Impact of new central securities depository on financial markets

Why new wine and old wineskins, one might ask. Financial markets have evolved into highly complex transactions with many products recently inconceivable.

However, handling them in the CBK’s old manual bond trading platform was akin to putting new wine in old wineskin.

Structured financing products such as repurchase agreement transactions or repos which involve a sale of assets and a simultaneous agreement to repurchase the same quantity of equivalent assets at future date are modern day financial tools designed to perform optimally using modern tools.

Moving their trading to a digital platform can, therefore, be seen as the shot in the arm the Kenyan financial sector needed.

A CSD holds securities such as bonds, either in certificated or uncertificated form, allowing ownership to be easily transferred through a book entry rather than by a transfer of physical certificates. 

This allows financial companies to hold their securities at one location where they can be available for clearing and settlement. Previously if you had a bank account at Stanbic Bank and wanted to bid for a Treasury bill, an omnibus public nominee account was used to present your bid among others. 

However, with the new system, omnibus accounts are a thing of the past. Since one can have personal accounts in their name, it is easy to differentiate bond owners and a client will be able to make multiple competitive bids due to the ability to hold several accounts. 

One advantage of going digital is the streamlining of previously ambiguous processes. The introduction of the digital CDS platform does exactly this when it comes to streamlining tax compliance for traders.

With all systems moving digital, CDS account holders can now access a linked personal tax portal and generate tax returns seamlessly. This simplifies tax compliance and reducing the burden on investors.

For clients transacting in structured finance through instruments like repos, the new CSD digital platform enables faster trading of government bonds, allowing investors to use their bond portfolio as security for loans through repos.

Banks now have the option of transacting repos horizontally among themselves without intermediaries, enable customers to borrow and sell bonds rapidly while benefiting investors and financial institutions. So far, banks have initiated horizontal repos to test the system's efficiency.

With automation also comes the little luxuries like the ease of using the bond portfolio as a repo or loan security. 

This will likely lead to a significant increase in repo volumes and investor participation in government securities. The newfound security and liquidity on the market will attract more investors seeking a reliable means to leverage their investments. 

The writer is Head of Global Markets, at Stanbic Bank Kenya