Category Archives: derivative

Online currency trading with FXPesa in Kenya

With the recent attention on exchange rates and online forex (foreign exchange) trading in Kenya, this month we got to engage with one of the pioneers in the space – EGM Securities.

Their parent company is Equity Global Markets Capital, with seven locations across the world, They launched in Kenya in 2017 after they got a non-dealing online foreign exchange broker license from the Capital Markets Authority (CMA). This means that they don’t set the prices locally, they just enable the trades and make money from the spreads.

They then spent their first few months tweaking and develop their offering in Kenya where the mobile phone is prevalent for payment transactions. They then came up with FXPesa, a simple tool for retail traders to use.

FXPesa was launched in May 2019 and also has a web version. Within six months, FXPesa had registered over 25,000 users. They have integrated with local payment methods such as M-pesa, Equitel, cards, and bank transfers for traders to get money out and in easily. People can trade as little as $100, right from an uber or matatu. Prices change in nano-seconds, but traders on FXPesa can set “stop-loss” and “take profit” triggers and also earn trading bonuses.

After downloading the FXPesa from an app store, users can register and get on to a demonstration portal. The demo account comes with some virtual money, and prices the same as real the trading side, for new potential investors to get started. 

Meanwhile, EGM does some vetting and extensive know-your-customer (KYC) checks to ensure the accounts are legitimate and not being used for money laundering. They also offer beginner, intermediate, or advanced training classes. They also aim not to be used for dangerous speculation and cap trading amounts based on people’s income.

FXPesa offers clients over 100 instruments such as currency pairs, commodities, indices and shares. Some of the most popular ones are currency pairs like Euro/US dollar, US dollar/ Japanese Yen and Great Britain pound/US dollar as well as commodities like gold and crude oil, and Apple and Google shares. The South African Rand is the third most traded currency.

EDIT: On June 4, 2020, Genghis Capital announced a partnership with EGM Securities, to offer investors a wider range of alternative asset classes including online currencies, commodities, precious metals, oil, and biotech company stocks.

EDIT: On April 20, 2021, EGM Securities become Kenya’s first online trading broker to offer derivative contracts on the most liquid traded equities and index in the country – futures contracts on British American Tobacco, KCB Group, Equity Group, Safaricom Plc, East African Breweries and ABSA Bank Kenya, as well as the NSE 25 Index. 

Kenya launches futures derivatives markets

The Nairobi Securities Exchange (NSE) has gone live with NEXT – futures derivatives trading in a move to enhance risk management and becoming the second exchange in Africa to offer exchange-traded derivatives.

The NSE will offer two types of derivatives; equity single stock futures (SSF) starting with shares of five listed firms that met specific criteria such as high daily trading volumes (British American Tobacco, East Africa Breweries, Equity Group Holdings, Kenya Commercial Bank Group, and Safaricom Plc) as well as an NSE 25 Share Index futures (EIF) that provides investors with a benchmark to track the performance of the Kenyan securities market. The introduction of NEXT futures will also increase trading activity and liquidity at the NSE as investors will have the potential for greater returns, even when share prices are going down (short selling), as they only have to put up a small amount of money as leverage.

This comes after a successful six-month pilot test in which end-to-end derivative transactions were done in a live environment, and which tested the capabilities of market players. Kenya’s Capital Markets Authority (CMA) then granted approval in May 2019 for the NSE to launch and operate the derivatives exchange market.

The CMA has also licensed several entities to undertake derivative services.  The stockbrokers that will offer derivatives futures to investors from today will be African Alliance Securities, AIB Capital, Apex Africa Capital, CBA Capital, Dyer & Blair Investment Bank, Faida Investment Bank, Genghis Capital, Kestrel Capital,  Kingdom Securities, NIC Securities, SBG Securities, Standard Investment Bank and Sterling Capital. Also, two banks, Stanbic and Cooperative, will provide clearing and settlement services, collecting margins and generating data and reports on futures trading activities.

The launch of NEXT derivatives trading comes after a series of other innovations at the NSE including the introductions of the M-Akiba mobile phone bond, Real Estate Investment Trusts (REIT’s), asset-backed securities and exchange traded funds (ETF’s). If the uptake and performance of stock futures are successful, next at the NSE will be currency derivatives and interest rate derivatives.

EDIT November 2019: The Capital Market Soundness Report- Q3. 2019 from the CMA showed that 349 contracts were traded between 4th July 2019 and 30th September 2019.

Of these, the market traded 248 Safaricom contracts representing a turnover of KES 6.9 million; banking contracts came in second with 58 KCB Group contracts traded at a total turnover of KES 2.3 million; and 26 Equity Bank contracts traded at KES 1.0 million. The NSE 25-Share index contract traded 12 contracts at a total turnover of 2.6M.

