Kenya
January 06 2018
The launch of Kenya’s short selling infrastructure in January could be part of the capital markets master plan to deepen the Kenyan markets through increased liquidity, if industry commentators are to be believed
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It was only in January that Kenya received the green light on short selling after the Capital Market Authority of Kenya gave the Nairobi Stock Exchange (NSE) the go-ahead.
Although progress was made to develop a securities lending and short selling infrastructure in 2017, no specific timeline was offered on when trading would be available, but in 2018 the blueprints are forming.
Kenya’s new short selling and supporting securities lending facility is expected to significantly increase the number of investors and as Terry Adembesa, derivatives market director at NSE, states: “This is part of the capital markets master plan to deepen the Kenyan markets through increased liquidity.”
The move was driven by a 2015 World Bank study, which analysed the state of liquidity in Kenya and proposed measures to improve liquidity, including the introduction of securities lending.
At the Global Custody Forum in London in 2016, one delegate from a global bank with significant African exposure, explained that the emergence of domestic institutional investors has been a big driver of growth. They said that out of the 54 African nations, Kenya is going to be the fastest developing economy, aside from South Africa.
But, before we start presuming he or she was a time traveller or a fortune teller, here’s why Kenya’s securities lending horizon looks so sunny.
There’s nothing that a hundred people or more could ever do
Since SGSS picked up a South African mandate in 2013, Kenya has been going from strength to strength in the securities lending space—especially since the NSE first launched its securities lending facility in September 2015, introducing same-day trading and settlement of government securities.
At that time, only 4 percent of the population was involved in the markets, however, the NSE and the country’s capital market authority wanted to entice domestic retail investors through investing in long-term growth initiatives and, in the same year, the NSE launched an exchange-traded fund (ETF), as well as derivative add-ons.
Barely six months later, a first-of-its-kind East African cross-currency repo transaction between Commercial Bank of Africa (CBA) and Standard Bank of Southern Africa (SBSA), worth $25 million, was completed, which saw CBA provide Kenyan government bonds as collateral.
Reggie Mlangeni, regional head of client solutions for East Africa at SBSA, said this would significantly “develop Kenya’s domestic financial markets”.
He added: “We see this type of transaction as key to developing deep and liquid financial markets in Kenya and across Africa as a whole.”
In the same month, securities lending was again highlighted as an area of Kenya’s capital markets that should be developed to improve overall market liquidity and continue the forward momentum enjoyed in recent years.
Now it’s ready for the launch, but it will be a slow process.
Gonna take some time to do the things we never had
Of course, the next process for Kenya’s securities lending is to implement the securities lending programmes, with the NSE closely following The Capital Markets (Securities Lending, Borrowing and Short Selling) Regulations 2017.
The Capital Markets (Securities Lending, Borrowing and Short Selling) Regulations 2017 were enacted for the introduction of securities lending and covered short selling in the Kenyan capital markets.
However, it restricts the transactions to be carried out by regulated persons or any other person specified by the authority. In effect, this restricts the intermediation of the transactions to institutions that are licensees of the authority.
Specifically, it states that all securities lending and borrowing (SLB) transactions must be collateralised to the extent of 100 percent of the value of the borrowed securities.
While this may be costly to borrowers, Adembesa states, the “resultant obligations to the clearing and settlement entity on the surety and safety of the collateral placed is paramount”.
He explains: “Borrowers will have to be satisfied with the safety, investment and valuation pricing data for their collateral.”
Also, the regulations prescribe that it is the CMA that will identify the criteria for the selection of securities to be lent and borrowed.
Adembesa suggests: “I believe market players are now positioning themselves to carry out the new business. The Central Depository (CDSC) is currently in the process of upgrading its core engine, which will facilitate the SLB programme. The new system is expected to be rolled out imminently in H1 2018.”
Any other type of security has to be prescribed by the regulator. Section 17 of the regulation further provides the operational responsibility for the regulator to preview and impose price controls, in the case of suspended short sales of a security, on a weekly basis.
As Adembesa explains: “The market players will impress on the regulator to be sensitive to timing and pricing of any suspension or imposition of restrictions on any securities as these may cause problems in their own right”.
What lending volume is feasible for the Kenya market to reach this early stage is difficult to tell and to place a figure on this at the moment is dependent on how the programme will be operationalised, according to Adembesa.
However, he is adamant that Kenyan capital markets are growing and shortly we should see “the development of a commodities exchange, development of the money markets, development of centrally cleared or reported OTC trades, introduction of primary dealers in the debt markets and the introduction of market makers to drive liquidity”.
With new regulatory requirements, such as the second Markets in Financial Instruments Directive (MiFID II), rolling out in Europe and arguably causing some stress and headaches, it’s unlikely this will affect the African market, yet, as Adembesa suggests “Kenyan banks are yet to achieve the latest Basel standards”.
Although the Kenya short selling infrastructure is in its early stages, Adembesa suggests that the East African regional regulators have been working on common listing requirements especially for debt issues.
He says: “The exchanges in Kenya, BRVM, Mauritius, Nigeria and South Africa have toyed with the idea of linking up their markets to provide for easier trading and settlement of securities across the markets, but these discussions are still ongoing.”
Kenya’s securities lending timeline
September 2015: Kenya looks to boost liquidity with securities lending platform
October 2015: The NSE prepares to launch with exchange-traded fund and derivatives add-ons
March 2016: East African cross-currency repo transaction between Commercial Bank of Africa and Standard Bank of Southern Africa, worth $25 million, is completed
October 2016: Kenya opens itself up to international securities lending and short selling transactions, developing its capital markets regulation
March 2017: CMA looks to diversify available financial products with the help of several international bodies, including The US Securities and Exchange Commission, the Financial Services Volunteer Corps and Bloomberg
January 2018: CMA gives the go-ahead to the Nairobi Stock Exchange to launch a short selling and supporting securities lending facility
Although progress was made to develop a securities lending and short selling infrastructure in 2017, no specific timeline was offered on when trading would be available, but in 2018 the blueprints are forming.
