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Treasury, CBK split over rival exchange for bonds
Under EABX, traders in government securities are allowed to interact and negotiate their transactions as opposed to the current model at the NSE where buyers and sellers do not interact.
The Treasury has broken ranks with the central bank by supporting a new exchange for trading government securities that will rival the Nairobi Securities Exchange (NSE).
The Treasury has backed the new privately owned platform —the East African Bond Exchange (EABX) — which allows investors to trade Treasury bonds outside the Nairobi bourse.
This places the Treasury and the Central Bank of Kenya (CBK) at odds since the banking regulator has raised concerns over the second bond trading platform.
The banking regulator fears that the dual platforms will distort the market through creation of two prices for the same bond.
EABX, the would-be competitor for the Nairobi Securities Exchange (NSE), received its operating licence from the Capital Markets Authority (CMA) in February last year.
It traces its roots to 2009 when an industry lobby, the Bond Market Association, agreed to set up a self-regulating organisation for the fixed income market. Secondary trading on the platform is yet to start because the CBK has denied the exchange an electronic link to integrate its system to the banking regulator, giving it access to the pool of bonds, owners and settlement accounts.
The Treasury says it will seek to provide EABX with the link to the CBK depository system this year.
“Provide electronic link to the government securities depository for the new over the counter exchange (EABX Ltd) to launch trading of government securities in the OTC exchange,” the Treasury states in the 2025 draft Medium Term Debt Management Strategy (MTDS).
The OTC market will allow traders to negotiate transactions directly with each other, without going through a formal securities exchange.
Under EABX, traders in government securities are allowed to interact and negotiate their transactions as opposed to the current model at the NSE where buyers and sellers do not interact.
The setting up of EABX was an attempt to promote trading transparency and settlement efficiency in the quest to attract more capital.
EABX is expected to rival the NSE which has for a long time controlled the secondary trading of government securities, notably Treasury bonds.
Secondary bonds trading is a lucrative venture based on the value and volumes involved, with the Treasury bond turnover having closed last year at a record high of Sh1.54 trillion, nearly doubling from Sh643.83 billion in 2023.
The NSE charges a 0.03 percent commission per bond trade, translating to an income of Sh462 million.
The exchange would represent an opportunity to unlock money market liquidity, its promoters reckon.
Bond trading at the NSE involves bondholders instructing the broker to buy or sell security at a specific price, or better.
The founders of EABX’s OTC, who include commercial banks, reckon that the platform will end opaqueness in the trading of bonds in the secondary market by eliminating the role of brokers in the trade.
Bond dealers in brokerage entities, who earn bond levies whenever trading occurs, will take a hit should the OTC market take off and cement direct engagement between traders.
Insiders told the Business Daily that the CBK denied the EABX a plug-in to the settlement platform because it is worried that having two trading platforms will likely distort the bond market.
While the launch of the OTC means more options for investors trading in government securities in the secondary market and transparency in pricing, there are also unanswered questions on how the yield curve will be generated from the two exchanges, the source added.
A yield curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period.
EABX says it remains in discussions with the CBK, the current proprietor of the government securities trading infrastructure, on the ‘best way’ to attain connectivity to the system while addressing any of the regulator’s concerns.
“EABX is in discussion with the CBK on a viable system linkage. At the moment EABX is still not connected to the CSD (central depository and settlement) infrastructure,” EABX chief executive officer Terry Adembesa said in an interview.
The EABX has downplayed the dual pricing concerns, arguing that government securities have been traded over the counter globally.
The Treasury’s backing of EABX comes at a time when it is reviewing the rules guiding trading of bonds, including seeking to strip the CBK of its role of selling bonds and Treasury bills on behalf of the government.
It wants the Public Debt Management Office (PDMO), a department within the Treasury, to issue government securities, setting it up for a clash with the apex bank.
“Support for legal amendments to…empower the PDMO to perform its functions as principal in the issuance of government securities. Consolidate auction functions under PDMO as the principal in domestic borrowing and not under a committee—to make PDMO more accountable in public debt issuance,” the Treasury stated in its draft 2025 debt management plan.
The move, if implemented, would see CBK’s role reduced to just monetary policy operations which covers the setting of the benchmark interest rates and the regulation of money supply.
The proposals under the draft debt management strategy are tied to the government’s ambition of lowering the interest rate on debt securities to below 10 percent.