Stock traders at the Nairobi Stock Exchange on September 6, 2012. The Capital Markets Authority has suspended the MD of Tsavo Securities after he failed to disclosed critical information to facilitate investigations into suspect bonds trading. File
What you need to know:
Fred Mweni, the managing director of Tsavo Securities, who is described as a “key” part of the ongoing investigations, was blacklisted on December 21 after the Capital Markets Authority (CMA) said he was blocking the ongoing investigation.
Though he does not have a dealing license, Mr Mweni is said by bond traders to be the main originator of fixed income transactions at the market, which are on average valued at over one billion shillings every day.
The disqualification means Mr Mweni cannot run the firm he majority owns, become a director or even an employee in a listed company, agency or brokerage firm.
The capital markets regulator has banned an influential bonds trader from running any CMA licensed intermediary, blowing the lid on an ongoing investigation into a multi-billion shilling scam involving treasury securities.
Fred Mweni, the managing director of Tsavo Securities, who is described as a “key” part of the ongoing investigations, was blacklisted on December 21 after the Capital Markets Authority (CMA) said he was blocking the ongoing investigation.
Mr Mweni, a former dealer at Suntra Investment Bank, who is said to control a substantial portion of the multi-billion shilling bonds market, has reportedly refused to disclose transaction details of suspect deals that were executed through his firm, including refusing to names clients demanded by the regulator.
Though he does not have a dealing license, Mr Mweni is said by bond traders to be the main originator of fixed income transactions at the market, which are on average valued at over one billion shillings every day.
Annual bonds turnover at the NSE dropped slightly to Sh445.5 billion last year, from a record Sh483.1 billion reported in 2010.
“The action against Mr Mweni was taken pursuant to an ongoing bond trade investigation,” said the CMA in response to the Business Daily queries Thursday, while, however, declining to disclose details of the investigation.
When reached for comment, Mr Mweni also declined to comment on the ban by CMA, only stating that he would address a press conference Friday.
“I have not refused to meet the regulator,” he said.
Sources close to the embattled bonds dealer, however, said the CMA is investigating bond transactions worth “billions of shillings” that are suspected to have been fraudulent.
News of the ongoing investigation plunged the Nairobi Securities Exchange into a new cloud of uncertainty as some financial institutions, including banks, were said to have been caught on the wrong end of the fraudulent deals.
The scam is said to be centred on a peculiar method of trading Treasury bonds that commercial banks and stockbrokers have been using in recent years. Known in capital markets jargon as sale-buy-back (SBBs), the transactions involve the sale of a Treasury bond by one bank to another, with the promise of buying it back in future.
In a confidential memo seen by the Business Daily and reported on November 25, the CMA had recommended a ban on all SBB transactions on grounds that they pose a risk to the financial system.
The CMA also argued that the SBB transactions are not legally enforceable contracts and have therefore been used to defraud banks and stockbrokers.
“The SBB transactions have led to significant distortion of the yield curve and in some instances fraud due to lack of practical rules that govern the transactions,” says the CMA memo.
Thursday the CMA said Mr Mweni’s ban was related to an investigation that is “distinct from SBB transactions”
“CMA is aware of the SBB transactions cases where some of the counter parties in the transactions have failed to trade the second leg of the transaction. The cases are under active investigation and for the purpose of integrity of the investigation process, CMA cannot not disclose the counter parties involved and the findings on the facts in issue pending the completion of the investigations.”
The disqualification six days ago means Mr Mweni cannot run the firm he majority owns, become a director or even an employee in a listed company, agency or brokerage firm.
CMA quoted Section 13 (1) of the Capital Markets Act which empowers the regulator to demand “any person to furnish to the Authority or to the authorised person, within such period as is specified in the notice, all such returns or information as specified in such notice.”
Mr Mweni is also accused of obstructing the Authority in the performance of its statutory duties contrary to Section 34 (1) (c) of the Capital Markets Act. Tsavo securities is understood to have declined to disclose the information citing confidentiality of its customers.
The requirements to provide information relates to an ongoing investigation relating to the bond market.
The source said there had been disputes on settlement of a number of transactions, thereby attracting the attention of the CMA and the Central bank. In the SBB cases, the agreement to deal in the bonds were found to have been done through e-mail communication, which is not legally binding.
Such trades are supposed to go through MT599 an electronic message which automatically registers at the Central Bank of Kenya (CBK), the custodian of bond central depository accounts.
A few months ago, the CMA recommended a ban on SBBs but the CBK only tightened rules relating to the trading.
The CBK decreed that commercial banks needed to send the electronic MT599 message to the CBK once a deal had been agreed making settlement automatic if any party failed to meet its obligations by the due date.
This would enable CBK to debit the account of the commercial bank concerned in the deal, ensuring that no default would be possible. However, in the case of the SBBs, this process was being by-passed meaning the regulator only learnt about it when a problem arose.
Market sources said CMA investigations also revolve around some brokers obtaining overdraft from some commercial banks through SBBs, but then failing to settle after bond yields went against them. This meant the broker or client obtained cash but refused to buy back the bond through repaying the cash advanced with the bond as security.
The SBBs have also come under criticism lately as they are used by commercial banks to change their portfolio to avoid recording losses on their bond trading books.
Since the client (broker or another bank) still had possession of the bond as indicated in the CBK’s CDS account details, he could go back on his word – failing to buy back as promised.
The CMA said its has formed a joint task force with CBK, the Kenya Bankers Association and NSE as members to address the challenges of SBB transactions.
