The Central Depository and Settlement Corporation (CDSC) has gone live with its stock lending and borrowing (SLB) platform after completing a two-year test run at the Capital Markets Authority (CMA) regulatory sandbox.
The CMA has also approved the rules for the SLB platform, which will allow investors such as pension schemes who hold stock assets for the long haul to lend them to fellow investors for a fee, for up to a period of one year.
During the testing period, the CDSC got a no-objection from the Retirement Benefits Authority (RBA) for pension funds to participate in SLB, lining them up to be the key drivers of the platform.
HOW DOES ONE GO ABOUT BORROWING STOCK ON THE NEW PLATFORM AND WHAT ROLES DO THE EXISTING MARKET INTERMEDIARIES PLAY?
Traditionally, we have had arrangements where a stock borrower seeks out a lender or vice versa on bilateral basis. They agree on terms, sign agreement and then consummate the transaction.
The platform that we have introduced as CDSC is a screen-based model. Potential lenders will give instructions to their CDS agents (stockbrokers) that they have shares that are available for lending, and these shares are put on a board within the CDSC platform.
Potential borrowers will then be able to access them, also through their agent, and the system will then match the borrowers and lenders. However, one can still do a bilateral transaction—the law allows that—but we felt as CDSC that we could get more uptake and adoption with a screen-based model, just like it happens in trading at the secondary market.
THE CMA HAS APPROVED THE RULES FOR THE PLATFORM. HOW DO THEY PROTECT SECURITY LENDERS AND BORROWERS AGAINST LOSS OF STOCK?
CDSC is operating as a central counterparty, guaranteeing all the transactions that take place on the platform. For the lenders, their shares will be returned at the end of the contract period, with the CDSC following up because we are the ones who know who has borrowed from whom.
However, if one wants their shares back before the end of the contract term, you can call them back, and the borrower must return them within 14 days.
We will also be holding collateral from every borrower— equivalent to a cash margin of 110 percent of the value of the shares borrowed — so that if a borrower is unable to return the shares because he or she can’t find them in the market or is unable to buy them, the CDSC will use the collateral to acquire the shares for the lender from the market.
We shall be marking the collateral to market on a daily basis, and if you go below the 110 percent we shall be making a margin call through your broker to top it up.
THE NAIROBI SECURITIES EXCHANGE (NSE) LAUNCHED DAY TRADING OF SHARES IN NOVEMBER, AND BY CMA DATA, IT TRANSACTED SH700 MILLION BY THE END OF THE YEAR. WHAT IS YOUR TAKE ON THE UPTAKE OF THIS PRODUCT?
I think Sh700 million is very encouraging for a new product, in less than 60 days. There is a lot of interest from high-net-worth and retail investors, but we need it to scale up, and the securities lending and borrowing should be a catalyst for that.
People will be borrowing shares for a particular strategy, either to participate in day trading to get value from certain security or to short the market, where they deem a share overpriced and bet on its price going down. They can borrow these shares, sell them, wait for prices to fall and then buy them to return to the lender.
Once SLB takes off and we get enough uptake it will spur the other products, including the derivatives market.
THE CDSC HAS RECENTLY BEEN SENDING MESSAGES TO HOLDERS OF DORMANT ACCOUNTS TO REACTIVATE THEM. IS THIS CAMPAIGN GETTING ANY TRACTION GIVEN THE STRONG APATHY IN THE MARKET?
Traditionally not more than 1.5 percent of the accounts actively trade. As part of our strategic initiatives, we thought that if we could increase that number we would see more throughput on the market, particularly in turnover.
The campaign to revive the accounts was fairly successful. Our goal was to double the number of active accounts during the period of our strategy and we achieved that in the first six months.
We are probably at just over three percent now, from about 1.2 percent.
The reactivated accounts generated 20 percent of the trading activity in 2021 and by extrapolation, 20 percent of the revenue for us as an industry when you look at the stock exchange and stockbrokers, among others.
ARE THERE PLANS FOR A SECOND M-AKIBA MOBILE BOND PROGRAMME?
M-Akiba was not necessarily a product of the CDSC, but rather an initiative of the Treasury. What we do know is that they will be issuing M-Akiba 2.0. The first one was successful in that it reached thousands of Kenyans who were able to save and get their money back.
It served the purpose of deepening the financial markets. We have said to the Treasury and the CBK that we are available to provide the same service that we did in the first one. We have the system and platforms to manage the bond.
SOME MOBILE NUMBERS THAT WERE USED BY M-AKIBA BORROWERS WERE DEACTIVATED BY TELCOS BEFORE YOU REMITTED THEIR PRINCIPAL REPAYMENTS. HAVE YOU BEEN ABLE TO PAY THESE PEOPLE?
The regulation from the Communications Authority of Kenya (CA) is that if a number is inactive for a certain period of time it is recycled. We were very careful not to pay people who did not participate in the bond — that is, the ones holding the numbers that had been recycled.
That was the biggest issue. We are working with the MNOs [mobile network operators] to trace the original buyers who are not the current holders of the numbers. The money is safe and is sitting with the paying bank, which is NCBA .
The affected were, however, a small number with respect to the whole issuance — about one percent.
IT HAS BEEN A DECADE SINCE THE KENYAN STOCK MARKET MOVED TO A THREE-DAY SHARE SETTLEMENT CYCLE (T+3) FROM T+4. OTHER MARKETS ARE INCREASINGLY GOING T+2. HAVE YOU THOUGHT OF JOINING THEM?
There is a technical reason as to why we have hesitated from doing that change to two days. Our market sits in the middle of the trading day on a global perspective, where we open as the markets in the East are closing and close as the markets in the West are opening.
Sometimes the cycle requires the transfer of funds from those jurisdictions, so we found that T+3 accommodates everyone. But we can accelerate trades, which we do regularly if the recipients want to do it. That’s how we are able to do day trading. But for the general market we shall continue to do T+3.