Barclays Kenya unveils AFMI 2018 – the Absa Africa Financial Markets Index

Barclays Kenya launched the second edition of AFMI 2018 – the Absa Africa Financial Markets Index, revealing performance improvements at a time of economic turmoil on the continent and also the addition of new countries to the index that now tracks twenty African economies.

In the time since Barclays launched the initial Africa Financial Markets Index in 2017, they have seen good engagement from policymakers striving to improve their appeal to investors through the AFMI 2018 index which measures countries across six pillars of market depth, access to foreign exchange, market transparency/regulations, capacity of local investors, macroeconomic opportunity, and enforceability of legal agreements. This year, three new countries – Angola, Cameroon and Senegal joined the index bringing the countries tracked to 20 and the country measures were also tweaked to include elements of financial inclusions and levels of investor education

The AFMI 2018 was again topped by South Africa, the most advanced financial market in Africa, followed by Botswana, Kenya, Mauritius and Nigeria. Kenya, Morocco and Seychelles all improved in the rankings while Mauritius and Namibia slipped slightly. Nigeria was credited for improving in its administrative efficiency and tax reforms. 

Jeremy Awori, Managing Director of Barclays Kenya said that emerging markets were under great pressure with currencies dropping, interest rates rising, political instability, falling commodities etc. and these highlighted how strong domestic financial markets could be used to cushion African economies from headwinds. He said that while  Kenya topped the access to foreign exchange pillar of the index, and had improved in the enforcement of  legal agreements, showing it was on a path to be a regional financial hub, there was still need to need to improve capacity of local investors, and grow the diversity of investor products. He added that Barclays Kenya was the first institution to list an ETF – an exchange-traded fund at the Nairobi Securities Exchange (NSE) and was also providing thought leadership on international swops and global master repurchase agreements.

Guests at the launch included Geoffrey Odundo, CEO of the NSE, and Paul Muthaura, CEO of Kenya’s Capital Markets Authority (CMA). Odundo said that while the 2006-08 IPO era unlocked retail investor capital, there was much more opportunity for investors to get good returns in the secondary markets including through REIT’s and that the NSE was currently piloting on offering derivatives. Muthaura spoke of initiatives to connect investors across African investors including a pilot exchange partnership between Kenya and Nigeria, and the African Securities Exchanges Association which was looking to enable trading links between the six largest exchanges on the continent.

Anthony Kirui, Head of Markets at Barclays Kenya said the country had an array of fixed income securities, but attention needed to shift to re-opening bonds as opposed to issuing new paper. He added that there was a need to create a primary dealership and a true OTC market and to also address the reluctance from local owners to list on stock markets. Muthaura said that one factor in the lack of new listings at the NSE was due to companies, who may have been candidates for listing to get new capital, now opting for the abundant and cheap funding from banks that were flush with cash in the era of interest rate caps

In East Africa, Uganda was stable (at No. 10) on the index while Rwanda and Tanzania dropped slightly, the former due to discrepancies in the implementation of rules and the latter due to lack of capacity of local investors. Ethiopia was at the tail end of the Index due to not having a security exchange and corporate bond markets, but that is likely to change as the country pursues reforms such as freeing the foreign currency exchange rate and planning for privatization of Ethiopian enterprises.

The AFMI 2018 report was done with the Official Monetary and Financial Institutions Forum (OMFIF) and can be downloaded from the Absa site.

7th BAFM – Building African Financial Markets – Day One

The 7th BAFM – Building African Financial Markets seminar was officially opened by Kenya’s Deputy President William Ruto with a joke that it was important that the organizers, who were the African Securities Exchange Association with the Nairobi Securities Exchange go out and clarify the difference “stock exchanges” and “stock theft” which is a big menace in Kenya. He then mentioned that securities exchanges provided assets protection and wealth creation and that some companies that the government had divested from like Kengen, Safaricom, and KCB were now among the leading institutions in Africa.

He asked the capital markets to help revive the agricultural sector and urged them to work on a commodities exchange and use block chain to create a ledger for collateral, and that he hoped the summit would redirect shareholders attention to the opportunities that reward vigilant, flexible and innovative investors.

One of the highlights of the day was a talk by Terry Adembesa who explained the complex processes and long steps that the Nairobi Securities Exchange has to go through to introduce new products and to persuade companies to list on the exchange. He explained how they had passed regulations to allow derivatives trading and short selling (which they plan to introduce later in 2018 for selected equities_ and to also allow market making by selected firms for stocks and bonds. They had made strides get pension and insurance funds to recognize their new products like Real Estate Investment Trust’s (REIT’s) and lobbied alongside Barclays to get Exchanged Traded Funds as an accepted class of equities that local funds could buy into. They had also lobbied the Kenya Revenue Authority to waive taxes on development REIT’s.

