Section 9Future OutlookCapital markets are subject to constant transformation. Over thenext decade and beyond, investors will continue to become highfrequency traders and more technologically savvy – this will requiremore products, further efficiency, ease of access, flexibility, speedand transparency. <strong>NSE</strong> prepares strategic plans to accommodatethe changing environment. The following are some of the changesexpected in capital markets in the coming years subject toimplementation:9.1 Capital Markets Master PlanOn 16 October 2012, a committee constituted by the CapitalMarkets Authority, commenced work on development of theCapital Markets Master Plan. This plan seeks to be transformativeand linked into Kenya Vision 2030. This plan will set the agenda forimplementation of various far reaching strategic initiatives whichare expected to grow capital markets more rapidly. The plan hassince been completed.9.2 LegislationOccasionally, the CMA and The National Treasury continue tointroduce new legislation.9.3 Equity Capital Market InitiativesThe following are specific initiatives amongst others that areexpected to grow the equities market:9.3.1 Growth Enterprise Market SegmentOn 22 January 2013, <strong>NSE</strong> launched this new segment which isto enable firms to benefit from price discovery and raiseongoing capital, while benefitting from increased profile andliquidity within a regulatory environment designed specificallyto meet their needs. This segment is expected to bring morelistings, more investors and more trading activity. <strong>NSE</strong> haslicensed Nominated Advisors and authorised representativeswho will be responsible to the <strong>NSE</strong> for providing advisoryservices on this new segment. The first listing has alreadybeen achieved.9.3.2 DematerializationIn November 2013, CDSC launched full dematerialization ofall equities securities into the CDS system and eliminate sharecertificates from the market. This could bring forward manynew shareholders into the CDS system, increase shareholdercontact during corporate actions and increase trading activity.9.3.3 Cross Border TradingThere are plans by <strong>NSE</strong> and CDSC to implement more efficientand effective cross border trading, delivery, settlement andelectronic registration. This could bring forward new crossborder investors, increased cross listings, increase orders oncross listed equities and increase trading activity.9.3.4 Smart Order RoutingSmart order routing involves the use of technological andalgorithmic ability to achieve best execution of trades whileminimizing market impact. This could lead to increasedorders, higher number of trade executions, increased turnoverand liquidity.9.3.5 Settlement Cycle<strong>NSE</strong>, CMA and CDSC have successfully reduced the equitiessettlement cycle over many years from T+14(+) to T+3 (year2011). This led to the upgrading of the standards of the <strong>NSE</strong> tointernational benchmarks. <strong>NSE</strong> (and CDSC and CMA, asnecessary) is exploring ways of reducing the settlement cyclefurther and even introducing day trading/same day settlement.This may include the introduction of straight through processingtechniques. This could lead to increased interest from highfrequency traders, increased orders, higher number of tradeexecutions and increased turnover and liquidity.9.3.6 Margin AccountWhen settling a trade the buyer can pay the purchase price in fullor in a margin account purchase, the buyer pays a portion of thepurchase price and the stockbroker/intermediary lends thedifference. The buyer in turn pays interest on the stockbroker’s/intermediary loan in addition to the usual commission fees.For collateral, the stockbroker/intermediary holds onto thesecurities. Income earned from the securities are used to helpoffset the interest payments. Trading on margin allows forbuying power by borrowing a major portion of the investmentamount. This could lead to increased interest from highfrequency traders, increased orders, large order sizes, highernumber of trade executions and increased turnover and liquidity.9.3.7 Short SellingShort selling (or “selling short”) is a technique used to try toprofit from the falling price of a stock - involves precise timingand goes contrary to the overall direction of the market. Someshort-sellers target the following types of companies:(1) small cap corporates that have been driven up by momentuminvestors, especially companies that are difficult to value;(2) corporates whose P/E ratios are much higher than can bejustified by their growth rates;(3) corporates with weak products and services;(4) corporates that have new competition coming;(5) corporates with weak financials and(6) corporates that depend too heavily on a few products.This could lead to increased interest from high frequencytraders, increased orders, higher number of trade executionsand increased turnover and liquidity.9.3.8 Securities LendingSecurities lending refers to the lending of securities by oneparty to another under a legal and regulated environment andcan be used to:(1) to facilitate settlement of a trade;(2) to facilitate delivery of a short sale;(3) to finance the purchase of the security, or(4) to facilitate a loan to another borrower who is motivatedby one of the above requirements.This could lead to increased interest from high frequencytraders, increased orders, higher number of trade executionsand increased liquidity.9.3.9 Upgrade Systems & Infrastructure<strong>NSE</strong> has plans to upgrade the core ATS in order to introducenew functionality and access. There are plans to upgrade theWAN infrastructure setup to reduce latency. This could leadto increased transparency, increased information flows, increasedspeed of placing orders and executions and increased turnoverand liquidity.9.3.10 New Listings<strong>NSE</strong> has a target of new listings every year on the varioussegments and has various initiatives to achieve the target.New listings have had a positive impact on increased turnoverwhich in turn can increase market liquidity indicators.9.3.11 Internet Trading<strong>NSE</strong> has plans to implement internet trading as a key componentof the capital markets evolution. It is believed this will becomea significant percentage of the daily traded turnover infuture years. This could lead to increased transparency, increasedinformation flows, increased speed of placing orders andexecutions and increased turnover and liquidity.9.3.12 Diaspora (Non Resident Kenyans)Following the introduction of internet trading, <strong>NSE</strong> has marketingplans to target more direct involvement from the diaspora(estimated in the hundreds of thousands) in the activities ofthe <strong>NSE</strong>. This could lead to increased orders and executionsand increased turnover and liquidity.9.3.13 Mobile Phone<strong>NSE</strong> has plans to further enhance the participation of more40
