Very strange dealings are happening in our bond markets. I recently came across a letter by the Central Bank of Kenya’s Director of Financial Markets, David Luusa, to the CEO of the Capital Markets Authority, asking the market regulator to investigate recent bond trades between some brokers and market players and the National Social Security Fund (NSSF).
The Central Bank says, in this letter, that it had conducted an analysis of these trades that revealed the following. First, instances where NSSF was buying bonds at significantly higher than the market average.
Secondly, instances where NSSF sold bonds at lower prices and bought the same bonds at higher prices in a few days.
Thirdly, these trades which the Central Bank described in the letter as ‘illegal’ were carried out between May and July this year.
"The purpose of this letter is to request the CMA to review the conduct of the above parties and share the actions with the Central Bank of Kenya," concludes the letter.
The letter also gives details on some of the parties, including the CDS numbers they were trading with. There is a chap by the name Humphrey Wachira Gichuru and a recently licenced stockbroking and investment back outfit by the name Pargamon Investment Bank.
I will stop the narration there because the evidence is still trickling in. To get the full picture, you have to access full market data on all trades made between May and July- by broker, security, price and the amounts of money.
Who were the counter parties? What instructions did they have to do these trades? Which bonds were they? Market data is what will tell us whether these were funds managed directly by the NSSF itself or monies managed on their behalf by asset managers.
When you buy a security at a price higher than the market average, you are creating huge profits for someone else. When you sell bonds at low prices and buy them back at high prices you are merely generating trading income for someone else.
Clearly, some unscrupulous NSSF insiders were colluding with brokers to create trading income for the market players. The insiders were creating a premium for third parties.
What are the big policy issues here? First, the case for a well-functioning bond market especially with regard to the issue of transparency.
Can we, really, claim to have a proper yield curve that accurately captures and reflects prices at which deals are closed? Today, it is an open secret that even within the big banks, it is not uncommon to find different departments within the same bank: finance department, the treasury department and risk department, projecting a conflicting picture on pricing.
It is also an open secret that many treasury departments of the large commercial banks generate their own yield curves. Many market players report the trades they have done days and weeks later, thus contaminating the purity and accuracy of the weekly yield curve generated by the NSE.
To get out of the corruption and the mess we are seeing in the dodgy trades at the NSSF which the Central Bank has flagged out as ‘illegal’, we must go back to that very novel idea about the East Africa Bond Exchange (EABX). This entity was conceived as a market organiser and self-regulatory body.
When you see dodgy dealings such as the current case at the NSSF, does it surprise that the EABX has faced stiff resistance from sections of market players. There was a time when the propaganda out there was that EABX was owned by a private individual.
The truth is that this is an entity that was conceived by the bond traders association and whose seed capital was contributed by perhaps the most critical players in the bond business- namely the commercial banking fraternity. The Kenya Bankers Association is the main supporter of the exchange.
Established nearly four years ago, it was not until January this year that EABX was licensed by the CMA. But it has not achieved full operationalisation because the Central Bank is taking too long to sort out connectivity to the central depository.
As the National Treasury’s fiscal agent and manager of the market for government securities, you would expect the Central Bank to be keener to enhance transparency in the market and in a reliable yield curve. It has not.
But the biggest elephant in the room is management and decision making on investment of funds by the NSSF. Even though the whole picture is not clear, you can bet that the amounts involved in this latest scandal runs into billions of shillings. Someone must be punished for this.
Meanwhile, continue watching this space as the full market data on these illegal dealings come to light.
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