A plan by the Central Bank of Kenya (CBK) to prioritise commercial banks in the trading of Treasury bonds has sent fears among brokers and investment managers.

 

This is because market intermediaries fear the proposed reforms could sideline them, jeopardising both their relevance and vital revenue streams.

At the heart of the proposed changes is a move to shift Treasury bond trading from the Nairobi Securities Exchange (NSE) to a CBK-owned platform. This new system would designate a select group of top commercial banks as market makers, entrusting them with holding these bonds and consistently quoting both buying and selling prices.

Commercial banks already hold the largest share of government-issued Treasury bonds and boast significant liquidity, making them prime candidates for this market-making role, as they can readily settle quoted prices.

The Nairobi Securities Exchange said it is carefully reviewing the proposed guidelines. Frank Mwiti, the NSE’s Chief Executive, expressed hope that any bond market reform would be implemented through a consultative process.“We are reviewing the guidelines to understand them so that it is much easier to really see what the implications are, and that conversation is happening at the capital markets round table,” Mwiti said. “I think that the best way to develop the market is through consultations.”Market intermediaries argue that the existing formal market on the NSE fosters effective price discovery. It brings together a diverse array of investors—including foreigners, insurance companies, pension funds, institutional investors, and high net-worth individuals—who hold differing perceptions on interest rate direction. This dynamic, they contend, leads to a more robust market mechanism than one controlled by a select group of institutions.

The CBK's draft over-the-counter (OTC) guidelines for the government securities market aim to shift bond trading from the Nairobi bourse to CBK-owned platforms, largely controlled by foreign entities like Bloomberg and Refinitiv.

This proposed shift is expected to directly hurt market intermediaries through lost revenues; stockbrokers typically charge a 0.03 percent commission per bond trade, while the NSE levies 0.1 percent of the bond's value.

The central bank states that these new institutional arrangements for an OTC market are intended to address challenges in pre-trade price discovery, improve market liquidity, and enhance transparency.

Under the proposed system, dealers would confirm trades on Bloomberg’s E-Bond and Refinitiv trading platforms, which are linked to the CBK’s government bond settlement system called DhowCSD.

Market makers, central to the CBK’s plan, are individuals and firms that consistently participate in the market, buying and selling securities to provide liquidity and ensure investors can trade quickly and at fair prices. They profit from the difference between their quoted buy and sell prices.

This ambitious government bond market reform plan is backed by the International Monetary Fund (IMF) and World Bank. It targets heavily capitalised, CBK-licensed banks to serve as market makers by consistently providing two-way quotes for Treasury bonds.

The outcome of this tug-of-war will significantly shape the future of Kenya's financial markets and the cost of government borrowing.

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