Stockbrokers are set to lose their grip on the bonds market following a decision by the capital markets regulators to sanction a law that will allow big buyers of treasury securities to deal directly with the Central Bank.
The Capital Markets Authority (CMA) chairman, Kung’u Gatabaki, says he has passed on to the Ministry of Finance for gazettment a new set of laws that will allow for licensing of ‘authorised securities dealers’
The dealers will trade bonds directly with the central bank and between themselves, unlike in the current situation where all buying and selling of treasury securities is required by law to be settled at the Nairobi Securities Exchange (NSE).
“I have lodged for gazettement into law a legal framework for licensing of players in bond trading known as the Authorised Securities Dealers,” said Mr Gatabaki during Wednesday’s launch of the Housing Finance corporate bond.
“This category will provide for the direct access to trading of fixed income securities by commercial banks, fund managers and insurance companies in order to increase efficiency and reduce costs in the markets,” added the CMA chairman.
Commercial banks and insurance companies account for more than 95 per cent of trading of treasury bonds, and a loss of the business is certain to hurt stockbrokers’ income.
The brokers have over the years enjoyed protection of the law to earn hundreds of millions of shillings every year as commissions for facilitating trading of bonds.
Bonds turnover fell slightly to Sh440 billion last year from the record trading volumes of Sh483 billion in 2010.
Stockbrokers earn commissions of 0.04 per cent on bond transactions, though stiff competition among the players has seen them give traders deep discounts.
Attempts to reform the market to allow for direct trading between the major bond buyers through an over-the-counter (OTC) market have been met with resistance from the stockbrokers.
The change in law means that stockbrokers will have to hunt for bond trading deals by playing the role of inter-mediation between buyers and sellers, which will see those with thin trading desks lose out to their better staffed counterparts.
“This new class of intermediaries form a critical component of the hybrid bond market being introduced to allow for OTC trading of debt securities to support increased liquidity in the market,” said Mr Gatabaki, adding that the NSE’s role will be reduced to post-trade reporting of deals done on the OTC market.
Commercial banks have been pushing for the OTC bonds market to cut their transaction costs, but there have been concerns that dealing outside the bourse could be opaque thereby distorting pricing of government debt, and by extension the cost of borrowing for private companies.
Bob Karina, the managing director of Faida Investment Bank, said the change in law will imply a significant hit on the intermediaries’ earnings.
“We will have to review our mode of doing business,” said Mr Karina, adding: “Earnings from bond trading forms a significant portion in brokers’ revenues.” He is, however, hopeful that the need for privacy and confidentiality amongst the big bondholders would still dictate that most trades on the debt instruments are channelled through the NSE trading system.
“Not all banks would want their peers to know what they are doing, by exiting or taking positions in the bond market, and this will drive a significant portion of the business through us,” said Mr Karina, who is also vice chairman of the NSE.
Brokers have in the past resisted the formation of the hybrid bond trading market arguing the OTC system will become prone to manipulation and underhand deals designed to benefit the more knowledgeable parties, such as banks, in the transactions.
Under the proposed hybrid bond market, buyers and sellers of financial securities agree on the payable price while at the stock exchange, market forces help to price the bond.