and allow investors an opportunity to take an offsetting view in the derivatives market instead of exiting the spot market.”
The NSE said last year it signed up Barclays Bank of Kenya Ltd., Co-Operative Bank of Kenya Ltd., Stanbic Holdings Plc, NIC Bank Ltd., Chase Bank Kenya Ltd. and Commercial Bank of Africa Ltd. to act as clearing houses for a derivatives market, guaranteeing the obligations of sellers and buyers to reduce default risk.
To contact the reporter on this story: Adelaide Changole in Nairobi at achangole2@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Robert Brand, Dana El Baltaji
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