Bond turnover slumps following Central Bank, CMA row

The turnover of bonds listed on the Nairobi Securities Exchange (NSE) has dropped sharply by 77.5 per cent between the beginning of November and mid this month.

The slowdown has been attributed to the beginning of the festivities season and controversy surrounding a peculiar method of trading known in capital markets jargon as sell-buy-backs, which involves the sale of a Treasury bond by one bank to another, with the promise of buying it back in future.

Confidential memos seen by the Business Daily last month indicated that the CMA wants a ban on SBB transactions, arguing that they are being used by banks to distort capital markets and report misleading profit figures.

The banking sector regulator, the Central Bank of Kenya, has however opposed the ban, arguing that the solution to this irregularity would be to have “written instructions” in all SBB transactions.

As at December 13, the NSE had recorded bond turnover of Sh4.0 billion compared to Sh17.7 billion in the week ending November 1.

The decline in turnover accelerated after the November 12 circular from the Central Bank of Kenya (CBK) which ordered banks to only trade bonds when a contract had been authenticated and confirmed through an electronic message to the monetary authority.

“We have seen sell-buy-backs decline drastically since the Central Bank became strict with the contracts for the transactions,” said Alexander Muiruri, a fixed-income trader at African Alliance Investment Bank.

The CBK move followed recommendations from the Capital Markets Authority (CMA) to tighten regulations in the SBB sales or ban them altogether.
With the sell-buybacks, many commercial banks traded SBBs by merely writing e-mails, a situation that saw some default on their promise to pay back or buy back the bonds.

The CBK ordered banks to ensure that a message —technically called MT599 — had to be sent before a transaction was finalised to ensure that any bank that failed to pay back what it had borrowed using the SBBs would have its account automatically debited on the due date. This caused many to stop trading the sell-buybacks completely.

In their latest weekly investor note, Kestrel Capital noted the declining turnover compared to the previous weeks and attributed it to festivities at this time of the year. “Bond volumes dropped by 38.0 per cent to Sh4.0 billion … as most investors closed their trading books ahead of the end of year festivities,” said Kestrel Capital.

For the week ending December 6, the turnover was Sh6.6 billion as Kestrel noted, which was itself a decline from about Sh9 billion the week before.

A bonds dealer, who declined to be named because his institution had been involved in huge SBBs trading and the matter had become sensitive, attributed their lower usage currently to existence of adequate liquidity among banks.

He said banks currently have a lot of liquidity as reflected by the high subscription figures for recent bond issues.

Many brokers have quietly opposed CMA’s proposed ban of SBBs arguing that the instruments are widely used in other parts of the world such as South Africa. Their position is that they should not miss on the brokerage commissions because some banks are refusing to abide by the rules.