‘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.

1. WORLD EXCHANGE CONGRESS, 2013
FEBRUARY 13, 2013
GUOMAN TOWER HOTEL
LONDON, UK
BY
JEREMMY OKONJO
CEO, AFRIDEX
JEREMMY@AFRIDEX.CO.KE

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. The End 
ANY QUESTIONS? SUGGESTIONS?

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