BSE prepares to introduce speculative instruments

MBONGENI MGUNI
Staff Writer | Friday July 16, 2010 00:00

CFDs, which is extensively used in more progressive exchanges, are contracts between two traders stipulating that one will pay the other the difference between the current value of an asset and its value at contract time.

Essentially, the CFD allows investors to speculate on the future price of assets such as shares, commodities and even the direction of indices such as the Botswana Domestic Companies Index.

The CFD allows investors to speculate on these movements, without the need for ownership of the underlying asset or commodity.This week, BSE Product Development Manager, Thapelo Tsheole told BusinessWeek that CFDs could appear on the local market within a year, providing local brokers with yet another instrument to trade on behalf of their clients.

He said the local bourse's experience in regulating and listing the inaugural Exchange Traded Fund (ETF) would be essential in developing the framework to introduce CFDs.

'Due to the experience from the ETF, perhaps in a year's time, we will be able to introduce CFD because now we know the path to take,' he said. 'After ETFs, CFDs will be the next product we will focus on. CFDs are a big way to boost liquidity. They presently comprise about 50 percent of London Stock Exchange volumes.'

Tsheole explained the process that the CFDs will have to travel before becoming available for trading in Botswana.'We start with the concept, then presentation to stakeholders, then drafting of regulations, before coming up with listing rules,' he said. 'After this, we formulate the trading rules and come up with the fee structure.' The process ends with a presentation to the BSE Board which, after approval, will pave the way for CFDs entry into Botswana. Typically, CFDs are bought and sold between traders through brokers, who are known for the purpose as CFD providers. The provider defines the contract terms, margin rates and what underlying instruments are to be traded.

CFDs have proven to be highly popular across the world stock exchanges, leveraging off their key advantages over other established market products. CFDs enable investors to profit off changes in the prices of shares, commodities and other underlying assets.

They also have no minimum deal size or minimum deposit requirement.

In the range of market instruments used for speculation such as futures, options and covered warrants, CFDs score higher due to their comparatively easier accessibility, lower costs, price simplicity and wider range of underlying instruments.

The entry of CFDs is expected to enable the commencement of speculative activities on the BSE, which are the hallmark of progressive and developed stock exchanges around the world.