Kenya’s CDSC to launch short selling, day trading

Saturday July 20 2013

By DAVID MUGWE The EastAfrican

Kenya’s Central Depository and Settlement Corporation (CDSC) is working on a raft of reforms meant to ease trading at the Nairobi bourse.

The changes, which include the introduction of new products such as day trading and short selling of securities are expected to boost CDSC’s earnings, which fell 42.68 per cent in the year ending December 2012 to Ksh15.62 million ($181,681) from Ksh27.26 million ($320,563) the previous year.

The drop was blamed on losses and a slowdown in business in the corporation’s subsidiaries. Overall, however, CDSC still made a profit, helped by higher revenues from improved trading of stocks and bonds at the Nairobi Securities Exchange where it earns a commission from every trade, which is its main source of income.

“CDSC intends to offer a broader range of services such as collateral management, day trading, settlement services for government securities, and regulatory environment permitting, securities lending and borrowing,” said Rose Mambo, chief executive officer, CDSC in disclosures contained in its latest annual report for the period ended December 2012.

Day trading allows investors to make quick trades in which all positions taken are usually closed by the end of the trading session and with the bourse already automated, it could see increased turnover of securities, which could earn CDSC and brokers more revenue.

Short selling allows an investor to borrow another’s shares, sell them if they think the price will drop, buy them back at the lower price and return the shares to the lender, keeping the difference.

Investors who like to take risks also bet on expected share price increases by borrowing money, buying shares and selling them at a higher price that covers their costs, paying off the debt and keeping the difference.

The two strategies increase the returns of the investor but are also risky, and losses are magnified in equal measure.

The introduction of day trading, settlement services for government securities and securities lending and borrowing will require the collaboration of other government agencies, including the Central Bank of Kenya, and the implementation of new laws and changes to existing ones.

“The positive is that there is improved liquidity, more buying and selling but there are also risks in short selling and it needs to be done in a strict risk management environment,” said Paul Mwai, chief executive officer, AIB Capital.

CDSC’s total income dropped marginally by 9.35 per cent to Ksh172.52 million ($2 million) from Ksh190.31 million ($2.2 million) the previous year following an 11.09 per cent increase in transaction and bond levy income both of which contributed 73.61 per cent of the total revenue for the corporation.

The central depository earns a 0.06 per cent levy of the value of equity trades and a 0.002 per cent levy on the value of corporate and government bonds traded at the NSE.

Ms Mambo said that last year results were mainly driven by improved market turnover as well as improved returns on invested funds.

“New technologies and the adoption of global market standards by many African countries as well as the regionalisation of market infrastructure make our markets attractive investment destinations. CDSC intents to capitalise on these emerging opportunities and offer a basket of services that will develop it into a world class central depository service provider,” said Ms Mambo.

CDSC Registrars Rwanda and CDSC Registrars Kenya made a combined loss of KSh1.1 million ($12,786) driven by a dearth of new business opportunities in Rwanda, and slow uptake of new registers in Kenya.

In 2011, the corporation made Ksh22.66 million ($226,449) from services provided to the National Bank of Rwanda at the Rwanda Securities Exchange, and a similar amount of money from registry services in Kenya and Rwanda.

“However, during the year, there were encouraging developments when CDSC registrars Kenya was appointed by the NSE to offer registrar services, as well as by UAP as the registrar and data processing agents for their initial public offering,” said Ms Mambo.

Initial public offering postage income rose 538 times to Ksh15.66 million ($182,085) while total expenses rose by 9.27 per cent to Ksh169.05 million ($1.9 million).