NSE investors to get window for loaning out shares

The Central Depository and Settlement Corporation (CDSC) plans to install a new IT system that will enable investors to borrow and lend shares to each other for margin trading.

The CDSC, which acts as the custodian of electronic accounts holding all shares and bonds that are traded on the Nairobi Securities Exchange (NSE), said the new system will make it possible for the type of trade, also known as short selling to take place at the bourse.

The CDSC chief executive Rose Mambo said the new system will free more stocks that are available for trading, potentially increasing market turnover. She said it should be ready by the third quarter (September) next year.

“We want to introduce securities lending which will increase turnover at the NSE,” said Mrs Mambo at the launch of Custody and Trading Software by Kenyan-based IT firm, Innova Limited.

At the end of 2012 the cumulative turnover at the NSE stood at Sh86.79 billion on 5.4 million shares traded, while market capitalisation stood at Sh1.27 trillion.

Mrs Mambo said that only one per cent of all stocks are actively traded.

An increase in the number of shares traded should have an impact on the CDSC’s revenues, which are mainly derived from commissions earned from the sale of stocks and bonds.

The CDSC charges a 0.006 commission on the value of a stocks traded and a 0.002 commission on the sale of a corporate or government bond.

The CDSC’s 2012 revenues stood at Sh172.5 million, of which transaction levy on stocks sold and bought accounted for 104.1 million or 60 per cent of total income.

Total revenues however decreased by 10 per cent from Sh190.3 million earned in 2011.The CDSC said that the proposed system will also have capacity for derivatives trading and will also handle custodial services for non-listed companies.

The regulator, the Capital Markets Authority (CMA), has said that it is looking at drafting laws that will introduce the securities lending, short selling, futures and derivatives.

“The Authority is working proactively to ensure the following broadened range of products and services in the capital markets industry including  framework to facilitate short selling of securities, margin trading and securities lending and borrowing,” said Acting chief executive Paul Muthaura in early June.

The CDSC said it has asked 12 companies, both local and foreign, to send bids for the proposed new system and expects to award the contract to the winning company in early 2014.

One of the biggest challenges would be protecting simple investors from fraud. Vendors said that in addition to a greater demand for speed and efficiency, demand for a secure system is increasing.

“Investors are becoming more sophisticated and better informed. They want far more than just data. They want to know that their portfolios are well optimised for risk and their investments are safe. They want rapid access to information regarding their portfolios,” said Vincent Ntalami, a co-director at Innova Limited.

Stockbrokers said that while all new products come with an element of risk, the system should ordinarily have checks that allow trading for stocks held and when there are funds in ones accounts.

Faida Investment Bank chief executive Bob Karina said finer details will come out after interested vendors give proposals but even before installation all brokers will have to undergo training.

“From the point of view of a day trading we would like to have as many products as possible to increase revenues,” said Mr Karina.