Investors warm up for reduced bond cost with new platform

By James Anyanzwa

Investors in the fixed income market are set to start paying less on bond transactions under new trading arrangements which seek to kick out brokers and allow commercial banks, fund managers and insurance companies trade directly among themselves.

The Capital Markets Authority (CMA) has already put in place plans of licensing a new category of intermediaries called  ‘Authorised Securities Dealers’ which will see commercial banks access the bond market’s automated trading system (ATS) directly from their offices. This will allow players to trade on their own books as part of initiatives towards deepening the capital markets.

The new development seeks to deepen the bond market through increased efficiency and reduction in investment costs. This will include scraping of investment costs particularly brokerage commissions (including CMA and Nairobi Securities Exchange (NSE) levies) that are currently being imposed on bond transactions. 

This new class of intermediaries form a critical component of the hybrid bond market being introduced to allow for the Over-The-Counter (OTC) trading of debt securities in order to support increased liquidity in the market.

The NSE is refining its systems to be able to provide a robust post-trade reporting system for the OTC market. The market regulator’s acting chief executive Paul Muthaura said CMA is still working with the Treasury and bond market steering committee to come up with a legal framework that would facilitate the issuance of Authorised Securities Dealer License (ASDL).

He said, if everything goes as planned, the proposed ASDL, which is designed to support, the planned OTC trading in bonds would go live within the next two months. “We are working together to ensure we get the launch before the end of the first quarter of this year,” Muthaura told The Business Beat in a telephone interview. 

Mr Muthaura said the ASDL would enable commercial banks, insurance companies and fund managers to trade bonds either on the exchange or Over-The-Counter (OTC).

“There is a general consensus to the benefits that will arise from this system,” he said. However, the stockbroking fraternity is concerned about the potential loss of revenue from the new trading system.

“The most obvious thing is that stockbrokers are going to loose because they are going to find new competitors and the commission is not going to be there anymore,” said John Kirimi, chairman, Kenya Association of Stockbrokers and Investment banks (KASIB), arguing that if stockbrokers are used properly they offer some element of independency and transparency which can always be compromised when institutions are left to deal directly with each other.

At stake is control of the multi-billion shilling bonds market that so far remains in the tight grip of stockbrokers to the discomfort of banks who boast of being the biggest single players in the fixed securities market. Banks have been demanding that they be licensed as bond traders – a move that would enable them to trade the bonds directly among themselves and save them the millions of shillings they pay brokers in commissions every year.

Commercial banks account for more than 50 per cent of all transactions in the bonds market, annually translating to huge commissions to brokers who must handle their trades.

Stockbrokers earn commissions of up to 0.04 per cent of the value of every bond transaction, which bankers say is undeserved because they add no expertise to the process. Bonds market trading volumes gained a new momentum late in 2009 after the NSE installed an automated trading system (ATS) that enables investors to freely trade the debt papers in the market.