Anxiety creeps into bond market over OTC plan

By FJ Writer

A move by the Capital Markets Authority (CMA) to introduce over-the-counter (OTC) trading of bonds is sending jitters at the Nairobi Stock exchange

Market players say if the plan is implemented it will lock out some investors, — particularly small investors — from the fixed income market, leaving bond prices exposed to manipulation by a cartel of big dealers.

Their contention is that in an OTC market, transparent price discovery mechanisms do not exist, and the pricing of bonds is left to informal mechanisms like dealer-to-dealer agreements, away from an open and fair market.

They further argue that since OTC markets do not have any rules that govern trade and dealing, creating the possibility of cartels and collusion amongst the dealers.

Contacted by Financial Journal, stockbrokers lobby group, Kenya Association of Stockbrokers and Investment banks (Kasib), an official at the secretariat was scanty with details but referred us to CMA, where the lobby group had forwarded its comments.

"An informal trade would jeopardise market confidence because it could introduce uncertainties in the market but also send the wrong signals to investors," said the official, who declined to be quoted due to the sensitivity of the matter.

If the new rule is implemented, stockbrokers stand to lose up to one-fifth of their revenues.

The OTC market will enable banks to trade bonds directly hence save transaction costs as they will not be subjected to brokers’ commissions.

DIFFERENT MARKETS

Bonds currently trading at the NSE are listed and do not have provision for dealing in the OTC market. This means trading the instruments on the proposed platform constitute a breach of the terms contained in the prospectus when they were being issued. It will be interesting to see how a listed bond will trade in two separate and different markets and yet retain a degree of true price discovery.

Interestingly, according to other market sources, trading of bonds on the OTC market is a normal practice although they caution that trading the same securities on two different platforms could be risky endeavour.

It is not clear how the market will set the price for a particular bond, and whether both the listed exchange prices and the OTC prices will be quoted publicly.

Indeed it will be disheartening for an investor to realise that they received a lower price for a bond as compared to the other parallel market. This might then mean that for an investor to sell their bonds, they will have the arduous task of having to window shop for the best price from a myriad of dealers as opposed to the current trend where investors get the best possible price regardless of the dealer or broker they go to.

It is still unclear whether Capital Markets Authority (CMA) will have any rules in place to govern trading of bonds on the OTC market as it is widely expected that the main players in this market will be the banks, which are regulated by the Central Bank of Kenya.

The Kasib official said allowing an OTC market for bonds is tantamount to reversing the gains already made in opening up the market by creating a market that is only accessible to few dealersmostly the big banks.

"Some small banks might be forced to shut down if they cannot access the action in the bond market as trading in bonds would be dominated by a few large banks and fund managers," said another source.

Since the introduction of the Automated Trading System (ATS), the liquidity of the bond market has significantly improved.

For instance, the launch of the ATS saw volumes dramatically rise by 358.7 per cent from Sh9 billion transacted in November last year to Sh42 billion in January.