harmonizing legal and regulatory frameworks to facilitate regional domestic bond market development...
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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
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Scope of presentation
IntroductionCurrent statusProposed Legal & Regulatory ReformsConclusion
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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.
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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
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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.
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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.
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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
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Concentration of investor, commercial banks dominating more than 50% in most markets.
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Yield Curves for Uganda, Kenya and Tanzania
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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
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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,
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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
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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.
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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.
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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.
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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.
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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.
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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.
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