The Capital Markets (Derivatives Markets) Regulations

Section 1. Citation Section These Regulations may be cited as the Capital Markets (Derivatives Markets) Regulations.

Section 2. Interpretation Section derivatives exchange;

Section 3. Obligation to obtain a licence Section A person shall not establish, run, conduct, organize or assist in establishing, running, conducting or organizing a derivatives exchange unless that person has obtained a licence from the Authority: Provided that a securities exchange, which has been operating under the Act at the commencement of these Regulations and is desirous of running a derivatives market, shall apply to the Authority for an additional licence for listing derivatives contracts under these Regulations and all the provisions of these Regulations shall apply to such securities exchange.

Section 4. Application for licence Section 4(1) A person who intends to establish a derivatives exchange shall submit an application for licensing to the Authority in the Form set out in the First Schedule. Section 4(2)(a) are in a form satisfactory to the Authority; and Section 4(2)(a)(i) are in a form satisfactory to the Authority; and Section 4(2)(a)(ii) restrict the applicant to the business of operating a derivatives market and services incidental thereto; Section 4(2)(b) details of trading, clearing and settlement systems proposed to be adopted by the applicant; Section 4(2)(c) the prescribed licensing fees set out in the Second Schedule; Section 4(2)(d) satisfactory bank references; Section 4(2)(e) a business feasibility plan evaluated by an entity with a proven track record and expertise in derivatives or derivatives market development, establishment or management; and Section 4(2)(f) such additional documents as the Authority may require.

Section 5. Consideration for grant of licence Section be a company limited by shares;

Section 6. Rules of the exchange Section 6(1) An applicant seeking approval to operate a derivatives exchange shall establish and adopt derivatives exchange rules. Section 6(2)(a) the clear demarcation of roles and responsibilities of the board, chief executive officer and the statutory committees of the board; Section 6(2)(b) the powers of the chief executive officer including in emergency situations; Section 6(2)(c) the granting of trading rights and non-transferable memberships of the derivatives exchange; Section 6(2)(d) general obligations of the derivatives brokers who are its derivatives members; Section 6(2)(e) specifications of the minimum parameters to be disclosed in respect of derivatives contracts to be listed with prior approval of the Authority; Section 6(2)(f) the clearing and settlement of all trades in derivatives contracts by the clearing house of the derivatives exchange where the clearing house is wholly owned by the exchange or is its subsidiary; Section 6(2)(g) the performance of novation, netting and guarantee settlement of trades; Section 6(2)(h) complete segregation of business accounts of brokers from that of their clients and between different clients; S...

Section 7. Trading system Section 7(1) A proposed derivatives exchange shall deploy a trading system which shall be approved by the Authority before such system is implemented. Section 7(2)(a) be integrated with a clearing and settlement system; Section 7(2)(b) have an online screen-based trading system for providing direct market access up to the client level via the internet; Section 7(2)(c) be capable of establishing connectivity with brokers and their clients; Section 7(2)(d) have the necessary infrastructure to ensure timely clearing and settlement of trades; Section 7(2)(e) have an adequate risk management mechanism including a pre trade check performed by the trading system; Section 7(2)(f) be capable of providing real time risk management and market surveillance tools for monitoring of trading activities of all brokers and their clients on a real time basis; Section 7(2)(g) provide brokers and their clients a facility for accessing both the daily transactions and financial reports including ledgers; Section 7(2)(h) have a facility to disseminate information about trades, quantities and quotes in real time to at least one information vending network which is accessible to in...

Section 8. Grant of provisional approval Section 8(1) The Authority may, if satisfied that the applicant has demonstrated that it is capable of complying with the requirements under regulations 4, 5, 6 and 7, grant the applicant a provisional licence to operate a derivatives exchange. Section 8(2) The provisional licence granted under subregulation (1) shall be valid for a period of six months: Provided that the Authority may, upon sufficient cause shown by the applicant, extend the validity of the provisional licence for a further period not exceeding three months.

Section 9. Power to make inquiries and call for information Section The Authority may, before and after granting a provisional licence to an applicant for a derivatives exchange licence, make inquiries and require such further information or document to be furnished, as the Authority may consider necessary.

