Competition in Kenya’s bond market is set to heat up following the Capital Markets Authority’s (CMA) approval of an application for a license for Over-the-Counter (OTC) trading by the East African Bond Exchange (EABX).
The Business Daily has learnt that the market regulator granted EABX the license on Tuesday, setting the stage for competition between the Nairobi Securities Exchange (NSE) and EABX for bond market activity whose annual turnover has averaged Sh734.0 billion between 2020 and 2023.
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.
This comes just a fortnight after the International Monetary (IMF) Staff Report following the January 17, 2024, sixth review of Kenya’s $4.43 billion, Sh717.3 billion, programme indicated that the government had committed the fund to take steps towards an OTC automated exchange to complement the operations of the NSE.
“We will further enhance the market infrastructure through policy support to market participants to operationalise an over-the-counter automated exchange to complement the broker intermediated Nairobi Securities Exchange,” the government committed to the IMF in the just concluded reviews.
“The aim of the exchange will be to promote trading transparency and settlement efficiency and attract more capital in the economy eventually leading to reduction of yields and cost of new public debt.”
This marks the third milestone for EABX with the first having been the no objection for set up acquired in 2020 and the second being the approval for capital raising secured in 2023.
The rollout of an OTC market for bond trading in the country now means fixed income activity in Kenya’s capital markets will be operating much like Nigeria, which has the Nigeria Stock Exchange and the OT bond trading targeted FMDQ Group operating side by side with FMDQ Group having been set up in 2012.
The top leadership of CMA has decried that whereas Kenya was ahead of Nigeria in bond market reforms a decade ago, Nigeria’s set up of an OTC bond trading market has seen the West African economy leapfrog ahead of Kenya in bond trading activity.
“When you look across the globe, the biggest OTC market is foreign currency. You can also find trading in OTC in equities, debt securities, derivatives and many others. Bonds, despite being not very small issuances, are finding their way in most jurisdictions in trading via OTC. Contrary to what you expect in a centralised exchange, the requirements for trading in an OTC market are far less onerous. The annual market turnover for Nigeria’s FMDQ comes to about Sh90 trillion annually and you can see the potential given that we were slightly way ahead of Nigeria in terms of bond market reforms,” CMA’s Director for Policy and Market Development, Luke Ombara, told journalists recently.
The NSE raked in an average of Sh73.2 million per annum in bond levies over the last two years and stands to lose a revenue line should activity gravitate towards EABX. Bond dealers in brokerage entities are also set to take a hit should the OTC market take off and cement direct engagement between traders.
Further, this move comes at a time when the NSE is struggling with depressed activity within the equities market.
The licensing of an OTC market player marks the second major change in under six months in Kenya’s bond market with President William Ruto having launched the new online bond trading platform, DhowCSD, on September 11, 2023.
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