THE Capital Markets Authority has hired a consultant to guide the formation of a futures exchange market in Kenya. CMA acting chief executive Paul Muthaura said the Pakistan national, with vast experience in futures trading, started work this week.
The consultant has a one-year period to have developed all the necessary requirements for the establishment of a futures market. "This is a very significant step for us," said Muthaura on the sidelines of a financial literacy forum in Nairobi.
A futures market allows investors to buy and sell commodities contracts for delivery in the future, which could help limit wide swings in prices caused by oversupply or shortages.
It is hoped that the first futures market will be up and running by the time the consultant finishes the assigment by December.
The consultant is expected to among others advice on all the regulatory and licensing as well as operational requirements for a futures market.
Muthaura said the authority has decided to shelf plans to first invite international firms to set up and operate a futures exchange for trading in currency, mineral and energy. Instead, the consultant has been brought in to fast identify the key challenges anticipated as well as the opportunities presented by the same market.
A futures market is expected to stabilise food prices, especially grains, which mostly fluctuate during harvest and low seasons.
Producers of maize, beans, coffee, tea, and other agricultural commodities normally sell their produce at low prices to middlemen during the harvesting season to cut on losses.
Price volatility reduces crop yields by discouraging farmers from planting for fear of making losses. The consultant will be expected to draft trading and oversight rules for the futures market and advise on international best practices.
The consultant will also set rules to identify and procure a firm that will establish a demutualised futures exchange. The futures exchange is expected to bring transparency in the market since it will provide a central place for buyers and sellers, helping improve price discovery.