NSE-Web-Prospectus-2014

11.2.5 Trading Intermediaries
The NSE relies on trading intermediaries to provide services to
investors and conduct business at the NSE. Various
intermediaries have had challenges in the past that have
adversely impacted the NSE, reputation and financial. The
NSE has since worked with the CMA where necessary, to
boost standards of corporate governance in the intermediaries
via numerous regulations. This includes regular in-depth
inspections, regular reporting and publishing of financial
performance and use of risk-based supervision approach.
However, there can be no assurance that present or future
intermediaries will have no adverse impact on NSE.
11.2.6 Strategy
Strategic risk is the risk of adverse impact on current and
prospective earnings or capital arising from incorrect or
inappropriate business decisions, improper implementation of
decisions or lack of responsiveness to industry change. The
NSE is managing strategic risk through the regular monitoring
and updating of its 5 year strategic plan based on new market
dynamics.
11.2.7 Compliance
Compliance risk is the risk of non-compliance with regulatory
guidelines. Regulatory risk is the current and prospective risk to
earnings or capital arising from violations of, or non-conformance
with laws, rules, regulations, prescribed practice, or ethical
standards issued by the regulator from time to time. NSE has in
place a compliance function which is responsible for continuous
review and monitoring to ensure compliance at all times.
The NSE is exposed to tax risk which is risk associated with
changes in taxation rates or law, or misinterpretation of the tax
laws and regulations which could have an adverse impact on the
NSE. Taxes introduced by GOK on listed securities may have an
impact on the NSE.
11.3 Financial Risk
The main business risks faced by the company in respect of its
principal non-derivative financial instruments are interest rate
risk, foreign currency risk, credit risk and liquidity risk. There
are policies for managing these risks. Refer to Annexure A2 –
Reporting Accountants’ Report for more details.
11.3.1 Interest Rate
Interest rate risk arises primarily from investments in fixed interest
securities and bank borrowings. The sensitivity analysis for
interest rate risk illustrates how changes in the fair value or
future cash flows of a financial instrument will fluctuate
because of changes in market interest rates at the reporting
date. The NSE monitors the sensitivity of reported interest rate
movements on a monthly basis by assessing the expected
changes in the different portfolios due to a parallel movement
of plus 5 percentage points in all yield curves of financial assets.
11.3.2 Foreign Exchange & Price
The NSE undertakes certain transactions denominated in
foreign currencies. Therefore, exposures to exchange rate
fluctuations arise however these are minimal.
11.3.3 Credit
Credit risk refers to the risk that a counter party will default on
its contractual obligations resulting in financial loss to the NSE.
Credit risk arises from deposits with banks, as well as trade
receivables. The NSE assesses the credit quality of each
customer, taking into account its financial position, past
experience and other factors. Bank balances, treasury bills and term
deposits are fully performing. Trade receivables under the fully
performing category are expected to be recovered in full as
the debtors are paying their debts as they continue trading.
11.3.4 Liquidity
Prudent liquidity risk management includes maintaining
sufficient cash to meet company obligations. NSE manages
this risk by maintaining adequate cash balances in the bank,
banking facilities and by continuously monitoring forecast and
actual cash flows.
11.3.5 Capital Management
The NSE manages its capital to ensure that it will be able to continue
as a going concern while maximising the return to stakeholders
through the optimisation of the debt and equity balance.
11.4 Investment Risk
11.4.1 Capital Markets Development
There are various initiatives ongoing in the capital markets,
some under the full control of the NSE and some not. Due to
the complex nature of these initiatives some maybe implemented
some may not. Some may be implemented within a calendar
year while some may take many years.
11.4.2 Offer Price
This can be affectd by GDP, equity and bond market capitalization
to GDP ratio, equity and bond turnover ratio, level of interest
rates and various other factors. There can be significant
variation between projected and actual indicators which can
change the investment environment. No adverse extra-ordinary
or exceptional events were included in the assumptions
however these are possible. This was concluded a number of
weeks before the date of the Prospectus and volatility can
affect the price of the Offer Shares. The share price of the NSE
should be considered volatile due to the unpredictable nature of
investor behavior towards the annual earnings potential of the NSE.
11.4.4 Liquidity
The NSE is listing on the Main Investment Market Segment of The
Exchange which has the maximum number of interested
investors including local and foreign sophisticated /institutional
investors. This can enhance liquidity. The actual level of free
float may be lower than projected which can affect liquidity. As
a result, shareholders and investors are cautioned that the NSE
Shares may experience moderate illiquidity.
11.4.5 Currency
Trading and payment of dividends is denominated in Kenya
Shilling and as a result those investors whose principal currency is
not the Kenya Shilling, are exposed to foreign currency rate risk.
44