3 March 2017

East Africa: NSE Firms Get Nod to Cross-List Exchange Traded Funds in East Africa

Kenyan capital markets regulators have given the nod to firms seeking to list exchange traded funds (ETFs) on the Nairobi Securities Exchange to cross-list the investment product on other East African exchanges as well.

The cross-listing is aimed at attracting more firms to issue the securities, whose performance is determined by an underlying asset.

NewGold Issuer (RF) Ltd, a subsidiary of South Africa's Absa Bank, last week received approval for the issuing and listing of 400,000 gold bullion debentures on the NSE. It will be the first ever ETF listing in the region.

"Yes, ETFs can be cross-listed if the secondary jurisdiction has an existing ETF market and appropriate regulatory environment and the issuer also wants to cross-list," said NSE chief executive, Geoffrey Odundo.

An exchange traded fund is a stock that tracks an index of a commodity, a bond or a basket of assets. NewGold Issuer (RF) Ltd however, will track gold indices such as the S&P GSCI Index, which helps investors assess the price of the precious metal on Comex (commodity exchange) -- the primary market for trading in metals including silver, copper and aluminium.

NewGold will, starting at 100 units, allow investors to own a portion of its gold bars (bullion), which they can sell to other investors on the NSE just as is they do with shares. Gold was trading at $1236.18 per ounce/$39.74 per gramme on Thursday.

NewGold will allow investors to track the rand price of gold with each debenture weighing approximately 0.01 ounce/ 0.28 grammes. Each unit of ETF was trading at SAR 154.04 ($12) at the Johannesburg Securities, meaning the minimum investment for 100 units could be in the range of $1200. The S&P GCSI Gold Index had a 10-year annualised return of 5.28 per cent as of last week.

"Our focus right now is to get the market to understand this new product, which will allow for the success of future listings. Once the initial listings are successful, we are confident that more will follow," said Mr Odundo.

Product diversification

Paul Muthaura, the chief executive of the Kenya Capital Markets Authority said that the issuer of the ETF on the NSE will be free to decide whether to cross-list the security.

Willie Njoroge, the Kenya Association of Stockbrokers and Investment Banks CEO said: "An ETF is a relatively stable security to invest in because there are no extreme price fluctuation."

Already, Uganda and Tanzania have signalled their intention to introduce trading of ETFs on their respective exchanges as a way of diversifying investment products and minimising risks associated with price fluctuations on stocks and bonds.

For example, last year, Uganda launched the region's second securities and derivatives exchange, ALTX East Africa, with plans to roll out new products including ETFs.

The chairman of ALTX East Africa Ltd Edward Katimbo Mugwanya said the new trading platform would pave the way for the introduction of global equities and provide access to global bond products and ETFs.

"Our plans for the securities sector include trading in Depository Receipts backed by Treasury securities, introducing securities issued and currently traded on a number of markets outside Uganda, initiating a derivatives market and developing a large following of local investors," said Mr Mugwanya at the launch of the new securities market in Kampala last year.

ALTX was approved by the Ugandan Capital Markets Authority in 2014 and started operation in July last year, becoming the second securities exchange to operate in Uganda after the Uganda Securities Exchange which was launched in 1997.

Diversifying risks

On its part, the Dar es Salaam Stock Exchange upgraded its trading platform in 2014 with a view to introducing new investment products such as real estate investment trusts (REITs), ETFs and derivatives.

In Kenya, ETFs will be bought and sold on the main investment market segment of the NSE. An investor will have to go through an intermediary such as a broker or investment bank to buy the units.

The move by NewGold Issuer (RF) Ltd to issue and list its gold bullion debentures on the NSE gives East African investors an opportunity to diversify their risks by investing in gold. The NewGold gold bullion debentures are backed 100 per cent by physical gold bullion.

The firm also has secondary listing of gold bullion debentures on securities exchanges in Botswana, Nigeria, Mauritius, Namibia, and Ghana. Its primary listing is on the Johannesburg Stock Exchange.

Successful investment product

Globally ETFs were first launched 25 years ago and have become one of the most successful investment products offered to investors. According to Consultancy firm KPMG, assets under management increased from $400 billion in 2005 to some $3 trillion in 2015.

In Europe ETF market is worth $454 billion with Ireland being the major beneficiary of this growth.

Ireland is Europe's leading ETF domicile with $247 billion in assets under management, accounting for 54 per cent of the European market, according to the findings of a study by KPMG dated November 2016.

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