- Fixed-income securities are a broad class of very liquid and highly traded debt instruments.
- Data shows that the average turnover of Kenya’s bond market is over $4.55 billion, and NSE and EABX are now vying for this market share.
- The choice to merge OTC and onscreen trading will allow market players a flexible way to execute trades on the bond market.
The Nairobi Securities Exchange will soon offer a secondary bond market that combines both onscreen and Over-the-Counter (OTC) trading of fixed-income securities following regulators’ approval. Capital Markets Authority approved amendments to NSE Fixed Income Trading Rules.
In the amendments, Kenya’s capital markets regulator licensed the East African Bond Exchange (EABX) to operate an over-the-counter (OTC) trading platform, likely to drive up competition in the bonds market. An OTC market is a platform that facilitates transactions between traders without requiring them to go through an official securities exchange.
NSE Chief Executive Officer Geoffrey Odundo said that The hybrid fixed-income market represents a forward-looking initiative to create a more dynamic and resilient fixed-income market that can better serve the needs of both investors and the broader financial ecosystem.
“The decision to operationalize a hybrid fixed-income market, marks a decisive strategic leap in our efforts to broaden and enhance the efficiency and appeal of Kenya’s bond market to investors.” said Odundo.
Rules for fixed-income securities trading
According to NSE, to guarantee the settlement of OTC transactions, the hybrid market structure has provided mandatory reporting of such trades by licensees of the Capital Markets Authority approved as Authorized Security Dealers, licensed trading participants, and investment banks.
The mandatory reporting mechanism by licensed entities will significantly eliminate settlement risks associated with OTC transactions.
“To this end, the NSE has interfaced with both the Central Bank of Kenya and the Central Depository and Settlement Corporation to ensure,” NSE said in the satatement.
Data shows that the average turnover of Kenya’s bond market is over $4.55 billion (Sh734 billion), and NSE and EABX are now vying for this market share.
Securities that are traded through a broker-dealer network rather than being listed on a major exchange are known as over-the-counter (OTC) instruments. This is typically the case for smaller companies not meeting the standards to be listed on a major exchange.
The established securities exchange is not involved in the framework’s operation but operates solely through bilateral talks between dealers. Every exchange that takes place directly between the involved parties is recorded electronically.
The NSE’s objective to transform Kenya’s bond market by increasing its vigour and efficiency is consistent with the operationalization of the hybrid fixed-income market.
By introducing a Quotations Board, the hybrid approach will enhance pre-trade transparency by giving investors greater insight into market quotes, facilitating more informed trading.
Additionally, the NSE intends to introduce a real-time daily yield curve that considers both market movements and the Quotations Board’s actions.
Read Also: Why investors in Kenya reaped big from fixed-income securities
Similarly, merging OTC and onscreen trading will allow market players a flexible way to execute trades on the bond market, boosting the market’s depth and liquidity even more.
To guarantee the settlement of OTC transactions, the hybrid market structure has provided for mandatory reporting of such trades by licensees of the Capital Markets Authority approved as Authorized Security Dealers by Part IV, Clause 23 (1) of the Capital Markets Act, as well as the licensed trading participants and investment banks.
The mandatory reporting mechanism by licensed entities will significantly eliminate settlement risks associated with OTC transactions. The NSE has interfaced with the Central Bank of Kenya and the Central Depository and Settlement Corporation to ensure efficient settlement of Government and corporate bonds respectively.
This milestone underscores NSE’s continued innovation, aimed at providing infrastructure capabilities that support efficient trading, clearing, and settlement of all financial market transactions in Kenya and the region.
