NSE-Web-Prospectus-2014

Section 11Material RisksThe future operating and financial performance of the NSE issubject to the material risks as described below which should nothowever be regarded as exhaustive of all potential risks anduncertainties that may impact the NSE. Risks when they materialisecan impact the share price and the market value of the NSE. Aninvestor interested in the shares of NSE should consider carefullythe material risks below, together with all other informationcontained in this Prospectus and any other information referencedor generally available before making an investment decision. NSEoversees risk management through its Audit, Risk & CorporateGovernance Committee.11.1 Country Risks11.1.1 Frontier MarketKenya is currently classified as ‘’frontier’’. Over the past twodecades, frontier markets have become increasingly relevantin the global economy and can complete investors’ globalexposure and improve diversification. But investing can bechallenging due to amongst other factors, lower marketcapitalization, lack of adequate liquidity, high volatility andlack of enhanced products and services. The NSE intends toseek upgrade to “secondary emerging” status in the futurewhich could have the impact of increasing business at the NSE.11.1.2 Sovereign Credit RatingKenya’s credit rating by Standard & Poor’s Rating Services andas of November 2013, the rating was affirmed as “B+/Stable/B”.The credit rating can change from time to time and cantherefore have some impact on investment in the country.This can affect macro-economic indicators which can impactthe listed corporates at the NSE and therefore impact theoperations of the NSE.11.1.3 Single Country ExposureThe NSE derives the majority of its revenues from operationswithin Kenya. NSE`s revenues are not adequately diversified tomitigate against fall in revenues in Kenya. NSE is exploringinitiatives to diversify its revenues including operatingexchanges in other neighbouring countries.11.1.4 PoliticsThe democratic environment prevailing in the country,underpinned by the implementation of what is widely believedto be a progressive Constitution, coupled with the supportfrom the international community reduces the risk of anysignificant political unrest. It is underlined however that nomatter what systems, controls and procedures businesses maydesign to mitigate political risk, there can be no assurancethat any adverse political events will not have an adverseimpact on the NSE’s business.11.1.5 MacroeconomicsSpecific issues include growth, inflation, unemployment,interest rates, exchange rates, money supply, trade deficitsand budget deficits. Different monetary and fiscal policiesaffect the aggregate behaviour of the population which thenaffects macroeconomic performance. These policies changefrom time to time based on domestic events as well asregional and international events. Reduced volatility in keymacroeconomic indicators can assist the growth prospectsand operational results of NSE. NSE has put in place a businessstrategy to minimise NSE’s exposure to adverse economicconditions, however, this cannot provide an assurance thatadverse economic conditions cannot hamper NSE’s performance.11.2 Operations RiskOperational risk is the risk of direct or indirect loss arising froma wide variety of causes associated with the NSE’s processes,personnel, technology and infrastructure and from otherunforeseen external factors. The focus of the NSE is to sufficientlymanage operational risk and hence minimize possible financiallosses and damage to market confidence. Senior management ofthe NSE is tasked with implementation of the necessary controlsto minimize any interruption of business. Key risks include:11.2.1 Regulatory FrameworkThe operations of the NSE is affected by:(1) international securities regulatory standards;(2) intentions of GOK as regards the industry;(3) the capital markets regulatory framework created andoverseen by the industry regulator, the Capital MarketsAuthority and(4) regional capital markets development.The regulatory framework is subject to change as capitalmarkets continues to evolve and although NSE may be consultedfor the changes, the NSE cannot determine the outcome in thefinal legislation or the time period it takes to enact newlegislation. Some legislation may be beneficial to NSE butsometimes it may be adverse - either because of the contentsor the time taken to implement the legislation.11.2.2 CompetitionThe NSE is the only approved securities exchange in Kenya butthis could change and affect the NSE should the CapitalMarkets Authority approve more securities exchanges inKenya. The NSE is aware of such a possibility so it has continuedto build the brand and put in place a dynamic strategy toensure continued competitiveness.11.2.3 Systems SupportAmongst other systems, the NSE is the license holder of twoparticular critical systems – the Automated Trading Systemand the Broker Back Office System - from two differentinternational software technology firms. NSE is in constanttouch with these firms to ensure continued support and willcontinue to have the systems updated in order to meetstakeholders’ expectations.11.2.4 ReputationThe integrity of the equities and bonds market also dependson the reputation of the NSE. Adverse reports touching on theCMA, the NSE, the NSE listed corporates or the marketintermediaries can affect the NSE brand, investors’ appetite totrade and hence the equities and bonds turnover. The NSE hasa proactive approach which includes training and other suchinitiatives aimed at building the capacity of marketintermediaries, with the objective of eventually licensing ofpractitioners. NSE also has a media monitoring mechanism toget timely feedback from the market so that issues can beaddressed at the earliest opportunity.43