Capital Markets

Watchdog pushes for CDSC merger to stem outflows

nse stocks

Stockbrokers on the NSE trading floor. FILE PHOTO | NMG

The Capital Markets Authority has reiterated its call for a merger of the two securities custodians run by the Central Depository and Settlement Corporation (CDSC) and the Central Bank of Kenya, saying it will help prevent flight of foreign investors who are tired of market inefficiencies in Kenya.

CDSC operates the depository for equities while CBK runs one for government bonds, with little or no information sharing between the two even in cases where they are dealing with the same investor.

CMA director for regulatory policy and strategy Luke Ombara said Thursday that this has inconvenienced global funds investing in Kenya’s market, given that they sometimes need to rebalance their portfolios quickly in order to take advantage of emerging opportunities.

Under the current arrangement, one has to first liquidate a position in either bonds or shares, wait for settlement and payment before buying the other type of security.

“This has greatly inconvenienced and curtailed foreign investor participation especially considering that in some competing jurisdictions, global custodians are able to transact and transfer various categories of securities using one CDS account, which is more efficient,” said Mr Ombara during the release of the CMA market soundness report Thursday.

“There is an urgent need to introduce a know-your-customer mechanism that allows the use of one CDS account for various categories of securities in the short term. In the long term it will be more efficient to have unified CSD to cover all transactions.”

Rising capital flight

CMA’s concerns come amid rising capital flight out of the Kenyan market, with foreign investors making net sales worth Sh4.3 billion from the NSE in October, as per market data compiled by Standard Investment Bank.

In the 10 months to October, foreign investors have recorded net outflows of Sh27 billion from the market, far outstripping the total for the whole of 2017 when they drew out Sh11.6 billion.

Foreign investors have been more prevalent in the equities market compared to bonds in Kenya, having shown a preference for infrastructure bonds which are tax-free.

The outflows have mainly been concentrated on the big four counters of Safaricom, Equity Holdings, EABL and KCB, which are preferred by the foreigners because of their ample liquidity that supports large trade volumes.

They account for 67.4 per cent of the total NSE market capitalisation, leading the CMA in the soundness report to flag this dominance as yet another risk for the market.