Section 10. Grant of licence Section 10(1) The Authority may, after the expiry of the period for which the provisional licence had been granted under regulation 8 and if the Authority is satisfied that the applicant has complied with regulations 4, 5, 6, 7 and any other relevant requirements under the Act, grant a licence to the applicant to operate a derivatives exchange. Section 10(2)(a) the nature of derivatives contracts to be dealt with by that derivatives exchange; and Section 10(2)(b) approval by the Authority of all derivatives contracts to be listed by that derivatives exchange.

Section 11. Period of licence Section A licence granted under regulation 10 shall remain valid unless suspended or revoked by the Authority.

Section 12. Regulatory fee Section A derivatives exchange shall pay a regulatory fee as set out in the Second Schedule or as may be imposed by the Authority from time to time.

Section 13. Revocation of licence Section 13(1)(a) ceases to comply with the eligibility conditions specified under regulations 5, 6, and 7; Section 13(1)(b) ceases to operate a derivatives market that it has been to operate under regulation 10; Section 13(1)(c) is being wound up; Section 13(1)(d) fails to comply with any requirement of the Act or these Regulations; Section 13(1)(e) fails to comply with a direction of the Authority; Section 13(1)(f) fails to provide the Authority with information required by the Authority; Section 13(1)(g) provides false or misleading information; Section 13(1)(h) is operating in a manner detrimental to the public interest; or Section 13(1)(i) requests the Authority to do so. Section 13(2) For the purposes of subsection (1), a derivatives exchange shall be deemed to have ceased to operate its derivatives market if the derivatives exchange has ceased to operate its derivatives market for more than thirty days unless the derivatives exchange has obtained prior written approval of the Authority to do so. Section 13(3)(a) closing down the operations of the derivatives exchange; or Section 13(3)(b) protecting the interests of the public. Section 13(4) T...

Section 14. Effect of revocation

Section 15. Net worth requirements Section 15(1) A derivatives exchange shall maintain, at all times, liquid net worth amounts of a type acceptable to the Authority, which shall be adequate in relation to the nature, size and complexity of the business of that derivatives exchange to ensure that there is no significant risk that liabilities may not be met as they fall due. Section 15(2)(a) an amount equal to one half of the estimated gross operating costs of the derivatives exchange for the next twelve-month period; or Section 15(2)(b) such other liquid networth amount as may be prescribed by the Authority. Section 15(3) A derivatives exchange shall have systems and controls to enable the derivatives exchange to determine and monitor whether its liquid networth is sufficient for the purposes of subregulation (1) and the minimum liquid net worth requirement for the purposes of subregulation (2). Section 15(4) A derivatives exchange shall submit to the Authority a liquid net worth certificate within thirty days after the end of each quarter. Section 15(5) A derivatives exchange shall, at least once in each year, submit to the Authority an audited liquid net worth certificate from the...

Section 16. General conditions Section 16(1) Save as otherwise provided for in these Regulations, the shareholding or voting rights of any person in a derivatives exchange shall, at all times, not exceed the limits specified in this Part. Section 16(2) The shareholding as specified in this Part shall include any instrument owned or controlled, directly or indirectly, which provides for entitlement to equity or rights over equity at any future date.

Section 17. Shareholding in a derivatives exchange Section 17(1) At least fifteen percent of the paid up equity share capital of a derivatives exchange shall be held by a Kenyan entity. Section 17(2)(a) control or be beneficially entitled directly or indirectly, to more than twenty five percent of the issued share capital or voting rights of a derivatives exchange; Section 17(2)(b) be entitled to appoint more than twenty-five per cent of a board; or Section 17(2)(c) be entitled to receive more than twenty-five percent of the aggregate dividends to be paid in any given financial year. Section 17(3) Where an applicant under subregulation (2) is an individual and does not meet the requirements of this regulation, that individual shall be required to comply with the requirements of this regulation within five years from the date of issue of a licence to operate a derivatives exchange. Section 17(4) Subregulation (2) shall not apply where the ownership structure of a corporate shareholder is sufficiently diverse and no single person holds or controls more than twenty-five percent of its shares, votes, directorship appointments or dividend.

