Chaos in bond trade as foreigners flee

By James Anyanzwa

A crisis has engulfed the bond market after the Central Bank introduced a new trading system that market players term as incompatible with bond trading.

Dealers in fixed income securities are disgruntled with operations of the T24 Core banking solution whose implementation on April 2, has negatively impacted on bond delivery and settlement periods.

The system, which owes its origin to Chennai, India, is mainly designed for banking operations.

The latest mess in the debt market jeopardises the Government’s efforts of borrowing from the domestic market through issuance of Treasury Bills and Bonds. The Government, through its fiscal agent CBK borrows heavily from the local debt market to finance budgetary deficits and support key infrastructure projects in the transport, energy and water sectors.

Crisis meetings

The banking regulator headed by Governor Njuguna Ndung’u is cornered between a rock and a hard place after a serious of meetings meant to resolve the matter failed to yield tangible solutions.

The meetings, between bond traders, NSE, Central Depository and Settlement Corporations Ltd (CDSC) and CBK representatives were held on April 23, May 8 and May 21.

The other meeting is scheduled for on Monday.

 “CBK implemented a new T24 system for operations but there have been some teething problems. Yes, there has been delays in settlement but we hope by the end of the month all issues will be resolved,” Nairobi Securities Exchange (NSE) Peter Mwangi told The Standard On Sunday, confirming that on a certain day out of 78 bond transactions, three had issues.

But industry insiders reckoned that the magnitude of the disorder in the debt market is so huge that it could spiral out of control unless urgent measures are undertaken to resolve the crisis that has seen foreign banks halt trading in the local debt instruments.

“There is no order in the bond market, turnovers have declined and some international banks have pulled out of the market,” a bond trader who sought anonymity told The Standard On Sunday.

CBK could, however, be walking a tightrope after it emerged that the solution to the problem could be a modification of the system to allow bond trading, a process that is expensive and also requires fresh tendering.

According to copies of correspondences in our possession the T24 core banking systems’ challenges to bond trading include delays in delivery and settlement of bond transactions at Kenya’s Real Time Gross Settlement (RTGS) System (KEPPS) in CBK and incompatibility of the NSE and CBK trading systems

Other problems include incidences where some trades fail to honour deals, while others are rejected forcing re-trading, and trade values matching on T+0 in contrast to T+10. T24 system only accepts T+0 settlements and rejects T+1, T+2 and T+3 trades, while in about three instances the system combined orders for different brokers into one order allocated to one broker.

 “The foregoing has caused lots of losses, inconveniences of all sorts, legal suits, broken relationships, market integrity, threats and intimidations. I’m aware that some banks, stockbrokers and other investors have quit secondary trading. This is unacceptable and very unsustainable for our market which has consistently done over Sh480 billion turnovers in 2010 and 2011,” read in part some of the correspondence.

Efforts to obtain comments from CBK officials were futile after the bank’s assistant director in-charge of Monetary Operations and Debt Management, Mwenda Marete, asked us to direct our enquires to the communications office. By the time of going to press, communications director Samson Burgei had not responded to our questions.

“Please let us stop making suggestions outside the meeting. Let us wait for Monday (tomorrow), we meet, deliberate and come up with a workable way forward,” said Marete.