Africa in push for new laws on securities

African countries are seeking to harmonise regulation of traded securities as capital markets on the continent grow more sophisticated.

Representatives from central banks, finance ministries and capital markets from Africa will meet on Wednesday in Botswana to discuss ways to align regulatory frameworks on derivatives and commodity exchanges.

Derivative is a financial contract whose value is dependent on the performance of underlying market factors, such as interest rates, currency exchange rates, commodity, credit, and equity prices.

Not yet grown

Examples include deals whereby a party agrees to buy a certain quantity of produce at a specific date and time. A farmer may sell crops he has not yet grown or harvested.

Trading in farming derivatives on commodity exchanges has been termed the panacea for African farmers who suffer from low returns and price turbulence. The Ethiopian commodities exchange has seen returns to farmers rise by at least 22 per since it was established in 2008.

“There has been growing realisation that efficient financial and commodity markets are a prerequisite for equitable, inclusive and sustainable development,” said the African Development Bank (AfDB) in a press statement.

Borrowing a leaf from its northern neighbour, Kenya was supposed to establish a futures exchange through the Nairobi Securities Exchange (NSE) by June this year.

The process was delayed as the Capital Markets Authority sought a consultant to set up the system.

Enhance stability

But derivatives can be dangerous if left unchecked. Firms that trade in derivatives hold a great amount of risk and their collapse can have profound effects on economies.

Derivatives in the real estate market were closely linked to the financial meltdown in 2008.

“Derivatives could enhance the liquidity, stability and robustness of financial systems, as long as they are structured and regulated” said the Africa Development Bank (AfDB).

Following the financial crisis, Western governments were quick to enact financial reforms geared at introducing stricter regulation in financial and capital markets.

Firms trading in derivatives need to go through a clearing house, central counterparties (CCPs), to assess their credit-worthiness and risk by year-end.

AfDB notes that other than South Africa, derivative exchanges and CCPs don’t exist in Africa.