youthful investors in the use of the mobile phone for tradingactivities at the <strong>NSE</strong>. This could lead to increased orders andexecutions, increased speed and increased turnover and liquidity.9.3.14 Foreign Investor Diversification<strong>NSE</strong> has plans to market the activities of the <strong>NSE</strong> to a widerinternational investor base including China, India and other FarEast countries. This could lead to large orders, increasedexecutions and increased turnover and liquidity.9.3.15 Active Trader<strong>NSE</strong> has plans to carry out public education campaigns on the‘active trader approach’ to investing. This could lead to moretraders, more orders, more executions and increased turnoverand liquidity.9.3.16 Market Maker<strong>NSE</strong> is keen to admit trading participants to act as marketmakers for equity securities. A market maker is a dealer whomaintains a firm bid or offer and is available to trade a statedsecurity on their own account at any time at the quotedmarket prices. This could lead to more orders, moreexecutions, increased turnover and liquidity.9.3.17 Regional Operator<strong>NSE</strong> is interested to operate exchanges in Somalia, SouthernSudan, Democratic Republic of Congo and Burundi. This couldlead to more cross border business.9.3.18 Counties Participation<strong>NSE</strong> is interested to increase participation from residents inthe counties in Kenya and has planned marketing initiatives.This could lead to more investor diversification, more ordersand trade executions.9.3.19 Free Float<strong>NSE</strong> is interested to increase the amount of free float of itslisted securities and will engage with listed corporates. Thiscould lead to more trading activity.9.4 Debt Capital Market Initiatives<strong>NSE</strong> wishes to increase the number of secondary market transactionsand will explore ways to ensure more public participation. Thefollowing are specific initiatives amongst others that are expectedto grow the debt market:9.4.1 Market Maker<strong>NSE</strong> is keen to license authorised securities dealers (under thecurrent regulations) to act as market makers for debt securities.Market maker is a dealer who maintains a firm bid or offerand is available to trade a stated security on its own accountat any time at the quoted market prices. This could lead tomore orders, more executions, increased turnover and liquidity.9.4.2 Corporate Bonds<strong>NSE</strong> will play a role in marketing for increased corporate bondlistings on the Fixed Income Securities Market Segment. Thiscould bring forward more listings.9.4.3 Municipal Bonds<strong>NSE</strong> intends to engage the county governments to use the <strong>NSE</strong>for raising development capital via the use of municipalbonds. This could bring forward more listings and moretrading activity.9.4.4 Shariah Compliant Bonds<strong>NSE</strong> will play a role in lobbying for the regulatory frameworkand encourage listings of these securities also known assukuks. This could bring forward more listings.9.5 New Market InitiativesThe following are other specific initiatives amongst others that areexpected to develop new markets, increase listings and tradingactivity:9.5.1 Real Estate Investment Trusts<strong>NSE</strong> has made progress towards future listing of Real EstateInvestment Trusts (REITs). A REIT is a regulated investmentvehicle that enables persons to collectively contribute moneyas consideration for the acquisition of rights or interests in atrust with the intention of earning profits or income from realestate as the underlying assets of the trust. There areDevelopment REITs and Investment REITs.9.5.2 Asset Backed Securities<strong>NSE</strong> will play a role in encouraging listings of these securities.An asset backed security is a security whose value and incomepayments are derived from and collateralized (or “backed’’) bya specific pool of underlying assets.9.5.3 Listed Unit Trusts / Exchange Traded Funds<strong>NSE</strong> intends to engage the managers of existing unlisted unittrusts to seek listing on the <strong>NSE</strong>. <strong>NSE</strong> wishes to support thelisting of exchange traded funds – i.e. an investment fundtraded on the <strong>NSE</strong>. The investment funds can hold differenttypes of securities. Some funds track specific indices.9.5.4 Derivatives Exchange<strong>NSE</strong> has plans to introduce a derivatives exchange. This is acentral financial exchange where people can tradestandardized futures and options contracts; a contract to buyor sell specific quantities of a commodity or other underlyingassets at a specified price with delivery set at specified time inthe future – these contracts fall into the category of derivatives.9.5.5 Mining Sector<strong>NSE</strong> is interested to tap the mining sector corporates that mayrequire to raise capital for their activities. The Ministry ofMining has appointed the <strong>NSE</strong> to chair the taskforce that hasbeen appointed to establish a mining and minerals exchangeto serve the region.9.6 Miscellaneous InitiativesThe following are other <strong>NSE</strong> related initiatives:9.6.1 Information Product Sales<strong>NSE</strong> intends to widen the products for sales, enlist more datavendors including international ones and introduce newsubscription fees for daily data.9.6.2 Marketing Campaigns<strong>NSE</strong> will implement targeted marketing campaigns to increaseawareness of the activities of the <strong>NSE</strong>.9.6.3 Media Briefings/Forums<strong>NSE</strong> will regularly call media briefings to announce performanceof the <strong>NSE</strong> and progress of the various initiatives.9.6.4 Indices<strong>NSE</strong> will consider introducing more indices to help investors moreclosely monitor the performance of their investments.9.6.5 World Federation of Exchanges<strong>NSE</strong> is currently an Affiliate Member of the World Federationof Exchanges but there are plans to achieve full membership.9.6.6 Brand Management<strong>NSE</strong> has plans to enhance the <strong>NSE</strong> brand through varioustargeted initiatives.9.6.7 Institutional Capacity<strong>NSE</strong> has plans to enhance internal capacity to implement thevarious initiatives it has planned.Source: <strong>NSE</strong>, CMA41