CMA reviews bond trading outside bourse

By James Anyanzwa

Strategists at the Capital Markets Authority (CMA) are re-looking into the modalities of implementing the proposed over-the-counter (OTC) trading in bonds.

OTC is a negotiated market between two parties where participants in the bond market trade debt instruments directly without going through the market intermediaries in the secondary market.

Uncertainty appears to have gripped the planned implementation of the model due to lack of clear-cut mechanisms for reporting transactions. The capital markets regulator is reviewing diverse options of executing the model, which seeks to allow bonds to be traded away from the Nairobi Securities Exchange (NSE).

“We are working through the bond steering committee. We are still reviewing the model to be used especially with regard to who to provide information when a bond transaction actually takes place,” CMA acting Chief Executive Paul Muthaura told Business Weekly, adding, “That is the key thing we are looking at.”

Time line

“We are still in discussions with potential providers of information and right now it is a bid hard to put a time line as to when the OTC model would go live.”

 CMA adopted a hybrid system of trading bonds after the OTC model wrapped some dealers in the wrong way.   Under the proposed model, investors, stockbrokers and bond dealers will have a choice of either trading bonds at the NSE or away from the exchange through the OTC method. The hybrid system is expected to accommodate the current matching of trades at the NSE and an OTC market, which is basically a negotiated market between two parties.

The move is part of the market regulator’s attempts to deepen the bond market and boost its liquidity with a view of attracting new investors. The changes are   contained in the miscellaneous Amendments Bill Submission, a legislative amendment that seeks to remove barriers to trading of bonds away from the NSE.

The amendments to the CMA Act Cap 485A seeks to facilitate trading of publicly issued securities on other platform in addition to approved securities. “It has been identified that the key to access capital for long-term investment lies with the development of the secondary market for fixed income securities.

However, this market has been noted to be illiquid and thus unattractive to investors,” said CMA. “In order to increase liquidity in secondary trading of both Government and corporate bonds, CMA proposes to facilitate the trading of all listed fixed income securities both on and off approved securities exchange.”

CMA expects the proposed trading model to have a trigger effect of increasing primary issues of bonds resulting in improved access to long-term capital for development.

More players

An alternative platform for trading bonds is widely expected to increase overall liquidity, open the market for more players as well as enhance efficiency in bond trading. Currently, shares and bonds are traded through the NSE.

Amongst the key benefits under this structure is the ability to create trading platforms for both institutional as well as the retail end of the market. 

There has, however, been concerns that the OTC model would kill competition in the bond market by locking out foreign investors, insurance companies, fund managers and pension schemes and eventually distort the price discovery mechanism.

The local debt market is expected to play a key role in mobilisation of domestic resources to finance the flagship projects identified in the country’s vision 2030.