How will Egypt’s futures market compete with primary market?

Fatma Salah
7 Min Read

Egypt is gearing up to launch its first market for financial derivatives within the next three months. The Egyptian Exchange (EGX) has launched Tasweyat company for clearing services, which specialises in the settlement of futures contracts.

The first stage will be offering futures contracts on EGX30 and EGX70 indices, then moving on to higher stocks, then commodities and precious metals.

Experts believe that Egypt was somewhat late in launching the futures market, as it will provide much needed liquidity and will help in the recovery of the stock market as well.

The Egyptian Exchange (EGX) is trying to benefit from the experiences of other countries, as it has studied 10 global markets, the most important of which are the Chicago and London Stock Exchanges, and Asian markets such as India, Malaysia and Hong Kong, and Arab countries, the most important of which are the United Arab Emirates and Morocco, to follow their approach in dealing with futures contracts.

Financial derivatives are generally defined as financial contracts whose value is derived from basic assets such as stocks, currency, precious metals, or commodities, and they include forward and futures contracts, options contracts, and swaps, or selling an asset or commodity at a specified price at an agreed upon time in the future.

It is mainly used to reduce the risks of changes in future prices, as the buyer fears the increase in prices, and on the other hand the seller fears the decrease in the price, so an agreement is reached between them on a specific price. If it decreases, the benefit accrues to the seller, who has the right to sell at the higher price. In both cases, the parties must abide by the terms of the contract. Futures contracts are also used to generate profits through speculation.

Mohamed Maher, Chairperson of the Egyptian Securities Federation (ESF), said that futures contracts are the beginning of attracting more financial derivatives to the Egyptian market, and that they would attract investors who prefer different types of risks, and the most likely reason for their delay is that the Egyptian market is relatively young and lacks the infrastructure and systems needed for derivatives trading.

Maher added that the success of the futures exchange will depend on teaching both companies and investors how to invest in them and realize their value.

Futures contracts have been traded for years in many countries, the most important of which is the United States of America on the Chicago Stock Exchange. In developing countries, due to the difficulty of regulating markets and their need for complex scientific and analytical measures, the traders need special training.

Mohamed Farouk Masoud, CEO of Global Invest Securities, said that creating an effective market for financial derivatives depends largely on the size of the primary market, and that it includes major companies, explaining that one of the reasons for the delay in its launch in Egypt is due to the lack of some required factors such as market size, which is likely to witness a boom in demand for it immediately after its launch, and to add strong cash flows to the main market and enhance its depth.

He believes that the most important thing now is the offerings of companies on the Egyptian Exchange, which can be the cornerstone for strengthening the market and increasing its size, and thus the success of financial derivatives.

Mohamed Younis, Director of the Egyptian Society of Technical Analysts (ESTA), said that futures contracts can advance the Egyptian Exchange, and financial derivatives have been in operation since ancient times in Western and Arab countries, explaining that this type of market needs time for successful trading and the creation of sufficient liquidity, explaining that the necessary training must be provided for investors. 

A field study published in the Journal of Financial and Commercial Research revealed the most important obstacles to dealing with financial derivatives in Egypt, after a survey of 20 specialists in the activity of workers in commercial banks in Egypt, where the lack of marketing of this activity was the first reason by 21%, followed by the absence of scientific models.

Mohamed Gaballah, a board member of Roa’ya Online Brokerage, said: “For a long time, financial derivatives have not been traded in Egypt yet, despite their spread in the world, due to the difficulty of marketing them and the lack of sufficient investment culture to enter them, and the futures exchange will face some difficulties in the beginning as a new product, and more awareness must be available for its success.”

Ahmed Shehata, former director of the Egyptian Society of Technical Analysts, believes that the fear of experiment and failure, and the lack of development of new tools are the most important reasons for the delay in the financial derivatives market in Egypt. On the models of successful countries to catch up with what they have reached, and to increase awareness and culture of them among the Egyptian investor.

Economist Ghada Talaat said that financial derivatives can create a state of balance in the exchange rate, especially in the event that financial derivatives contracts are launched on the dollar, which in the solution of trading would eliminate the black market for the dollar in light of the conditions Egypt suffers from now.

Talaat added that it provides a variety of available investment tools and thus attracts different types of investors. Derivatives were delayed in Egypt due to the need to build an effective legal and legislative system and provide technological systems and modern methods for managing them.

Share This Article
Leave a comment