A dark cloud hangs over the bond market

By JAMES ANYANZWA

Players in the industry are opposed to bond trading that will cut out stockbrokers, while authorities have differed on the use of bonds as alternative sources of financing.

These wrangles mean that the government and companies could find it difficult to raise funds from the bond market — where their debt is traded.

Already, last week, bond deals fell to 53 from 127 the previous week.

The downswing saw bonds worth Sh9.9 billion transacted, down from Sh19 billion the previous week, a 48 per cent decline in turnover, according to data from the Nairobi Securities Exchange (NSE).

Getting business

The planned introduction of the Over the Counter (OTC) bond-trading method has left stockbrokers up in arms because it will sideline them from getting business from banks and fund managers.

The OTC allows banks and fund managers, the largest holders of bonds, to trade bonds directly without going through market intermediaries such as stockbrokers.

Brokers worry that the OTC would not be transparent enough to allow proper prices of debt instruments to be known.

“I think introducing the hybrid method of bond trading is not necessarily solving the problem, because brokers obviously have a role to play. I think the priority should be to create more transparency in bond trading at the NSE rather than going for OTC,” said Paul Mwai, AIB Capital’s chief executive said.

Currently, shares and bonds are traded through the NSE, allowing brokers to earn a commission.

But even as the brokers fight to keep their income, they are caught up in the controversy surrounding the operations of sell/buy back (SBB) transactions.

SBB transactions, which offered an alternative source of funding for commercial banks, have come under sharp scrutiny from the Central Bank and Capital Markets Authority following revelations that some market participants were abusing the process.

SBB is an agreement between two parties where one in need of money sells a financial instrument (bond) to the other with the promise of buying it back at a future date.

But there have been concerns over some parties reneging on the second part of the transaction, which involves buying back the security, prompting intervention from market regulators.

According to statistics from CMA a total of Sh409 billion worth of bonds were traded during the 2011/2012 financial year of which 98 per cent consisted of Treasury Bond trading. The market was dominated by SBB deals at over 40 per cent of the total transactions.

CMA reckons that though SBB transactions are vital funding instruments they have been highly vulnerable to abuse and hence require strict controls.

“We didn’t abolish SBBs. What happened is that, together with CBK, we laid down rules on how it should work. We issued new procedures to ensure that there is no settlement failure during the second leg (buying back) of the transaction,” acting Chief Executive Paul Muthaura told Business Beat.

But even as the regulators rush to streamline the functions of SBB transactions, there are concerns that the latest turn of events could spell doom to the government’s drive to tap into the debt market for infrastructure funding.

The Treasury plans to raise Sh106.7 billion through borrowing from the domestic market to finance part of the Sh330 billion Budget deficit for the current financial year.

Bond dealers argue that daily turnover in the bond market has dropped to an average of Sh3 billion.

According to CMA, instability in interest rates, inflation and the exchange rate have affected the operations of the bond market.

“When interest rates and inflation go up, the bond market grows, but when interest rates and inflation decline you find that people see high returns in equity,” said Muthaura.

Market players, however, expect reforms in the bond market to attract more issuers and investors.

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