Section 18. Eligibility for acquiring or holding shares Section 18(1) A person shall not, directly or indirectly, acquire or hold five per cent or more of the equity shares of a derivatives exchange unless that person has been certified by the Authority as fit and proper. Section 18(2) A person who, directly or indirectly, either individually or collectively with other persons, plans to acquire equity shares such that the shareholding of that person exceeds five percent of the paid up equity share capital of a derivatives exchange, shall seek approval of the Authority at least fifteen days prior to the proposed date of acquisition. Section 18(3) A person who holds more than five percent of the paid up equity share capital in a derivatives exchange, shall file a declaration within fifteen days of the end of every financial year to the derivatives exchange, as the case may be, that person complies with the fit and proper criteria provided in the Act. Section 18(4)(a) holds five per cent or more of the equity shares of a derivatives exchange; and Section 18(4)(b) shall cease to exercise any voting rights immediately upon the derivatives exchange being notified in writing by the Author...

Section 19. Disclosure of shareholding Section 19(1) Without prejudice to any provision of these Regulations, a derivatives exchange shall disclose to the Authority, in the format specified by the Authority, the shareholding pattern of the derivatives exchange on a quarterly basis within fifteen days from the end of each quarter. Section 19(2)(a) the names of the ten largest shareholders and the number and percentage of shares held by each of them; Section 19(2)(b) the names of the shareholders falling under regulations 17 and 18 who acquire shares in that quarter. Section 19(3) A derivatives exchange shall at all times monitor and ensure compliance with this Part.

Section 20. Record keeping

Section 21. Composition of the board Section 21(1)(a) shareholder directors; Section 21(1)(b) at least one third public interest directors; and Section 21(1)(c) a chief executive officer: Section 21(2) A derivatives broker who is a derivatives member or an associate or an agent of that derivatives broker shall not be a member of the board of any derivatives exchange. Section 21(3) At least one public interest director shall be present in the meetings of the board to constitute the quorum.

Section 22. Conditions of appointment of directors Section 22(1) A derivatives exchange shall submit for approval by the Authority, the names of proposed directors for appointment to the board of a derivatives exchange thirty days prior to their appointment or re-appointment. Section 22(2) A public interest director appointed under subregulation (1) shall serve for a fixed term of three years and shall be eligible for reappointment for one further term.

Section 23. Appointment of chief executive officer Section 23(1) A derivatives exchange may change its chief executive with the prior written consent of the Authority and in accordance with any conditions that may be imposed by the Authority. Section 23(2) A derivatives exchange shall, subject to the guidelines issued by the Authority from time to time, determine the qualification, manner of appointment, terms and conditions of appointment and other procedural formalities associated with the appointment of the chief executive officer. Section 23(3) The tenure under any contract for the chief executive officer of a derivatives exchange shall not be less than three years and not exceeding five years: Provided that the tenure of office of the chief executive of a derivatives exchange may be renewed for one further term. Section 23(4)(a) a shareholder or an associate of a shareholder of any derivatives exchange; or Section 23(4)(b) a shareholder or an associate of a derivatives broker. Section 23(5)(a) if the chief executive officer fails to comply with the articles of association of the derivatives exchange; or Section 23(6) The Authority may on its own motion, terminate the appointme...

Section 24. Code of conduct for directors and key personnel Section 24(1) Every director of a derivatives exchange shall abide by the Code of Conduct set out in Part A of the Third Schedule. Section 24(2) Every director and key personnel of a derivatives exchange shall abide by the Code of Ethics set out in Part B of the Third Schedule. Section 24(3) Every director and key personnel of a derivatives exchange and its clearing house shall be fit and proper persons as prescribed under section 24A of the Act. Section 24(4) The Authority may, if a director of a derivatives exchange fails to abide by these Regulations, the Code of Conduct or the Code of Ethics or in case of any conflict of interest, either upon a reference from the derivatives exchange or on its own motion, take appropriate action including removing or terminating the appointment of any director, after providing that director a reasonable opportunity of being heard.

Section 25. Compensation and tenure of key personnel Section 25(1) A derivatives exchange shall establish a compensation committee comprising of a majority of public interest directors. Section 25(2)(a) be chaired by a public interest director; and Section 25(2)(b) establish a compensation policy for all employees of the derivatives exchange. Section 25(3) The compensation policy under subregulation (2) (b) shall be subject to the approval of the Authority. Section 25(4) The compensation given to the key personnel shall be disclosed in the annual report of the derivatives exchange. Section 25(5) The tenure of key personnel, other than a director, shall be for a fixed period, or as may be determined by the derivatives exchange compensation committee.

