Banks, stockbrokers fight for bonds market millions

A recent bonds market boom has renewed an old rivalry between banks and brokers that now threatens to suck in the financial services and capital markets regulators – the Central Bank of Kenya and the Capital Markets Authority.

At stake is control of the multi-billion shilling bonds market that so far remains in the tight grip of stockbrokers to the discomfort of banks who boast of being the biggest single players in the fixed securities market.

Banks have been demanding that they be licensed as bond traders – a move that would enable them to trade the bonds directly among themselves and save them the millions of shillings they pay brokers in commissions every year.

Brokers and investment banks have, however, put up strong opposition to the move, citing the law that blocks the trading of securities – both shares and bonds – outside the Nairobi Stock Exchange.

Commercial banks account for more than 50 per cent of all transactions in the bonds market, annually translating to more than Sh200 million in commissions to brokers who must handle their trades.

Stockbrokers earn commissions of up to 0.04 per cent of the value of every bond transaction, which bankers say is undeserved because they add no expertise to the process.

More recently as investors fled the bearish run at the stock market for safety of fixed income securities, the bonds market has been the main beneficiary earning brokers millions of shillings in commissions.

Last year, the bonds market volumes rose to an all time high of Sh110 billion earning the brokers about Sh440 million in commissions.

Bonds market trading volumes gained a new momentum late last year after the NSE installed an automated trading system (ATS) that enables investors to freely trade the debt papers in the market.

Launch of the ATS saw volumes rise by 358.7 per cent from the Sh9 billion transacted in November to Sh42 billion in January alone.

This growing appetite for debt papers has raised the profile of the fixed income market renewing the old rivalry between banks and brokers.

Banks buy the bonds to earn interest income or make capital gains by buying low and selling high.

Barclays, one of Kenya’s top banks, for example earned Sh3.3 billion in interest income from its Treasury Bonds portfolio last year, Standard Chartered and KCB made Sh3.1 billion each while Equity Bank returned Sh1.3 billion from the bond trade.

Significant demand for bonds has also come from foreign investors keen on cashing in on the relatively higher returns in frontier markets such as Kenya and the ease of trading afforded by the automated trading platform.

CMA — which regulates trading of all listed bonds — had promised to amend the law to allow for a “hybrid” system that would free bankers from the grip of the brokers and allow them to trade bonds among themselves but there has been no action on the matter.

People familiar with the matter said CMA plans to establish an over the counter (OTC) market that will allow banks to trade bonds without passing through the market intermediaries but the brokers, who stand to suffer revenue losses, have all long been opposed to the move.

Last week, just as banks were expecting the CMA to make a decision on the matter the NSE chief executive, Peter Mwangi, fired letters to banks asking them to apply for licences to become “authorised securities dealers.”

Such a move would afford banks the privilege to directly trade bonds amongst themselves without exiting the NSE’s trading system.

Bankers have however reacted strongly to Mr Mwangi’s letter, vowing to push for nothing short of an OTC bonds market completely separate from the NSE.

“Being an authorised securities dealer only makes banks associate members of the exchange,” said Duncan Kinuthia, the vice chairman of commercial bank treasury dealers association (ACI) in a letter to members in response to Mr Mwangi’s letter. “As we were gunning for a full OTC environment, it is not clear whether this is the right direction for banks to go,” added Mr Kinuthia, who is also a dealer at Bank of Africa’s treasury department.

Mr Kinuthia told Business Daily that applying for a dealers’ license from the CMA would just add another layer of regulation for banks, which already fall under Central Bank of Kenya’s watch.

The bankers argue that by routing their transactions through CBK, which is the custodian of all treasury bonds, they have the capacity to originate and settle deals seamlessly without incurring any brokerage costs.

But some market players have described direct trading of bonds among banks as being fraught with the risk of unethical market practices such as price fixing among the traders.

Authorised securities dealers pay the CMA and the NSE a one-off license application and admission levy of Sh300,000 and an annual fee of Sh100,000.

Dealers also pay “statutory fees” to CMA, NSE, the Central Depository and Settlement Corporation (CDSC) and the Investor Compensation Fund based on the value of bonds traded.

Mr Mwangi reckons that the invitation to banks to apply for dealership licences is not an attempt to kill the idea of an OTC market.

He said the move would ‘significantly’ cut the statutory fee that banks incur on trades at the NSE and relieve them of the commissions burden.

Hidden costs

“Authorised Security Dealers (ASDs) licences will enable commercial banks to access the ATS directly from their offices and trade on their own books,” said Mr Mwangi. “This is part of initiatives towards deepening the capital markets.”

Mr Kinuthia, however, says banks are wary of additional hidden costs that may come with membership of the stock exchange.

Some of the contentious issues will be discussed at a meeting between Mr Mwangi and the Central Bank of Kenya’s director of monetary operations and debt management, Jackson Kitili.

“It is important that senior management from the invited institutions attend this meeting because serious and firm decisions have to be made,” says Solomon Alubala, a dealer with Co-operative Bank and secretary of the ACI, in another letter to members seen by Business Daily.

The National Bank of Kenya (NBK) has, however, broken ranks with other players and submitted an application for an authorised dealer’s licence.

NBK’s manager for custodial services, Daniel Mboi, said the move was necessitated by the growing base of high net worth foreign clients who are queuing to buy treasury bonds through the bank opening a new income stream.