WORLD EXCHANGE CONGRESS, 2013
FEBRUARY 13, 2013
GUOMAN TOWER HOTEL
LONDON, UK

BY
JEREMMY OKONJO
CEO, AFRIDEX
JEREMMY@AFRI...
What are the main hurdles to overcome
when setting up an emerging
market Commodities or derivatives
exchange?
Experiences ...
KENYAN SECURITIES
INDUSTRY STATUS REPORT
NSE INDICES:


ALL SHARE INDEX

109.23 pts



20 SHARE INDEX

4,633.48 pts



...
OTHER TRADING STATISTICS


MARKET CAPITALIZATION



TOTAL SHARE TRADED



EQUITY TURNOVER



TOTAL DEALS



1 I.P.O

...
NEW MARKET DEVELOPMENTS


Introduction of Indexes by FTSE



Development of Credit derivatives such as the
Kenya Bond FT...
POTENTIAL FOR A COMMODITY
DERIVATIVES EXCHANGE


Kenya’s agricultural sector accounts for 24% of annual GDP.



75% of K...
POTENTIAL FOR A FINANCIAL
DERIVATIVES EXCHANGE


Kenya is an export-oriented market, requiring
foreign exchange risk mana...
AFRIDEX MISSION AND
OBJECTIVES
AFRIDEX is seeking to be a multi-asset transnational
demutualized financial and commodity d...
OBJECTIVES
OF
PRESENTATION

THE



Share AFRIDEX perspective on the challenges of
exchange establishment and recommendati...
Defining Emerging Markets


This presentation adopts the country classification
used by the International Finance Corpora...
SIGNIFICANCE
OF
EMERGING
MARKETS IN GLOBAL DERIVATIVES
TRADE
The establishment of derivatives exchanges in
emerging market...
RECENT TRENDS IN ESTABLISHMENT
OF DERIVATIVES EXCHANGES IN
EMERGING MARKETS


Consolidation of exchanges within and betwe...
FUNDAMENTALS FOR SETTING UP A
COMMODITY DERIVATIVES EXCHANGE


Presence of underlying spot market



Price volatility in...
CHALLENGES IN SETTING UP AN EMERGING
MARKET COMMODITY DERIVATIVES EXCHANGE












Poorly developed spot ma...
RECOMMENDATIONS ON OVERCOMING
CHALLENGES


Poorly developed spot market: phased exchange development –
spot, forwards, fu...
RECOMMENDATIONS ON
OVERCOMING CHALLENGES








Lack of homogenous products: create new
products of exchange-referen...
The End 

ANY QUESTIONS? SUGGESTIONS?
CONTACTS:



JEREMMY OKONJO

AFRICA FUTURES & DERIVATIVES EXCHANGE
(AFRIDEX)




EMAIL: jeremmy@afridex.co.ke

MWAGAMB...
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Challenges of Setting Up Commodity or Derivatives Exchanges in Emerging Markets

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‘Challenges of Setting Up Commodity or Derivatives Exchanges in Emerging Markets” Presentation to the Annual Commodities and Derivatives World Exchange Congress (WEC) 2013, in London, United Kingdom, on 13th – 14th February 2013, under the auspices of Terrapin.

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Challenges of Setting Up Commodity or Derivatives Exchanges in Emerging Markets