Section 26. Segregation of regulatory departments Section A derivatives exchange shall separate the regulatory department from other departments in the manner set out in Part C of the Third Schedule.

Section 27. Oversight committees Section 27(1) A derivatives exchange shall establish independent oversight committees of the board. Section 27(2)(a) be chaired by a public interest director; and Section 27(2)(b) the regulation of futures brokers who are derivatives members; Section 27(2)(b)(i) the regulation of futures brokers who are derivatives members; Section 27(2)(b)(ii) derivatives contracts design; and Section 27(2)(b)(iii) trading and surveillance functions. Section 27(3) A head of department handling the matters referred to in subregulation (2)(b) shall report directly to the respective committee and to the chief executive officer. Section 27(4) Any action of a derivatives exchange against a head of a regulatory department specified under subregulation (2) (b) shall be subject to an appeal to the respective committee, within such period as the board may determine.

Section 28. Advisory Committee Section 28(1) The board of a derivatives exchange shall establish an advisory committee mandated to advise the board on non-regulatory and operational matters including product design, technology, charges and levies. Section 28(2) The advisory committee established under subregulation (1) shall comprise of the derivatives brokers who are members of a derivatives exchange. Section 28(3) The Chairperson of the board and the chief executive officer shall be permanent invitees to every meeting of the advisory committee. Section 28(4) The advisory committee shall meet at least four times a year but a period of three months shall not elapse between the date of one meeting and the next meeting. Section 28(5) The recommendations of the advisory committee shall be tabled at the meeting of the board of the derivatives exchange for consideration and appropriate decision of the board, and such recommendations along with the decision of the board on the same, shall be disclosed on the website of the derivatives exchange. Section 28(6) A derivatives member shall not be a member of any other committee of the derivatives exchange.

Section 29. Risk management Committee Section 29(1) A derivatives exchange shall establish a risk management committee comprising of directors and independent external experts. Section 29(2)(a) report to the board; Section 29(2)(b) formulate a detailed risk management policy which shall be approved by the board; Section 29(2)(c) monitor the implementation of the risk management policy; and Section 29(2)(d) keep the Authority and the board informed on the implementation of policy and any deviation. Section 29(3)(a) be responsible for implementation of the risk management policy; and Section 29(3)(b) report to the risk management committee and to the chief executive officer of the derivatives exchange.

Section 30. Appointment of compliance officer Section 30(1) A derivatives exchange shall appoint a compliance officer from amongst its employees. Section 30(2)(a) monitoring compliance by the derivatives exchange with its articles of association, rules, these Regulations, the Act, any guidelines or directions issued thereunder; and Section 30(2)(b) the redress of investors' grievances. Section 30(3) The compliance officer shall, immediately and independently, report to the Authority, the lack of compliance with any provision stated in subregulation (2).

Section 31. Establishment of an investor protection fund Section 31(1)(a) is separate from the board of a derivatives exchange; Section 31(1)(b) comprises of contributions by derivatives brokers and derivatives exchanges; and Section 31(1)(c) is intended to satisfy the claims of clients against derivatives brokers. Section 31(2) The fund referred to subregulation (1) shall be managed by trustees appointed and holding office under a trust deed drawn by the board of a derivatives exchange.

Section 32. Disclosure and corporate governance norms Section A derivatives exchange shall comply with the disclosure requirements and corporate governance norms applicable to listed companies where no specific provisions have been made under these Regulations.

Section 33. Transfer of penalties Section 33(1) A derivatives exchange may levy penalties for breach of these Regulations. Section 33(2) All penalties levied under subregulation (1) shall be credited to the investor protection fund established by the derivatives exchange.

