THE Bond and Derivatives Exchange Zambia Plc (BaDEx) has now become operational, heralding the dawn of a new financial market arrangement for Zambia.
BaDEx deputy chief executive officer, Peter Sitamulaho said that in the last 12 months the exchange has been building the market facilities to include clearing banks.
This work has now been completed and on April 17, 2014, the exchange performed its first live transaction with BancABC, thereby marking an important milestone for BaDEx and the capital markets in Zambia.
“BaDEx has an ambitious plan to expand its business and extend its product and service offerings to individual and corporate customers in the domestic and international markets. BaDex has ambitious plans to become a world class exchange in Zambia,” Mr Sitamulaho told me on Tuesday this week.
The firm, which is Zambian owned and managed, was incorporated in 2009 and became a licensed exchange in 2011 with ownership still open to the public.
In the main, the shareholding is mostly by the original sponsors of the company but recently a few private investors bought into the exchange.
Unlike the Lusaka Stock Exchange (LuSE), this second exchange in the country will be listing a range of futures in currencies, bonds, equity indices and single stocks.
Generally, futures allow market participants to buy or sell fixed quantities or amounts of standardised financial instruments on fixed future dates and at fixed prices.
A futures contract is a legally binding deal which obliges an investor to buy or sell an underlying or original instrument like foreign currency at a fixed price on an agreed future date.
According to Mr Sitamulaho, this type of exchange, which is notably second in Africa after the Johannesburg one, is not a business competitor of the LuSE, nor that of the commercial banks in the country.
In fact, it will play complementary role to the banks and the 20-year-old local bourse to help grow the economy by bringing the sellers and buyers of the futures together, mainly through online transactions.
While the prices of futures contracts are determined in the same way as in the currency spot market there is a lot more transparency in this exchange due to centrally accessible market via an electronic futures exchange for market participants.
After a long chat with Mr Sitamulaho, I realised that the entity has a big job to do to sell itself, let alone its products because of the seeming complexity somewhat surrounding the whole project.
It is a new concept to Africa, and Zambia in particular.
In providing futures contracts between the buyers and sellers, BaDEx wants to help solve the limitation of forwards by standardising the terms and provide more liquidity due to the system’s ability to be infinitely more liquid than underlying market.
There will be reduced default risks through this centrally cleared exchange structure while the settlement price is daily.
In terms of products BaDEx takes the currency futures and options as the first one and the first Kwacha/dollar futures contract is already on and will mature on June 16 2014.
Following the first live transaction, BaDex is now signing up new trading members (or brokers) who are the legal entities participating in the market that provides the physical access for market participants (customers) to be involved in the markets.
Another positive impact of a derivatives exchange is the creation of business opportunities and satellite industries.
For example, BaDEx is already signing up new trading members.
This presents an opportunity for any Zambian aged above 18 years who complies with the exchange requirements and the requirements of the Securities and Exchange Commission (SEC).
It gives opportunities for young Zambians who have had some business college education, with total capital of K50,000 to team up and set up their own trading member firms (brokerage firms).
In addition, opportunities in other innovation exist for young people .
Trading members may transact directly in the market as liquidity providers or proprietary traders.
Another important category of BaDEx’s players is that of the final customers who the end-users of the products, which will be offered.
Customers are given access by trading members who also manage the risk on the underlying customers in terms of adherence to the rules of the exchange and the margin management on these customers.
They ensure that they manage their portfolios in line with the requirements of the exchange.
Since the launch the derivative exchange has been waiting for another category of players, the clearing members or commercial banks and apart from BancABC two others, Finance Bank and Zanaco have come on board.
Finance Bank started doing its one-week pilot live transaction on Monday this week while Zanaco is finalising it’s, and is expected to join the other two banks in the next three weeks.
Next week, I will look at some specific exchange traded futures and explore some of the end-users of these products like the hedgers, speculators and investors.
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