  1. 1. WORLD EXCHANGE CONGRESS, 2013 FEBRUARY 13, 2013 GUOMAN TOWER HOTEL LONDON, UK BY JEREMMY OKONJO CEO, AFRIDEX JEREMMY@AFRIDEX.CO.KE
  2. 2. What are the main hurdles to overcome when setting up an emerging market Commodities or derivatives exchange? Experiences from Kenya and East Africa BY JEREMMY OKONJO CEO, AFRIDEX
  3. 3. KENYAN SECURITIES INDUSTRY STATUS REPORT NSE INDICES:  ALL SHARE INDEX 109.23 pts  20 SHARE INDEX 4,633.48 pts  FTSE NSE KENYA 15 INDEX 144.66 pts  FTSE NSE KENYA 25 INDEX 148.20 pts  FTSE NSE KENYA BOND INDEX 92.48 pts
  4. 4. OTHER TRADING STATISTICS  MARKET CAPITALIZATION  TOTAL SHARE TRADED  EQUITY TURNOVER  TOTAL DEALS  1 I.P.O  Several Share Splits 1,466.12 TRILLION 41,262,600.00 shares 983,871,176.00 Billion 1,667.00
  5. 5. NEW MARKET DEVELOPMENTS  Introduction of Indexes by FTSE  Development of Credit derivatives such as the Kenya Bond FTSE Index  NSE Index is at a 2-year high  Anticipated derivatives products provide path to diversification and risk management  Hedge funds and trading houses setting up shop in Nairobi, Kenya  Introduction of the Growth Enterprise Market Segment (GEMS) in 2013
  6. 6. POTENTIAL FOR A COMMODITY DERIVATIVES EXCHANGE  Kenya’s agricultural sector accounts for 24% of annual GDP.  75% of Kenyans depend on agriculture  66% of manufacturing sector agro-based  Sizable export market for coffee, tea, pyrethrum, horticulture  Well-established agro-grain processing sub-sector: includes maize, wheat, rice, sorghum, millet and barley among others
  7. 7. POTENTIAL FOR A FINANCIAL DERIVATIVES EXCHANGE  Kenya is an export-oriented market, requiring foreign exchange risk management  increased FDI capital inflows in Kenya (record $ 729 million in 2007, $ 133 million in 2010), requiring interest rate and foreign exchange risk management  Foreign investor inflows at NSE rose 130% to Kshs. 20 billion in 4th quarter of 2012  NSE ranked World’s 3rd best performer in 2012  Equities market participants in need of new asset classes for investment
  8. 8. AFRIDEX MISSION AND OBJECTIVES AFRIDEX is seeking to be a multi-asset transnational demutualized financial and commodity derivatives exchange based in Nairobi, Kenya, enabling the trading of financial and commodity derivatives across the African Continent and globally in a secure, regulated and transparent trading ecosystem.
  9. 9. OBJECTIVES OF PRESENTATION THE  Share AFRIDEX perspective on the challenges of exchange establishment and recommendations for overcoming them  Market Kenya and East Africa as a promising emerging market  Invite strategic engagement of stakeholders with complementary synergies and best practices
  10. 10. Defining Emerging Markets  This presentation adopts the country classification used by the International Finance Corporation (IFC) given that it is based on the level of development of a country´s stock markets.  The IFC classifies a stock market as emerging if it meets at least two general criteria: (i) it is located in a low or middle-income economy as defined by the World Bank, (ii) its investable market capitalization is low relative to most recent GDP figures
  11. 11. SIGNIFICANCE OF EMERGING MARKETS IN GLOBAL DERIVATIVES TRADE The establishment of derivatives exchanges in emerging markets has:  Allowed market participants to access local terminal markets.  Lowered transaction costs,  Enhanced the transfer of local information,  Facilitated the geographical transfer of risk and cross-border transactions.
  12. 12. RECENT TRENDS IN ESTABLISHMENT OF DERIVATIVES EXCHANGES IN EMERGING MARKETS  Consolidation of exchanges within and between countries, aimed to achieve higher efficiency and market depth, fostered by market globalization and communication technology improvements.  Cooperation between emerging market and developed market exchanges denoted by the signing of memoranda of understanding between exchanges in different countries which serve a variety of purposes including personnel training, sharing of internet-based trading platforms, and joint listing of products.  Preference for financial over commodity derivative products in the newly created exchanges in emerging markets contrasting with older exchanges, which usually started trading just commodities.  Exchange demutualization: the segregation of trading rights and membership rights allowing outside ownership of the exchange. This follows a world trend of demutualization in stock and derivatives exchanges.
  13. 13. FUNDAMENTALS FOR SETTING UP A COMMODITY DERIVATIVES EXCHANGE  Presence of underlying spot market  Price volatility in spot market  Tradable volumes of production  Export potential  Market liberalization  Liquidity  Product homogeneity  Infrastructure: transport, assaying, grading, sorting, packaging, insurance, information technology, warehousing,  Regulatory framework  Education and training  Market information dissemination  Market support: government, private sector, civil society
  14. 14. CHALLENGES IN SETTING UP AN EMERGING MARKET COMMODITY DERIVATIVES EXCHANGE            Poorly developed spot market Agricultural market fragmentation Low, untradeable product volumes Predominant domestic markets Government intervention/food security concerns Absence of liquidity in contracts introduced to the exchange Lack of homogenous products Inadequate market infrastructure Sub-optimal regulatory framework: absent or too stringent Inadequate technical capacity Market support: political, government, business and civil society
  15. 15. RECOMMENDATIONS ON OVERCOMING CHALLENGES  Poorly developed spot market: phased exchange development – spot, forwards, futures.  Market fragmentation (small-holders): cooperatives, hedging purchasers, and financial institutions/trading houses  Low, untradeable volumes: single national exchanges or regional exchanges  Predominant domestic markets: price risk management strategies  Government intervention/food security concerns: interventionist concerns through the exchange mechanisms, e.g. marketmaking by government agencies;  Absence of liquidity: sequencing of financial and commodity futures, and broadening of market participants; cross-listing, dual listing etc.
  16. 16. RECOMMENDATIONS ON OVERCOMING CHALLENGES      Lack of homogenous products: create new products of exchange-referenced quality Inadequate market infrastructure: exchange establishment will mobilize public and private sector resources to gradually improve infrastructure; make use of government, private sector and civil society partnerships Sub-optimal regulatory framework: private-sector driven legislative processes; self-regulation. Inadequate technical capacity: education and training; MoUs with established, developed market exchanges. Market support: government, private sector and civil society partnerships
  17. 17. The End  ANY QUESTIONS? SUGGESTIONS?
  18. 18. CONTACTS:   JEREMMY OKONJO AFRICA FUTURES & DERIVATIVES EXCHANGE (AFRIDEX)   EMAIL: jeremmy@afridex.co.ke MWAGAMBO & OKONJO ADVOCATES  VIEW PARK TOWERS, 20TH FLOOR  P.O. BOX 13724-00800   NAIROBI EMAIL: jeremmy@mwagambo-okonjo.co.ke  Tel No. +254 771 44 72 62

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