NSE, CDSC terminate years-old treasury bond revenue sharing as reforms kick in
L-R: Nairobi Securities Exchange CEO Geoffrey Odundo, CDSC CEO Nkoregamba Mwebesa during the Nation Media Group's bell-ringing ceremony to commemorate the share buyback transaction at the NSE in Nairobi, Kenya on June 28, 2021. PHOTO | NMG
The Nairobi Securities Exchange (NSE) and its associate Central Depository and Settlement Corporation (CDSC) Ltd have terminated a more than 10-year bond revenue sharing agreement after the Central Bank rattled the bond market through the establishment of its own trading platform for government bonds.
On August 1, Central bank moved to implement its own online bond trading platform dubbed ‘CBK DhowCSD’ which has effectively locked out brokers from the lucrative Treasury bond deals since investors can now place their bids directly without involving intermediaries.
With bond revenue streams now at its lowest the struggling entities — NSE and CDSC — have reached a mutual consent to part ways from a revenue sharing plan hinged on joint operation of an NSE bond trading infrastructure housed within the CDSC premises.
This is after the NSE automated its bond trading and its servers were domiciled at the CDSC together with the equity trading servers under the coupled environment.
Hosting fee ceded
Under the agreement NSE earned 0.0035 percent fee on the value of bond transactions while CDSC earned 0.002 percent for hosting the NSE servers (bond trading infrastructure).
The CDSC chief executive Nkoregamba Mwebesa confirmed to The EastAfrican that the bond revenue sharing agreement has been terminated after the CBK took over the trading operations of government bonds.
“We neither do settlement for government securities, nor host a depository for government securities, or have investor accounts for government securities because that is held in the Central Bank central depository system (CDS). So ordinarily we would not be participating in bond trading,” Mr Mwebesa said.
“We have two central securities depositories (CSDs) in this market because Central bank has its own CSD for trading in government securities. We used to earn some levy on bonds trading purely because we were hosting the NSE infrastructure.”
The NSE and the CDSC agreed for a three-year revenue ceding timelines (2021-2023) through which the CDSC would surrender its 0.002 percent bond levy to NSE.
Under the plan, 25 percent of the bond levy revenues will be ceded by CDSC in the first year, 50 percent in the second year and 75 percent in the final year.
“The agreement was that because we host the infrastructure used for trading of bonds and we got a levy from the trades. When the arrangement ended, we agreed on a three-year ceding of that revenue back to NSE, “said Mwebesa.
NSE Chief Executive Geoffrey Odundo, however, said reversion of bond trading infrastructure from the NSE premises was to enhance operational efficiencies.
“To enhance operational efficiencies, the NSE moved back to its highly equipped data centre at the NSE premises. The NSE also provided an additional redundancy link to ensure uninterrupted trades. All functions regarding fixed income trading are handled at the NSE,” said Mr Odundo.
Market reform
The CBK bond trading portal that went live on August 1 gives retail investors unprecedented access to attractive returns via mobile phone, opening up the Treasury bond market that has hitherto been the preserve of a small club of sophisticated and deep-pocketed investors.
This platform has been in the works for three years and allows investors to open bond trading accounts at the CBK online portal from where they place bids for their preferred securities during auctions.
This is part of the National Treasury’s bond market reform measures to boost its uptake of domestic debt through treasury bills and bonds. In 2021, the then Cabinet Secretary for the National Treasury Ukur Yattani proposed key reforms in the multi-billion-dollar government securities market to allow treasury bonds to be traded away from the NSE effectively kicking out brokers from the lucrative business.
Last year, bond turnover at the NSE declined by 24.8 percent to Ksh979 billion ($6.84 billion) from Ksh1.3 trillion ($9.09 billion) in 2021, resulting to a decline in bond transaction levy by relatively similar margin to Ksh34 million ($237,762.23) from Ksh45 million ($314,685.31) in the same period.
Treasury bonds are very lucrative investment products in the capital markets by virtue of being tools used by the government to raise revenues to finance operations and budget deficits.
