harmonizing legal and regulatory frameworks to facilitate regional domestic bond market development...

Harmonizing Legal and Regulatory Frameworks to Facilitate Regional

Domestic Bond Market Development

“The East African Community Experience”Presentation at the African Capital Markets

Seminar

Organized by African Development Bank

10th May 2009

Stephen KaboyoDeputy Director Financial Markets

Bank of Uganda

2

Scope of presentation

IntroductionCurrent statusProposed Legal & Regulatory ReformsConclusion

3

Introduction

Bond markets reforms in EAC are focusing on:Issuers with long term financing needsInvestors with a need to place savingsIntermediaries that link investors and issuersInfrastructure that provides conducive

environment for securities transactions, price discovery, etc.

4

A regulatory regime that provides the framework for bond markets.

All 5 member states implementing/putting in place 5 year Financial Markets Development plans.

Uganda first to implement September 2008

5

Current Status

EAC member states issue government bonds

Tanzania, Kenya, fiscal purposesRwanda’s maiden bond issued in 2008Different regulatory regimes exist in E.

Africa.Different stages of market developmentKenya bonds trade on the exchange only.

6

Uganda bonds listed on the exchange. OTC market allowed and encouraged through Primary Dealers.

Tanzania bonds listed on the DSE, Rwanda Bond trading on the OTC trading facility.

Parallel depository systems, central banks and stock exchanges.

Clear need to harmonize regulatory frameworks

Low liquidityDVP absent in most marketsInformation creation and dissemination still

weak both pre trade e.g. issue calendar and post trade prices

Bond markets fragmented, no benchmark issues yet

7

Concentration of investor, commercial banks dominating more than 50% in most markets.

8

Yield Curves for Uganda, Kenya and Tanzania

9

10

Structure of Bond Market for Uganda, Kenya and Tanzania

Uganda Kenya TanzaniaLargest Tenor 10 20 10Primary Dealers Yes No YesRatio of T-Bills/T-Bonds as at 31 Jan 2009 (%) 47/53 22.62/77.38Foreign Participation Yes Yes No

11

Proposed Legal and Regulatory Reforms in EAC

Regulation of OTCOTC bond market to be regulated by the capital

markets authoritiesContinue to use exchanges for listing to ensure on

going disclosureCMA’s to enforce rules through licensing, trading

rules, reporting.Central Banks traditionally cover prudential regs,

12

risk management for banks and CMA for investment banks, unit trusts/collective investment schemes and brokers

Primary Dealers and BrokersNeed to interface Primary Dealers and BrokersTrading on equal termsCMA’s and Central Banks to have MOU’s for sharing

information because government bonds settle on central bank depository systems

13

Organization of central depository systemsCorporate bonds to be registered on Central Banks

CDS initiallySettlement in central bank moneyMove towards having a single CSD for all securitiesSecond stage to move towards one EAC, CSDLegislative changes required to set up the regulatory

framework for OTC.

14

Approval process needs to operate on full disclosure basis.

Clear guidelines on bond issuance so that distinction is created between bond and equity regulations.

Secondary marketTo enhance secondary market liquidity, investor

diversification is critical. Pension reforms in Tanzania and Uganda would greatly assist.

Ultimate objective to have investors participate in all member states.

15

Brokers to be allowed to offer services in any country.

Regulation Home Country Passport.Harmonization, mutual recognition favored as opposed

to single regulatory regime.Country level regulators to accept licenses and

prospectuses of other countries.Enforcement, national regulators with different but

complementary roles e.g. home regulators issue prudential guidelines and host country regulates business conduct.

16

Need for regulators to exchange information, conduct investigations jointly.

Uniform infrastructure, e.g. all countries on RTGS, trading platforms, etc.

Additional ReformsEstablishment of a bond dealers association, objective

is to promote market development.

17

Association to have a legal statusAssociation likely to transform to an SRO at a later

stage.Encouraging formation of bond funds to stimulate retail

investment in bond markets.Consideration of underwriting Tier system.

18

ConclusionImplementation requires strong

commitment from authorities. Effective regional cooperation at government, regulatory and market level.

Harmonized economic policies at the regional level very critical e.g. full capital account liberalization.

Reforms to lead to a deeper more efficient bond market across EAC.

19