Stockbrokers wary of new model that may render them jobless

CMA Acting CEO Paul Muthaura says the move is part of the regulator’s attempt to deepen the bond market and boost its liquidity. [PHOTO: FILE]

By JAMES ANYANZWA

Stockbrokers and bond dealers face tough times as the Capital Markets Authority (CMA) prepares to launch a new method of trading bonds that excludes middlemen.

The market regulator is finalising the logistics of implementing an Over-The-Counter (OTC) trading platform.  The portal provides for the trading of fixed income securities away from the Nairobi Securities Exchange (NSE).

“We are finalising the approach to the trade reporting platform and we are in discussions with both the NSE and international trade reporting service providers,” said CMA’s Acting Chief Executive Paul Muthaura.

Secondary market

“I cannot mention names but they are the global providers of these services. The legal framework will be issued once the system has been agreed on by the bond market steering committee.”

OTC is a negotiated market where participants in the bond market trade debt instruments directly without going through market brokers and dealers in the secondary market.

The new law gives rise to a new breed of players in bond trading, known as Authorised Securities Dealers. It is also a bitter pill to swallow for the stockbrokers.

 The authorised securities dealers will provide direct access to trading of fixed income securities by commercial banks, fund managers and insurance companies.  The move will increase efficiency and reduce costs in the markets.

“The authorised securities dealer has now become law and the authority will consider licence applications from a wider spectrum of applicants including fund managers, commercial banks and insurance companies,” said Muthaura last week.

More earnings

Stockbrokers earn commissions of 0.04 per cent on bond transactions but intense competition among the players has also seen them give investors huge discounts.

Under the proposed OTC bond trading system, NSE’s role will be reduced to post-trade reporting of deals done on the market. The hybrid bond-trading model, borrowed from South Africa, allows for the trading of listed debt instruments both on the NSE and away from the NSE (Over- The- Counter).

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

 CMA adopted a hybrid system of trading bonds after the OTC model rubbed some dealers 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.

Currently, shares and bonds are traded through the NSE. 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.