Capital Markets

Bond traders in bid to weed out rogue dealers

Central Bank of Kenya has taken two of its former staff to court for dealing in fake bonds. Photo/File
Central Bank of Kenya has taken two of its former staff to court for dealing in fake bonds. Photo/File 

Bond traders are seeking to register an umbrella members body to enforce self-regulation and weed out rogue dealers in the industry, which has recently been rocked by claims of irregular trading.

They have formed a new association after realising that the former body — Bond Traders Association — which was chaired by now blacklisted dealer Fred Mweni, was unregistered.

“When we had elections, the new office bearers decided to verify the status of the association and that is when we realised it was not registered,” said Chris Muiga, who is the interim vice-chairman of the new association.

The interim chairman of the new umbrella body known as the Bond Market Association is John Mwaniki.

Unlike the Bond Traders Association that included dealers only, the new body will incorporate fund managers, insurance brokers and bank dealers, all who are major participants in the bond market.

The association will attempt to restore sobriety and confidence in an industry which has been accused of giving free passes to rogue traders, malpractices and non-settlement of trades.

“It (the association) will handle issues pertinent to the market which include ensuring a code of conduct, admissibility and dispute resolution so it will be the first line of regulation,” said Mr Muiga.

Registration should be completed by end of February, he said, but acknowledged there was some resistance in the market towards formation of the body.

The Central Bank of Kenya has admitted receiving complaints from six banks of brokers failing to settle deals done under the sell-buy-back (SBB) transactions. The SBB sales involve a loose arrangement where buyers of bonds are given a ‘buy-back’ promise by sellers at a later date.

Under SBB transactions, Bank ‘A’ accepts a bond as collateral to give cash to Bank ‘B’ under the agreement that after a specified period Bank ‘B’ will take back its bond and repay the cash.

However, as the transfer is not effected with the Central Bank, some of the banks have been declining taking back their bonds, which have low returns, dumping them on the lenders.

“The Central Bank of Kenya’s attention has been drawn to improper market conduct where stockbrokers have been executing purchase orders for Government bonds through e-mail with the Commercial banks,” noted CBK in a memo issued out to the industry in November last year.

Commercial banks have also been accused of overstating their profits by using the bond market to reclassify their bond portfolios, evading the strict application of accounting standards.

Central Bank has also taken two of its former employees to court for dealing in fake bonds, further denting confidence in the multi-trillion shilling market.

Last year’s bond market turnover stood at Sh1.1 trillion. Market players attributed the malpractices in the market to having diverse players, leading to different roles being played out by different regulators.

CBK is the custodian of the securities and regulator of commercial banks while the Capital Markets Authority (CMA) regulates the brokers through whom all trades are conducted, while the NSE executes the trades.

The regulators have also not reached a consensus on how to treat the SBB transactions. The CMA has recommended their total ban, a move opposed by the CBK.