Alternate stock market to offer small brokers chance at bourse

PHOTO | FILE Capital Markets Authority chair Kung’u Gatabaki (left), National Treasury Financial Secretary Mutua Kilaka (centre) and CMA acting Chief Executive Officer Paul Muthaura at the launch of the CMA strategic plan and risk-based supervision system on September 26, 2013.  NATION

In Summary

• NSE is currently owned by 22 stockbrokers
• Speaking to the Sunday Nation, Capital Markets Authority chair Kung’u Gatabaki said the regulator is determined to license a second, or even a third, securities exchange to open up the market following the stockbrokers’ first-round success after their proposed changes to the regulatory framework were fully adopted by Parliament.

By JOSHUA MASINDE
More by this Author

As far as transformation goes, 2014 could see radical changes in the operation of the stock market introduced after the regulator vowed to ensure competition is intensified by licensing a second securities exchange.

Speaking to the Sunday Nation, Capital Markets Authority chair Kung’u Gatabaki said the regulator is determined to license a second, or even a third, securities exchange to open up the market following the stockbrokers’ first-round success after their proposed changes to the regulatory framework were fully adopted by Parliament.

“There’s a strong feeling on the need to have another exchange. We are considering the possibility of licensing a second, and even a third, stock exchange,” Mr Gatabaki said, without giving any timelines.

The licensing of another operator would allow more players to participate in the multi-billion-shilling securities market that is now controlled by a few brokers. The NSE is owned by 22 stockbrokers.

On several occasions the CMA has been at loggerheads with stockbrokers, accusing them of operating like a cartel by putting up barriers to entrance into the multi-billion-shilling exchange market.

The CMA, the NSE and stockbrokers disagree on several issues, with the regulator planning for a futures exchange operated by a different player, through the changes previously suggested in the Capital Markets (Amendment) Bill, 2013.

The NSE, lobbying lawmakers to buy more time to comply with rules in line with the running of the futures market, were granted a three-year grace period to meet the regulations of running the proposed exchange, something that didn’t settle well with the CMA.

President Uhuru Kenyatta signed the new Bill into law a week ago.

“The moment we consider this possibility, we shall get much interest from the market. We are even thinking of an East African Stock Exchange to remove the hurdles associated with cross-listing,” Mr Gatabaki said.

The chairman of the Kenya Association of Stockbrokers, John Kirimi, says it is within the CMA mandate to license another commodities exchange market.
.
 

“We have no problem with having another market, even if it were to start right away,” he said, adding that preference should be given to local players. “It is best to license a local player, in the spirit of supporting local entrepreneurship.”

Mr Gatabaki maintains that by seeking exemption from some rules in the management of the futures/derivatives exchange, the NSE lobbied for a bad cause.

Now, with the licensing of another regulator in the cards, the stockbrokers must prepare for competition in a market they have controlled for decades.

Another bone of contention has been the demutualisation process, which involves the separation of the exchange’s management from its ownership.

Should the differences surrounding this process persist, the process, which would have seen the NSE eventually self-list, opening it up to public ownership could take even longer.

According to the CMA chair, the process should have been finalised two years ago but has been held back up the brokers. But the brokers accuse the CMA of delaying the process, arguing that the only reason demutualisation has taken so long to complete is because the regulator ‘refused’ to approve the market access fees requirement proposed by the NSE.

“They (CMA) gave a set of conditions, which we met, but they failed to adopt our stand on fees,” Mr Kirimi said by phone. “If demutualisation were to be done today, brokers would cease to be the only NSE shareholders.”

While the stockbrokers had settled on a market access fee of Sh200 million for the entry of new players, the CMA proposed Sh2.5 million or lower, which the NSE found unacceptable.

The CMA’s argument was that a requirement as low as Sh2 million would pave way for other players, further expanding capital-raising activities and investment in the country. But the stockbrokers argue that NSE has been built on their sweat and hard work, which justifies their proposed premium.

SEEN LOGIC

“When they put the figure at Sh200 million, they must be joking,” Mr Gatabaki said. “I believe some of them have seen the logic. They have to play within international standards. Then they can go ahead and list.”

But Mr. Kirimi said the differences between the regulator and the stockbrokers, which have played out in the last year, should not be interpreted as a fight for supremacy.

“The CMA is the regulator; we are just market players,” he said.

Writing in Business Daily last week CMA acting chief executive Paul Muthaura criticised the three-year exemption granted to the NSE as “ill-timed”

.

“It is a bad time to introduce conflicting standards of compliance with respect to the operation of a new sector as sensitive and potentially transformative to economic growth as the derivative markets,” Mr Muthaura wrote.

“All regulatory standards must be seen to be equally applicable to all players to avoid imbalances in the costs of compliance