The Capital Markets Authority is overseeing the expansion of over-the-counter bond trading in the secondary market as part of measures to establish a reliable yield curve by reducing inefficiencies.
According to the capital markets regulator, the initiative will include easing licensing for securities dealers who primarily engage in the over-the-counter (OTC) bond market where buyers and sellers engage directly including negotiating prices.
OTC bond deals have been stifled by elaborate licensing of players that has resulted in just four entities getting the nod.
They are Standard Chartered Bank, SBM, Kingdom Securities and investment advisory firm Private Wealth Management.
“The process of licensing can be very involving and so, we are making it easier so that they can take up that licence,” CMA chief executive officer Wycliffe Shamiah said on Thursday.
Without adequate dealers, off-market bond deals have been forced to be cleared through intermediaries in the organised Nairobi Securities Exchange (NSE).
At present, only the EABX Group Plc, a company that proposes to establish and operate an over-the-counter exchange in East Africa, has applied to be an authorised securities dealer.
“If you have huge players like banks who want to transact among themselves, they may negotiate the transaction and price the deals but the rules dictate that they go through members of the exchange to complete the transaction. This has brought a bit of inefficiencies,” added Mr Shamiah.
Further to increasing the number of authorised securities dealers, the CMA says it is working with the NSE to improve the exchange’s own Unquoted Securities Platform (USP) that has a window for off-market bond trades.
The revamp is expected to include the creation of new rules and a system that will allow players to provide two-way quotes on securities during pre and post-trade sessions.
“We have asked the NSE to come up with specific OTC rules for bonds,” added CMA director of policy and market development Luke Ombara.
Currently, the USP's listings are Acorn investment/development real estate investment trusts, the Linzi Sukuk and Laptrust’s real estate investment trust while the market has been described as fairly illiquid.
The National Treasury is eager for the reforms to widen off-market bond trading as it seeks to deepen the domestic securities market.
Automated exchange
“We will further enhance the market infrastructure through policy support to market participants to operationalise an over-the-counter automated exchange to complement the broker-intermediate NSE," the Treasury told IMF.
"The aim of the exchange will be to promote trading transparency and settlement efficiency and attract more capital in the economy, eventually leading to reduction of yields and cost of new public debt issues."
Bond trading in the secondary market has come under sharp focus in the past year as rising interest rates in the primary auctions distort pricing in the secondary market.