Section 34. Duties of Derivatives exchange Section 34(1)(a) a fair, efficient and transparent market in derivatives contracts that are traded on its derivatives market; and Section 34(1)(b) that risks associated with the business and operations of that derivatives exchange are managed in a prudent manner. Section 34(2)(a) act in the interest of the public; and Section 34(2)(b) ensure that the interest of the public prevails where it conflicts with the interest of the derivatives exchange, derivatives brokers who are its members, shareholders or the management. Section 34(3) A derivatives exchange shall operate its facilities in accordance with the rules approved by the Authority. Section 34(4) A derivatives exchange shall regulate the operations, standards of practice and business conduct of derivatives brokers who are its members and representatives or other employees of those derivatives brokers in accordance with the rules, policies, procedures and practices of the derivatives exchange. Section 34(5) A derivatives exchange shall formulate and implement appropriate procedures for ensuring that the derivatives brokers who are its members and representatives or other employees of t...

Section 35. Facilities to be maintained by a Derivatives exchange Section adequate and properly equipped premises;

Section 36. Derivatives exchange to assist Authority Section 36(1) A derivatives exchange shall provide such assistance to the Authority as the Authority may require for the performance of the functions and duties of the Authority. Section 36(2)(a) the furnishing of returns and the provision of books and other information relating to the business of the derivatives exchange; Section 36(2)(b) information in respect of trading in derivatives contracts; or Section 36(2)(c) such other specified information as the Authority may require for the proper administration of its functions under the Act.

Section 37. Self-Regulation Section a procedure and appropriate system of exercising self-regulation over its derivatives members;

Section 38. Derivatives Exchange to oversee its members

Section 39. Accounts and audit Section 39(1) A derivatives exchange shall keep proper books of account and records of income and expenditure, assets and liabilities and all other transactions of the derivatives exchange. Section 39(2) The derivatives exchange shall, as soon as practicable after the end of each financial year, prepare a statement of accounts of the derivatives exchange for the financial year, including a statement of comprehensive income and a statement of financial position. Section 39(3) The derivatives exchange shall submit the statement of accounts prepared under subregulation (2) to its auditors for audit. Section 39(4) The auditors shall prepare a report on the accounts and submit the report to the derivatives exchange. Section 39(5) A derivatives exchange shall, immediately upon receipt of the auditor's report referred to under subregulation (4), send a copy of the report and a copy of the statement of accounts to the Authority. Section 39(6)(a) the opinion of the auditor, whether the statement of comprehensive income for the financial year to which the report relates gives a true and fair view of the surplus or deficit of the derivatives exchange; and Sectio...

Section 40. The Authority may appoint an auditor Section The Authority may, where the Authority is satisfied that it is the public interest to do so, appoint an auditor, in writing, at the expense of the derivatives exchange, to examine, audit, and report, either generally or in relation to any matter, on the books, accounts and records of the derivatives exchange.

Section 41. Annual report Section 41(1) A derivatives exchange shall, within four months after the end of its financial year, submit to the Authority an annual report. Section 41(2)(a) a description of the activities undertaken by the derivatives exchange in that financial year; Section 41(2)(b) the resources, including financial, technological and human resources, that the derivatives exchange had available and used, in order to ensure compliance with its obligations and, in particular, the obligation of the derivatives exchange to ensure that the derivatives market operates in a fair, efficient and transparent manner; Section 41(2)(c) an analysis of the extent to which the derivatives exchange considers that the activities undertaken, and resources used have resulted in full compliance with all of the obligations of the derivatives exchange under these Regulations and the rules of the derivatives exchange; Section 41(2)(d) the audit report as required under these Regulations; and Section 41(2)(e) any other information and statements as the Authority may specify.

Section 42. Clearing house of a derivatives exchange Section managed and operated as a department of the derivatives exchange;

Section 43. Duties of a clearing house of a derivatives exchange Section 43(1)(a) in so far as reasonably practicable, there is orderly, fair and expeditious clearing and settlement arrangements for any transactions in derivatives contracts, cleared or settled through its facilities; and Section 43(1)(b) the risks associated with its business and operations are managed in a prudent manner. Section 43(2)(a) act in the interest of the public; and Section 43(2)(b) ensure that where the interest of the public conflicts with its interest, the interest of the public prevails. Section 43(3)(a) operate its facilities in accordance with the established clearing rules; Section 43(3)(b) formulate and implement appropriate procedures to ensure that derivatives brokers comply with its rules; Section 43(3)(c) ensure confidentiality of any information in its possession concerning its derivatives brokers and their clients, subject to disclosure of such information when required in writing to do so by the Authority, the derivatives exchange or if it is ordered by Court to do so; and Section 43(3)(d) have efficient procedures and arrangements to address investor complaints. Section 43(4)(a) that any...