Kenya’s new short selling and supporting securities lending facility is expected to significantly increase the number of investors and as Terry Adembesa, derivatives market director at NSE, states: “This is part of the capital markets master plan to deepen the Kenyan markets through increased liquidity.”
The move was driven by a 2015 World Bank study, which analysed the state of liquidity in Kenya and proposed measures to improve liquidity, including the introduction of securities lending.
At the Global Custody Forum in London in 2016, one delegate from a global bank with significant African exposure, explained that the emergence of domestic institutional investors has been a big driver of growth. They said that out of the 54 African nations, Kenya is going to be the fastest developing economy, aside from South Africa.
But, before we start presuming he or she was a time traveller or a fortune teller, here’s why Kenya’s securities lending horizon looks so sunny.
There’s nothing that a hundred people or more could ever do
Since SGSS picked up a South African mandate in 2013, Kenya has been going from strength to strength in the securities lending space—especially since the NSE first launched its securities lending facility in September 2015, introducing same-day trading and settlement of government securities.
At that time, only 4 percent of the population was involved in the markets, however, the NSE and the country’s capital market authority wanted to entice domestic retail investors through investing in long-term growth initiatives and, in the same year, the NSE launched an exchange-traded fund (ETF), as well as derivative add-ons.
Barely six months later, a first-of-its-kind East African cross-currency repo transaction between Commercial Bank of Africa (CBA) and Standard Bank of Southern Africa (SBSA), worth $25 million, was completed, which saw CBA provide Kenyan government bonds as collateral.
Reggie Mlangeni, regional head of client solutions for East Africa at SBSA, said this would significantly “develop Kenya’s domestic financial markets”.
He added: “We see this type of transaction as key to developing deep and liquid financial markets in Kenya and across Africa as a whole.”
In the same month, securities lending was again highlighted as an area of Kenya’s capital markets that should be developed to improve overall market liquidity and continue the forward momentum enjoyed in recent years.
Now it’s ready for the launch, but it will be a slow process.
Gonna take some time to do the things we never had
Of course, the next process for Kenya’s securities lending is to implement the securities lending programmes, with the NSE closely following The Capital Markets (Securities Lending, Borrowing and Short Selling) Regulations 2017.
The Capital Markets (Securities Lending, Borrowing and Short Selling) Regulations 2017 were enacted for the introduction of securities lending and covered short selling in the Kenyan capital markets.
However, it restricts the transactions to be carried out by regulated persons or any other person specified by the authority. In effect, this restricts the intermediation of the transactions to institutions that are licensees of the authority.
Specifically, it states that all securities lending and borrowing (SLB) transactions must be collateralised to the extent of 100 percent of the value of the borrowed securities.
While this may be costly to borrowers, Adembesa states, the “resultant obligations to the clearing and settlement entity on the surety and safety of the collateral placed is paramount”.
He explains: “Borrowers will have to be satisfied with the safety, investment and valuation pricing data for their collateral.”
Also, the regulations prescribe that it is the CMA that will identify the criteria for the selection of securities to be lent and borrowed.
Adembesa suggests: “I believe market players are now positioning themselves to carry out the new business. The Central Depository (CDSC) is currently in the process of upgrading its core engine, which will facilitate the SLB programme. The new system is expected to be rolled out imminently in H1 2018.”
Any other type of security has to be prescribed by the regulator. Section 17 of the regulation further provides the operational responsibility for the regulator to preview and impose price controls, in the case of suspended short sales of a security, on a weekly basis.
As Adembesa explains: “The market players will impress on the regulator to be sensitive to timing and pricing of any suspension or imposition of restrictions on any securities as these may cause problems in their own right”.
What lending volume is feasible for the Kenya market to reach this early stage is difficult to tell and to place a figure on this at the moment is dependent on how the programme will be operationalised, according to Adembesa.
However, he is adamant that Kenyan capital markets are growing and shortly we should see “the development of a commodities exchange, development of the money markets, development of centrally cleared or reported OTC trades, introduction of primary dealers in the debt markets and the introduction of market makers to drive liquidity”.
With new regulatory requirements, such as the second Markets in Financial Instruments Directive (MiFID II), rolling out in Europe and arguably causing some stress and headaches, it’s unlikely this will affect the African market, yet, as Adembesa suggests “Kenyan banks are yet to achieve the latest Basel standards”.
Although the Kenya short selling infrastructure is in its early stages, Adembesa suggests that the East African regional regulators have been working on common listing requirements especially for debt issues.
He says: “The exchanges in Kenya, BRVM, Mauritius, Nigeria and South Africa have toyed with the idea of linking up their markets to provide for easier trading and settlement of securities across the markets, but these discussions are still ongoing.”
Kenya’s securities lending timeline
September 2015: Kenya looks to boost liquidity with securities lending platform
October 2015: The NSE prepares to launch with exchange-traded fund and derivatives add-ons
March 2016: East African cross-currency repo transaction between Commercial Bank of Africa and Standard Bank of Southern Africa, worth $25 million, is completed
October 2016: Kenya opens itself up to international securities lending and short selling transactions, developing its capital markets regulation
March 2017: CMA looks to diversify available financial products with the help of several international bodies, including The US Securities and Exchange Commission, the Financial Services Volunteer Corps and Bloomberg
January 2018: CMA gives the go-ahead to the Nairobi Stock Exchange to launch a short selling and supporting securities lending facility
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