Derivatives trading is almost here. The Financial Regulatory Authority (FRA) officially licensed the EGX to operate its futures exchange, clearing the way for trading to launch as early as March, according to a statement. This aligns with the exchange’s latest guidance that a functional derivatives market will go live before the end of 1Q.

SOUND SMART- Think of derivatives as contracts that derive their value from the performance of an underlying asset — like a stock, index, or commodity — allowing investors to hedge against risk or speculate on future price movements without owning the asset itself. This market includes futures — the type of derivative the FRA just greenlit — which lock in prices for a later date, and options, which give the holder the right, but not the obligation, to buy or sell an asset, providing a form of financial ins.

Beyond simple wagers on price direction, derivatives enable strategies like short selling to gain from market declines and swaps, which allow parties to exchange variables like interest rates of currencies to stabilize cashflow. Because these instruments typically require only a small upfront deposit to control a large position, they provide significant leverage, which amplifies both potential earnings and the risks of a total loss.

The rollout will be phased, debuting with futures contracts on the benchmark EGX30 index, before eventually expanding to the EGX70, single-stock futures, and options.

Seven brokerage firms have already applied for licenses to trade futures, and technical linkages between brokers and the clearinghouse are expected to be finalized within a month.

Our take

This introduces the country’s first true hedging mechanism for equities — a critical development for institutional investors. Foreign funds, in particular — which EGX Chairman Islam Azzam said have already requested meetings — often view the ability to hedge exposure or short the market as a prerequisite for capital allocation in frontier and emerging markets.

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