The Central Bank of Kenya (CBK) has declined to approve trade on a new secondary bond platform by the East African Bond Exchange (EABX), fearing distortion on rivalry with the Nairobi Securities Exchange (NSE), sources have told the Business Daily.
The EABX is yet to begin operations eight months after the Capital Markets Authority (CMA) granted it a permit to run an over-the-counter (OTC) bond trading platform.
In this kind of OTC platform, bond traders interact among themselves without going on a formal exchange such as the NSE.
Insiders told Business Daily that the CBK denied the EABX a plug-in to the settlement platform because it is worried that having two trading platforms will likely distort the bond market. The CBK did not respond to an email from the Business Daily seeking comment on the matter.
The CBK, which issues bonds on behalf of the National Treasury, is responsible for the stability of the sovereign bond market.
Sources said that the CBK asked the EABX to explain how they would operate without distorting the bond.
“I am made to understand that the CBK is uncomfortable with the concept of having two parallel bond markets and therefore two different yield curves for the same securities,” said a source close to the issue.
“The CBK wants to understand the full scope of how the EABX shall trade the bonds, and the measures they shall put in place to ensure that the bond market is not distorted by having two yield curves.”
While the launch of the OTC platform means more options for investors trading in government securities in the secondary market and transparency in pricing, there are also unanswered questions about how the yield curve will be generated from the two exchanges, the source added.
A yield curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period.
EABX Chief Executive Officer Terry Adembesa, however, downplayed the fears, noting that debts are traded over-the-counter globally, adding that the idea is to have a central utility that is fed by the different models.
“You have more than one model where there is a central utility or regulator that generates a real yield curve, right? Or they have a model where they have multiple yield curves in the market and then people follow where there is liquidity,” said Adembesa.
Currently, Treasury bonds are traded on the secondary market, allowing bondholders to receive money for their security without rediscounting (selling them back to the CBK before maturity at a lower rate). However, Treasury bills, or short-term papers, are not traded on the secondary market.
Bond trading at the NSE involves bondholders instructing the broker to buy or sell security at a specific price, or better.
The founders of EABX’s OTC, who include commercial banks, reckon that the platform will end opaqueness in the trading of bonds in the secondary market by eliminating the role of brokers in the trade.
The NSE last week launched its Hybrid bond market, as part of the reforms to the secondary bond market.
“The development (hybrid bond market) has allowed a wider pool of licensed financial institutions, including trading participants and commercial banks, access to the NSE on behalf of their clients,” said John Mbadi, the Cabinet Secretary for National Treasury.
The NSE also received regulatory approvals from the CMA to run its own OTC as it transforms into a hybrid fixed-income market.
The new EABX platform was supposed to set the stage for competition between the NSE and EABX for the bond market activity whose annual turnover averaged Sh734 billion between 2020 and 2023.
Bond dealers in brokerage entities, who earn bond levies whenever trading occurs, will take a hit should the OTC market take off and cement direct engagement between traders.
EABX received no objection to set up in 2020 before securing approval for capital raising in 2023.
Initially, the EABX OTC Exchange appeared to have the blessing of the government, a notion that must have been buttressed by the commitment by senior officials to the International Monetary Fund (IMF) to take steps towards an OTC-automated exchange to complement the operations of the NSE.
EABX had initially listed on its website Mr Ndolo as a representative of Treasury on its board. But the name has since been dropped from the website and the business registration documents.
“To the best of my knowledge, GoK (the Government of Kenya) does not have a stake in EABX,” said Dr Chris Kiptoo, the Principal Secretary for the National Treasury in February.
