Kenya’s Central Bank and the National Treasury are in discussions to onboard deep pocketed individuals and firms in the form of market makers to stabilise government bond prices and enhance liquidity in the debt instruments after the banking regulator rejected a new bond trading platform dubbed the East African Bond Exchange( EABX) that is owned by commercial banks and that is expected to run parallel with the Nairobi Securities Exchange.

The EABX Plc received regulatory approval from the Capital Markets Authority (CMA) in February last year (2024) to establish and operate an over-the-counter (OTC) bond trading platform and function as an autonomous self-regulatory organisation within the country, with a plan to expand operations into the wider East African region.

But to be able to trade in government securities, EABX is required to link its systems to the Central Bank’s online bond trading portal dubbed the DhowCSD which acts as registry for all government bonds being traded.

A CBK director privy to the ongoing negotiations however told The EastAfrican that the government is working towards introducing market makers to enhance liquidity in bonds in line with global trends and that this position has already been shared with the EABX managers, leaving the firm’s much anticipated plan of trading government bonds in abeyance.

“We have communicated our position to them (EABX) because the whole area of over- the- counter trading is being worked on between CMA, CBK and National Treasury and it is likely to be going in the direction of market makers. That is the position. We want to have a market makers programme which is the direction a lot of the countries take so that there is proper transparency and low complexity,” the source said.

Market makers are individuals and firms that participate in the market at all times, buying and selling securities with an aim of providing liquidity, which ensures investors can trade quickly and at a fair price in all conditions. Market makers quote both buy and sell prices in tradable assets hoping to make a profit on the difference.

Treasury bonds are very lucrative investment products in the capital markets by virtue of being tools used by the government to raise revenue to finance operations and budget deficits.

Annual bond turnover on the Nairobi Securities Exchange (NSE) averaged Ksh734 billion ($5.68 million) between 2020 and 2023 with government bonds comprising close to 99 percent.

An OTC market is an infrastructure that allows traders to interact without having to go through a formal securities exchange. The framework works purely through bilateral negotiations between traders without the intervention of the established securities exchange since all trades are captured electronically and directly between the engaging parties.

CBK, which owns a registry for government bonds, has declined to allow EABX access to these bonds through a plug-in to the settlement platform, effectively implying the new trading platform cannot trade in government bonds, with reports indicating that the regulator is worried that having two trading platforms will likely distort the bond marketTerrence Adembesa, the EABX Chief Executive, however remained hopeful that a breakthrough could be reached from the firm’s engagement with CBK, saying discussions are ongoing with the regulator on how best they can interconnect their systems and that he does not envisage a scenario where it (EABX) does not attain connectivity to Central Bank.“We are currently in discussions with the Central Bank on how best to attain connectivity to DhowCSD. EABX has not envisaged a scenario where it does not attain connectivity to the Central Bank,” said Mr. Adembesa.“EABX has been set up to deepen and improve the liquidity of Kenya’s fixed income markets as well as improve the market’s governance and transparency standards.

CBK has denied the EABX a plug-in to the settlement platform for government securities because it is worried that having two trading platforms will likely distort the bond marketEABX is a market-led initiative backed by the Kenya Bankers Association (KBA) with additional support from Financial Sector Deepening Africa (FSD Africa).

It is owned 30 percent by Kenyan banks through the Kenya bankers Association (KBA) and the lobby group is the key promoter of the new exchange.“The exchange is critical for banks in enhancing market liquidity, development and price discovery of fixed income securities,” said Raimond Molenje, Chief Executive, KBA.

A source at CMA said EABX is still in the process of agreeing with CBK on the proposed connectivity of the systems.

“We have given them approval now to finalise because they have done this process for a long time. Part of what they need, they need access to the DhowCSD and you know now when you want to go to a new system there are usually some links that need to be done. So that is the area where they are still now. They are in the process because they are engaging Central bank that is the position now,” said source.“They are still in the process of agreeing and of course. Of course, once they are given the go ahead, they need to have their technical people, engineers work on what they require to have the junctions and then access the Central bank.”CBK through its trading platform hold and controls a registry for government bonds while the Central Depository and Settlement Corporation (CDSC) Ltd provides a registry for corporate bonds traded on the NSE.

In 2023 NSE and CDSC Ltd terminated a more than 10-year bond revenue sharing agreement after CBK established its own bond trading platform citing declining revenues after government bonds were transferred to CBK registry.

The revenue sharing plan was hinged on joint operation of an NSE bond trading infrastructure housed within the CDSC premises.

Under the agreement NSE earned 0.0035 percent fee on the value of bond transactions while CDSC earned 0.002 percent for hosting the NSE servers (bond trading infrastructure).

The CBK bond trading portal went live on August 1, 2023 and gives retail investors unprecedented access to attractive returns via mobile phone opening up the Treasury bond market that has hitherto been the preserve of a small club of sophisticated and deep-pocketed investors.

The platform allows investors to open bond trading accounts at the CBK online portal from where they place their bids for their preferred securities during the auctions. © Copyright 2022 Nation Media Group. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).