He added that African exchanges like Kenya’s have low volumes compared to Johannesburg and Mauritius; they mainly trade equities, with low participation from local investors (Trading at the Nairobi Exchange is 35% by local investors compared to 100% in many Asian markets) and later this meshed well with a nice presentation on the African Financial Markets Index by George Asante of Barclays Africa. It was a nice illustration of the maturity levels of stock exchanges in 17 countries that constitute 60% of GDP of Africa, with a startling finding that there was a significant cost borne by African countries by them not having effective capital markets.

Sallianne Taylor explained how Bloomberg  collects data and showcases African companies and exchanges to the wider world, facilitating financial leaders and exchanges to meet investors and financial journalists, while Nora Owako traced the evolution of Safaricom’s M-Pesa which has changed over the years to match the needs of consumers and now encompasses international remittances, savings, loans, utility payments, and merchant finance.

Another striking revelation was by David Waithaka of Cellulant during one of the afternoon panels on fintech as an enabler. The company, which was founded in Kenya, had run a platform in Nigeria that had connected 15 million farmers to 6,000 agro-dealers for farmers to get inputs and with commercial banks providing bridging finance to agro-dealers as they awaited reimbursements from the government. The program had a redemption rate of 59% and through it, farmer incomes improved from $700 to $1,800. It was later extended to rice and saw $2.4 million worth of commodity trades in two months. It is being rolled out in Liberia and event participants asked” Why not Kenya?”!

One of the shocks of the first day of the BAFM was from Joseph Tegbe of KPMG Nigeria who gave a talk on cybersecurity and warned that there was a real possibility that countries could use cyber attacks to target and destabilize the stock exchanges of other countries.

NSE Chairman Samuel Kimani thanked the BAFM gold sponsors – Bloomberg and Barclays, silver ones – CMA Kenya, Safaricom, Kengen, EFG Hermes, and others. The day ended with news during a panel on fintech as an enabler, that Barclays launched a green mortgage product, offering cheaper financing for energy-efficient homes

Day one of the 7th BAFM – Building African Financial Markets seminar was held at the Villa Rosa Kempinski Hotel in Nairobi Kenya on April 19, 2018. 

Barclays launches the Africa Financial Markets Index 

Barclays launched their first edition of the African Financial Markets Index (AFMI) that ranks and compares the depth of financial markets in seventeen African countries. The countries were score against six broad pillars of (1) Financial markets depth, (2) Access to foreign exchange,  (3) Market transparency & the regulatory environment, (4) Macroeconomic opportunity, (5) Enforceability of agreements and (6) Capacity of local investors.

South Africa came out on top of the AFMI with 92 out of 100. It was classified as a highly developed market but (with a) challenging macroeconomic outlook; It was followed distantly by Mauritius (66), Botswana (65) and Namibia (62).

Kenya was ranked fifth (59), just ahead of Nigeria (53) Ghana (49) and Rwanda (48), and Kenya was found to be the most sophisticated in East Africa due to innovations and reforms by the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA).  Kenya’s scores were quite consistent across the six pillars with recent developments including the de-mutualization and the IPO of the NSE, the launch of a first exchange-traded fund by Barclays Kenya, and the launch of the M-Akiba bond.

Kenya is the seventh largest stock exchange by market capitalization and sixth by bond listings. But George Asante, Managing Director and Head of Markets at Barclays Africa said that Kenya lacked deep-pocketed market-makers who could broker deals, and take price risks and also that Kenya needed to develop a primary dealership network. He added that the participation of local investors in long long-term investing was quite limited and local investors are critical as they buffer volatility caused by foreign investors. Assets were concentrated among buy-and-hold investors, rather than pension funds and insurers. Kenya’s domestic institutional investors have $12.6 billion of assets but this only works out to  $173 per capita and he suggested that Kenyan markets and regulators needed come up with more securities listings, instruments, and innovations.

Barclays Bank of Kenya Managing Director Jeremy Awori said that “The AFMI will be produced annually to drive conversations, track progress and address gaps in financial markets.” Already countries like Rwanda and Morocco want to use the index data to improve their financial markets.  At the tail end of the AFMI was Egypt, Mozambique, Seychelles and Ethiopia. Ethiopia was scored as “a fast-growing economy but with no financial markets depth or local investor capacity.”  

Guests at the launch included Jeffrey Odundo, CEO of the NSE, and Paul Muthaura, CEO of Kenya’s CMA. Muthaura said the CMA had a master plan to make Kenya a choice destination for capital flows by 2023, while Odundo said the NSE has broadened its  revenue and product base (by introducing REIT’s, ETF’s, M-Akiba and next derivatives, and a new law to govern securities lending), and was working to make Kenya more visible. They are active members of the Africa Securities Exchange Association and will host a “Building African Financial Markets” seminar in Nairobi in April 2018. They also plan to join the World Federation of Exchanges.

The AFMI report can be downloaded here from the Official Monetary and Financial Institutions Forum website; OMFIF produced the report with Barclays Africa.