Section 44. Clearing and settlement rules of a derivatives exchange Section 44(1) A derivatives exchange shall make rules for its clearing house. Section 44(2) Where a clearing house is a distinct entity from a derivatives exchange, the clearing house shall make its own rules. Section 44(3)(a) registration of derivatives contracts; Section 44(3)(b) settlement of transactions involving derivatives contracts; Section 44(3)(c) guarantee to its derivatives brokers the settlement of derivatives contracts; Section 44(3)(d) types of margins to be applied on all open positions; Section 44(3)(e) periodic marking to market of all open positions; Section 44(3)(f) determining the daily settlement price and the final settlement price; Section 44(3)(g) setting up a settlement guarantee fund; Section 44(3)(h) setting up an investor protection fund; and Section 44(3)(i) the procedure of expulsion, suspension or disciplining of a derivatives broker who contravenes the clearing and settlement rules of the derivatives exchange. Section 44(4) In addition to the requirements of subregulations (1) and (2), the rules of a derivatives exchange and its clearing house shall also include default provisions,...

Section 45. Ranking of default proceedings of clearing house in insolvency Section 45(1) Where property is subject to a market charge or has been provided as a market collateral, no execution or other legal process for the enforcement of a judgment or an order may be commenced or continued, and no distress may be levied, against the property by a person seeking to enforce any interest in or security over the property, except with the consent of the clearing house concerned. Section 45(2) Where a person is not entitled, by virtue of this regulation, to enforce judgment or an order against any property, any injunction or other remedy granted with a view to facilitating the enforcement of any such judgment or order shall not extend to that property.

Section 46. Derivatives broker to be party to certain transactions as principal Section 46(1)(a) enters into any transaction, including a market contract with a clearing house of a derivatives exchange; and Section 46(1)(b) is likely to be a party to that transaction as an agent, Section 46(2)(a) two or more derivatives brokers enter into any transaction; and Section 46(2)(b) any such derivatives broker is likely to be a party to that transaction as agent,

Section 47. Property deposited with a clearing house Section 47(1) Subject to regulation 44, where a derivatives broker deposits any property with a clearing house as market collateral in accordance with the clearing and settlement rules of a derivatives exchange, then, notwithstanding any other law, no action, claim or demand, either civil or criminal, in respect of any right, title or interest in such property held or enjoyed by any person shall lie, or shall be commenced or allowed against the derivatives exchange or its nominees. Section 47(2) The operation of subregulation (1) shall be subject to any modifications and exclusions provided in the clearing and settlement rules of the derivatives exchange.

Section 48. Preservation of rights etc. Section any right, title, interest, privilege, obligation or liability of a person;

Section 49. Transactions that may be conducted on a derivatives exchange Section 49(1) The Authority shall, by notice, prescribe transactions which may be conducted on a derivatives market. Section 49(2) The transactions prescribed under subregulation (1) shall only be dealings in derivatives contracts or other financial products.

Section 50. Approval of derivatives contracts Section 50(1) Every derivatives contract shall be approved by the Authority prior to becoming eligible for listing on a derivatives exchange. Section 50(2) A derivatives exchange shall submit an application for approval of a derivatives contract to the Authority. Section 50(3)(a) size of the contract; Section 50(3)(b) tick size; Section 50(3)(c) duration of the contract; Section 50(3)(d) mode of final settlement; Section 50(3)(e) grade and quality of the underlying asset, if applicable; Section 50(3)(f) position limits at the derivatives broker and client levels; and Section 50(3)(g) any other information which the Authority may consider necessary. Section 50(4) Upon receipt of an application under subregulation (2), the Authority may, if it is satisfied that the application fulfills the requirements under subregulation (3), approve the derivatives contract for listing on the derivatives exchange. Section 50(5)(a) direct the derivatives exchange to correct the deficiency; Section 50(5)(b) direct the derivatives exchange to comply with the prescribed condition or requirement within the specified time; Section 50(5)(c) amend the specifica...