Kenya’s central bank is targeting leading local banks to provide liquidity in the government bonds market as part of a broader shift aimed at ensuring the availability of buyers and sellers and enhancing price transparency in transactions.
The reform plan, backed by the International Monetary Fund (IMF) and the World Bank, targets heavily capitalised banks regulated by the Central Bank of Kenya (CBK), which will serve as market makers by consistently providing price quotations for the buying and selling of treasury bondThe CBK has set the minimum two-way quotations by banks at Ksh20 million ($155,038), with incremental lot of Ksh50,000 ($387.59), according to the draft regulations seen by The EastAfrican.“The purpose of the Pilot Market Makers Program is to establish a wholesale secondary market for benchmark Government of Kenya securities by designating top Kenyan banks to serve as market makers and liquidity providers,” the draft guidelines say. “This will support economic growth through a deeper and more efficient government securities market that will support the National Treasury’s efforts to mobilise resources, reduce borrowing costs, and attract foreign investments.”Banks are major players in the treasury bond market, where they control more than 45 percent, equivalent to Ksh2.83 trillion ($21.93 billion) of the government’s total domestic debt, followed by pension funds (28.82 percent), insurance companies (7.25 percent) and parastatals (6 percent).
CBK and the National Treasury have decided to go for market makers to enhance liquidity and price discovery in government bonds, arguing the move is in line with global trends.
A market maker or liquidity provider is a company or individual who stands ready to buy and sell securities at quoted prices thereby providing liquidity to the market.
They play a crucial role in ensuring that there are always buyers and sellers available for a particular security, allowing investors to trade quickly and at a fair price.Market makers quote both a buy and a sell price in a tradable asset held, hoping to make a profit on the difference, which is called the bid-ask spread.
The introduction of the market makers in the government’s bond market is part of a major reorganisation plan aimed at enhancing transparency in trading and making it easier and faster for bondholders to exchange their securities for cash. According to the guidelines, market makers (banks) on the pilot programme will be required to maintain continuous quotes for the benchmark government bonds on the run during specified trading hours.These banks will be under obligation to quote prices for a period of five hours between 9.30am and 2.30pm.According to the draft rules, the parties to the bond transaction should ensure settlement finality and in the event of failure of the transaction due to the unavailability of the security/funds from trading parties, the aggrieved party will be entitled to demand payment of interest.
The draft rules stipulate that a market maker must be a duly registered local bank under the Banking Act Cap 488, or any other qualifying institution as prescribed by the Central Bank of Kenya (CBK) from time to time. Additionally, the institution must demonstrate sufficient capital to fulfill market-making responsibilities as determined by the CBK.Its employees must be adequately qualified and experienced to fulfill the obligations set on the market maker and must also obtain an Authorised Securities Dealer licence to support OTC market making obligations as prescribed by the Captial Markets Authority (CMA).The market maker is also expected to comply with the applicable laws of the Republic of Kenya and implement adequate internal procedures and controls in relation to its intended business of being a market maker.The CBK bond trading portal, DhowCSD, went live on August 1, 2023, giving 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.
CBK is a fiscal agent of the government selling bonds on behalf of the National Treasury earning a commission of 1.5 percent of the amounts raised.
CBK controls a registry for government bonds while the Central Depository and Settlement Corporation (CDSC) Ltd provides a registry for corporate bonds traded on the Nairobi Securities Exchange (NSE).
© Copyright 2022 Nation Media Group. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).
]