The Nairobi Securities Exchange is awaiting final regulatory approval by the Capital Markets Authority, to roll out the derivatives market, a senior official has said.

He said NSE is targeting derivative contracts by December becoming the second exchange in sub-Saharan Africa after Johannesburg to trade on derivatives.

NSE derivatives market director Terrence Adembesa said the derivatives market in Kenya has huge potential, supported by increased volatility in asset prices in financial markets.

A derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate.

Derivatives can be used to insure against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets.

"The bourse is proposing to introduce exchange traded futures at the start and options once the market hits full maturity," said Adembesa in Naivasha during a media training on NSE's new products.

He said Kenya has witnessed increased integration of its financial markets with the international markets and improvement in communication facilities.

"Derivatives combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets," he said.

The market had anticipated derivatives trade since April, but NSE has been postponing its launch to adequately prepare the market.

NSE will act as the clearing house in the derivatives market structure. It has also created a complete trading structure which includes clearing agents, trading members (futures brokers), clients ,a guarantee fund (to settle potential specified margin claims) and an investor protection fund.