The NSE (Nairobi Securities Exchange) is set to operate a hybrid fixed-income market following the approval of amendments to its Fixed Income Trading Rules by the Capital Markets Authority.
- The approval will now enable the NSE to offer a secondary market that combines both onscreen and Over-the-Counter (OTC) trading of fixed-income securities.
- This new development is expected to move competition in the bonds market a notch higher after CMA recently approved the East African Bond Exchange (EABX) to run an Over-the-Counter (OTC) trading platform.
- An OTC market is an infrastructure that allows traders to interact without having to go through a formal securities exchange.
“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.” Geoffrey Odundo, Chief Executive Officer of the NSE said.
Data indicates that Kenya’s bond market has an average turnover of close to KSh 734 billion, a cake that is now up for grabs between NSE and EABX. Over-the-counter (OTC) instruments are securities that are not listed on the major exchange and are instead traded via a broker-dealer network, usually because many are smaller companies and do not meet the requirements to be listed on the main exchange.
The framework works purely through bilateral negotiations between traders without the intervention of the established securities exchange. All trades are captured electronically and directly between the engaging parties.
The operationalization of the hybrid fixed-income market is in line with NSE’s commitment to revolutionize Kenya’s bond market by enhancing its efficiency and vibrancy.
- The hybrid model will improve pre-trade transparency through the introduction of a Quotations Board which will provide investors with increased visibility into market quotes, thereby supporting more informed trading.
- The NSE also plans to launch a real-time daily yield curve that factors in the activities of the Quotations Board as well as the trades executed in the market.
- Equally, the decision to combine onscreen and OTC trading will provide market participants with a multifaceted approach to the execution of trades on the bond market, further increasing liquidity and depth in the market.
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 play a significant role in the elimination of settlement risks associated with OTC transactions. The NSE has interfaced with both 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.
“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,” added Odundo.
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