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Kenya’s Nairobi Securities Exchange (NSE) has been journeying to launch its own securities lending and borrowing (SLB) platform, which will allow asset owners and borrowers to use agents to engage in securities lending, with counterparts they cannot trade with bilaterally.
In April 2020, the Capital Markets Authority (CMA) announced the admission of the Central Depository and Settlement Corporation (CDSC) to the Regulatory Sandbox, to test NSE’s proposed screen-based SLB platform.
The Sandbox, which is run by the CMA, requires participants to comply with minimum regulatory requirements prescribed by the Regulatory Sandbox Policy Guidance Note (PGN). This includes the submission of test plans, which outline key test objectives, testing metrics, performance indicators, safeguards and remedial measures for test clients.
Entering 2022, the CMA confirmed that the CDSC — the central counterparty that will guarantee the settlement of all lending and borrowing transactions — has successfully completed testing of its SLB product.
In an initiative to improve capital market liquidity in the country, the test of the screen-based model will ensure that any investor could perform an SLB transaction without worrying about their counterparties.
If approved, the current Capital Markets 2017 regulations on securities lending, borrowing and short selling — which envisages a bilateral model of SLB — will be amended to include the screen-based model.
This particular model will allow trade requests to be captured in an automated system by the agents on behalf of their clients or on their own behalf.
Commenting on the SLB platform, Geoffrey Odundo, NSE chief executive, says: “The new system functionalities are in line with international standards and best practice as envisioned in the Kenyan Capital Markets Master Plan.” This plan promotes the development of Kenya’s capital market to be an investment destination of choice through facilitative regulation and innovation. The system allows for short selling and day trading, which was launched on 3 December 2021.
Odundo adds: “The initiative enhances our delivery versus settlement agenda, as the introduction of market makers or liquidity providers will enhance execution by ensuring that every buyer has a seller and every seller, a buyer. The SLB is also geared towards improving liquidity in the market. The more liquid a market is, the lower the costs of transactions and the faster new entrants experience price discovery. This also serves as a big attraction for foreign investors.”
