CDSC phases out paper certificates for corporate bonds

The Central Depository and Settlement Corporation (CDSC) has concluded dematerialising corporate bonds, bringing to a close the era of physical certificates held as proof of ownership of the securities.

The conclusion of the process comes a year after that of equities. According to presentations made by the CDSC at a meeting of the East African Securities Exchange Association (EASEA) last week, all corporate bonds would be declared dematerialised on November 30 (Sunday).

CDSC noted that the number of CDS accounts has grown in multiples since 2004 when the immobilisation journey began, to stand at 2.5 million up from 30,000.

The phasing out of paper certificates for both shares and corporate bonds is meant to increase efficiency, reduce transfer costs and increase transparency in trading.

“The bond issues recently have been done in electronic form, so this would largely apply to those issued sometime in the past. What this means is that paper bond certificates will no longer be taken as primary proof of ownership, although the bonds themselves are not going to be cancelled,” said ABC Capital corporate finance manager Johnson Nderi.

This is to say that no one will lose their money or ownership, but those who have skipped the process or failed to present their certificates for the exercise for one reason or another will be forced to dematerialise them at the time they will seek to trade the securities.

Only dematerialised securities will be tradable from Monday.

Mr Nderi said that unlike in the case of equities where there are many investors, there will be fewer affected parties on the bonds market in the dematerialisation given that the fixed-income securities are mainly held by institutions such as fund managers.

When it came to equities, the paper certificate system presented a variety of challenges like duplication of shares, loss and mutilation of certificates, signature mismatches and a time consuming sale and transfer process.

This had become a major contributor to rising arbitration cases and investor disputes.

In addition to the conclusion of the dematerialisation process, CDSC reported that it was working towards compliance with standards set by the Committee on Payment and Settlement Systems (CPSS), which is an organ of the Bank of International Settlements set up by the G10 countries.

The CPSS committee draws members from central banks of the G10 countries and monitors developments in payment, settlement and clearing systems for efficiency and to build strong market infrastructure at the international level.

It seeks to ensure organised markets in terms of payments and settlement.

Next month, the CDSC will move to a central bank money settlement model which offers better settlement risk management. Payments will therefore be channelled through the central bank.

According to the EASEA statement released after the meeting, the modernisation of Kenyan capital markets has played a key role in increasing investor appetite locally, regionally and internationally.

Two other member exchanges — the Uganda Stock Exchange (USE) and Rwanda Stock Exchange (RSE) — gave updates on their modernisation and automation processes, which mainly focus on easing settlement and automating trades.

USE said it was finalising discussions with the Bank of Uganda (BoU) to link the securities central depository to the bank’s payment and settlement systems, which will ensure real time gross settlement for securities traded on the USE.

The Ugandan exchange has also bought and is installing an automated trading system similar to what has been used by the NSE since 2006.