Bruised by poor response from firms to list on Alternative Capital Market (ACM), the 13-counter Malawi Stock Exchange (MSE) is mulling over the introduction of a derivatives market.
This is a financial market for derivatives—financial instruments such as futures contracts or options—derived from other forms of assets. The derivatives market can be divided into two: that for exchange trade derivatives and for over-the-counter derivatives.
Market watchers say futures or contracts are financial contracts obliging a buyer to purchase an asset or the seller to sell an asset such as a physical commodity (maize, coffee and tea) at an agreed price and can be used either to hedge or to speculate on the price movement of the underlying asset.
MSE operations managers Esnat Lweya said in an interview last week the establishment of the derivatives market is meant to provide opportunities that would otherwise be unavailable to investors by providing payoffs that simply cannot be obtained with other existing assets.
She said, among others, the local shares market is working towards developing an automated system before it rolls out the derivatives market.
Said Lweya: “We are working towards automation so that, we can start trading other alternative investment securities such as derivatives.”
She said officials at MSE are intensifying awareness on how the derivatives market works to woo more firms to list on the market.
Lweya said the derivatives market largely depends on a vibrant existing stock exchange market.
But Reserve Bank of Malawi (RBM) spokesperson Mbane Ngwira in a separate interview said despite working tireless to develop a derivatives market, establishing such a market cannot be an easy task in the Malawi economy.
He said the local bourse has not been vibrant; hence, chances to roll out the derivatives market any time soon could be a tall order.
“There are a number of technicalities to be considered before establishing a derivatives market. Also, people are not aware of how they can trade on this market,” he said.
Mbane, nonetheless, said monetary authorities are constantly undergoing training and also training other government agencies to be ready for any developments.
“We have engaged individuals and a number of corporates such as Electricity Supply Corporation of Malawi [Escom] and Malawi Housing Corporation [MHC] through training workshops on developments on the capital market,” he said.
Some few years ago, MSE had plans to establish ACM, meant to offer an opportunity to small companies that cannot list on the main bourse due to stringent listing requirements.
To-date, no company has listed on ACM apparently because they are afraid to dilute their shareholding.