Banks mull over-the-counter bonds trading plan

Kenyan banks are considering a move by the Nairobi Stock Exchange allowing them to trade bonds directly.

Banks in East Africa’s largest economy are required to place their orders through stock brokerages, which earn a 0.04 per cent commission on any deal, a practice which the banks say adds unnecessary costs in a fast-growing debt market.

“If you look at the volumes and the way they have been going, that becomes a very huge expense for any bank. The banks have been pushing for these to come down,” said Duncan Kimani, vice chairman of ACI-Kenya, an association of money markets traders. “For a long time, there has been a push for the market to go OTC (over the counter) but without killing the broker because the broker has a role in the market. The broker will be an intermediary but will be paid whenever he acts on your behalf.”

The system would allow banks to trade directly with each other, but they would have to register with relevant authorities.

Under the rules proposed by NSE, the fees banks pay to brokers would be reduced by 70 per cent.

The future over the counter system would eliminate charges.

Fixed income traders for commercial banks said they would still use the services of brokers from time to time, even after the changes are implemented, due to their knowledge of the market and the anonymity they offer when they execute large orders on behalf of banks.

“People thought the brokers are going to be sidelined, I think they will still remain... brokers have got more information of what is happening in the market, who is selling what and who is buying what,” said Ignatius Chicha, treasurer at Citibank.

Debt market

Kenya’s debt market has boomed since the second half of last year on the back of improvements in the market aimed at raising efficiency, transparency and security like the automation of the trading platform.

The market also gained from investors’ chase for high-yields.

The debt instruments also benefited on a revision of the methodology used to calculate inflation, which pushed the rate into single digits and resulted in a positive real interest rate environment.

NSE said Sh27 billion ($351.8 million) worth of bonds were traded in January, a 69 per cent jump on December’s Sh16 billion.

The volume rose to Sh42 billion worth of bonds traded in February, 56 per cent higher than January. Volumes stood at Sh110.6 billion last year.

Yields have fallen by an average 200-300 basis points this year with the 20-year Treasury bond sliding from an average of above 13 per cent to just over 10 per cent.

The yield on the 364-day T-bill has fallen from around nine per cent to slightly over seven per cent.