NSE plans to automate trading in bonds

July 21, 2008
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, NAIROBI, July 21- The Nairobi Stock Exchange (NSE) Monday announced that it was mulling over plans to automate the trading of bonds, which is currently done manually through an open-outcry system.

Decrying the old system which he said was limiting the vibrancy of the bond market, NSE Chief Executive Officer Chris Mwebesa told reporters that towards this end they were considering linking the bourse’s Automated Trading System (ATS) to the Central Bank of Kenya’s (CBK) Central Depository System (CDS), specifically for Treasury bonds.

He said this move would enhance the trading activity in the fixed-income market, which he termed as an excellent avenue to raise funds to finance development projects.

“This will not only allow for electronic trading (for bonds) but more importantly, it will allow for electronic dissemination of information about the market, which will also spur trading activity,” he explained.

In 2007, the trading in the bond market was up 72 percent above that recorded in 2006 but the official reckoned that the figures could be higher.

Citing the introduction of the CDS, where although equities were traded manually saw the trading activities increases two fold while the launch of the ATS saw trading going up by three times, the CEO was optimistic that the electronic trading of bonds would have the same impact on the market.
 
Mwebesa also said that together with the CBK, Treasury and other stakeholders, they were looking at introducing a Primary Dealership System (PDS) where selected financial intermediaries would promote investment in government bonds and trading in the secondary market.

“The primary dealers will be the main participants in the primary auction but with a mandate to create a secondary market,” the CEO explained.

This, he added would come in handy especially because many investors lack information on how to effectively trade on the NSE.

He however said the time lines for the implementation of these two projects had not been set, but consultations were ongoing.

The CEO spoke during the listing of the Sh2billion second tranche of the Barclays Bank of Kenya (BBK) Sh5billion corporate bond program, which matures in 2015.

Also present during the launch was the Capital Market Authority (CMA), which also revealed that it would in the coming days engage market players to discuss pertinent issues that hinder the development of the bond market.

Speaking on behalf of the newly appointed CMA boss Stella Kilonzo, the Authority’s Manager in charge of Legal Department Rose Lumumba said they were looking at overhauling the current infrastructure to benchmark it with international standards where bonds are traded on an Over the Counter (OTC) platform.

Lumumba said they would also seek the players’ views on bond issuance costs, pricing and valuation.

She observed that the market needs a single bond pricing model noting that in the absence of a market determined yield curve, different players have resulted in developing their own models which only reflects their sentiments, perceptions and internal position.

“We will also be reviewing the regulatory framework to sufficiently facilitate the issuance of bonds,” the official added.

The regime has remained unchanged for the last 20 years.

“Developing a bond market isn’t rocket science. It’s a process which has been successfully undertaken elsewhere and can be done in our market,” she emphasised.

BBK Managing Director Adan Mohamed said the final tranche of Sh2billion would be issued in due course although it would largely depend on investors’ appetite (for the bond).

Mohamed observed that the market responded positively to the second tranche, which was a combination of fixed and floating rate notes. The issue was oversubscribed by 27 percent compared to the first one which had an oversubscription rate of 15 percent.

“As the economy expands, the demand for long term loans from our customers to finance long-term investments has been rising and the corporate bond program offers us a timely opportunity to respond to those needs,” he enthused.

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