Brokers oppose OTC market plan for bond trading

• Stockbrokers, who earn commissions from trade of the fixed income instruments, are opposed to the OTC market which will see bankers and other holders of bonds trade directly between themselves without having to route their transactions through the exchange, as is currently required by the law.
• The stand-off has seen the capital markets regulator appeal for a resolution, arguing that a hybrid OTC and securities exchange trading system will help to deepen the market and eventually raise the overall transaction volumes.
• They brokers contend the OTC system will become prone to manipulation and underhand deals designed to benefit the more knowledgeable parties, namely banks, in the transactions.

A stand-off between stockbrokers and bankers over implementation of an over-the-counter (OTC) market for bonds is hindering start of the trading system, it has emerged.

Stockbrokers, who earn commissions from trade of the fixed income instruments, are opposed to the OTC market which will see bankers and other holders of bonds trade directly between themselves without having to route their transactions through the exchange, as is currently required by the law.

The brokers argue that the OTC system will introduce opaqueness to bonds trading and impede price discovery as it will allow users to just meet wherever they wish and trade.

The stand-off has seen the capital markets regulator appeal for a resolution, arguing that a hybrid OTC and securities exchange trading system will help to deepen the market and eventually raise the overall transaction volumes.

“We appeal to stakeholders to quickly and soberly address issues causing delay in the implementation of a hybrid bond market that will allow trading of bonds both in and outside the securities exchange,” said Capital Markets Authority (CMA) chairman Kung’u Gatabaki on Monday during listing of the Sh1.7 billion Consolidated Bank bond.

He said trading in bonds through the exchange had been successful in the past few years but added that more needed to be done to put the country at par with the rest of the world.

Companies have raised Sh54 billion through corporate bonds listed at the exchange in the past five years, of which about Sh45.5 billion has been in the past three.

Mr Gatabaki, however, noted that development of the bond market in Africa has been slow, accounting for a paltry two per cent of the total global turnover with retail participation at a minimal level.

They brokers contend the OTC system will become prone to manipulation and underhand deals designed to benefit the more knowledgeable parties, namely banks, in the transactions.

READ: Stockbrokers call for review of commissions

On the other hand, bankers argue the brokers are more concerned about the commissions they are likely to lose when the trading of the fixed-income instruments is taken away from them.

While bankers see nothing wrong with the policy on having an active OTC market, the fear among brokers is that this will eventually take trading of all bonds away from the exchange.

“We had a number of issues with taking trading outside the system,” said Bob Karina, the vice-chairman at the Nairobi Securities Exchange.

The brokers’ lobby, Kenya Association of Stockbrokers and Investment Banks (KASIB) said if the OTC system was implemented it would be to the “disadvantage of investors who will never know what dynamics influenced the final price as they will be prone to manipulation, underhand deals and corruption”.

“We are totally opposed to the introduction of the OTC market bonds. We want all bonds traded openly at the exchange. It is something that KASIB members have discussed and that is what we have told the CMA,” said KASIB chief executive Willie Njoroge.