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The good and bad of dealing in omnibus share accounts

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A securities trader at Nairobi Securities Exchange (NSE) trading floor at the Exchange building in Nairobi on August 26, 2020. FILE PHOTO | NMG

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Summary

  • Some of the benefits of an omnibus account, also called a “cash management” or “asset management” account, involve possibly quicker distribution of dividends and information regarding the stock.
  • It is worth mentioning that owing to the changes in the investment environment and practice—global securities companies are increasingly using omnibus accounts to process trading orders— there’s been a growing need for omnibus accounts.
  • That said, despite their obvious benefits, omnibus accounts present several challenges.

During his budget speech for the 2020/2021 fiscal year, Treasury Cabinet Secretary Ukur Yatani put forward several proposals concerning the capital markets.

Key among them are amending the Central Depositories Act to allow opening of omnibus investment accounts, establishing an electronic over-the–counter secondary market platform for government securities and the amendment of the Capital Markets Authority (CMA) Act to enable the regulators tribunal to hear and determine any appeal within 90 days.

Out of the three, the omnibus suggestion stood out for me for three reasons; ability to spur trading (perennial turnover rates stand at less than 10 percent), make foreign investor participation more convenient and the possible reduction of transaction costs.

For starters, omnibus investment accounts are a type of a nominee account in which the operator (mostly the stockbroker or investment bank) handles the collective position of securities of more than one investor in a single account.

In other words, the operator receives trading orders from their underlying clients and places multiple orders through a single account.

Some of the benefits of an omnibus account, also called a “cash management” or “asset management” account, involve possibly quicker distribution of dividends and information regarding the stock.

It is worth mentioning that owing to the changes in the investment environment and practice—global securities companies are increasingly using omnibus accounts to process trading orders— there’s been a growing need for omnibus accounts.

That said, despite their obvious benefits, omnibus accounts present several challenges.

First, in case of the operator‘s bankruptcy, this may increase the investor‘s risk of not being able to recover their assets.

Secondly, omnibus accounts can be used to obscure the identities of persons engaging in illicit activities. If proper checks are not put in place, omnibus accounts can facilitate violations of CMA laws, such as manipulative stock trading and/or insider trading, as well as other illicit activities.

Thirdly, with respect to the operation of an omnibus account, CMA may face other more complicated issues such as allocation of securities (as well as gains or losses from securities transactions) and the execution of instructions from the beneficial owners.

Furthermore, if the omnibus account becomes available to foreign investors, it will be generally quite challenging, even impossible, for the regulator to identify or track down the actual beneficial owners.

In summary, the omnibus account represents another way for investors to bypass some of the “red tape” associated with buying and selling stocks.

Their introduction will see account management, trading, and settlement procedures made more convenient. For foreign investors, they’ll probably enjoy greatly reduced transactional costs as separate accounts for each of their orders are integrated into a single account.

Nonetheless, despite the growing need for the government to enhance inclusivity and open access to investment opportunities, omnibus accounts come with risks.

As such, they should be considered with caution, only after appropriate measures are put in place.

The government will, therefore, need to work with all relevant stakeholders to establish specific policies created for omnibus accounts that all intermediaries can adhere to.

Mr Mwanyasi is the managing director at Canaan Capital