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 10 th May 2009 Stephen Kaboyo Deputy Director Financial Markets Bank of Uganda

2 Scope of presentation  Introduction  Current status  Proposed Legal & Regulatory Reforms  Conclusion

3 Introduction Bond markets reforms in EAC are focusing on: Issuers with long term financing needs Investors with a need to place savings Intermediaries that link investors and issuers Infrastructure 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 purposes Rwanda’s maiden bond issued in 2008 Different regulatory regimes exist in E. Africa. Different stages of market development Kenya 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 liquidity DVP absent in most markets Information 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 UgandaKenyaTanzania Largest Tenor Primary DealersYesNoYes Ratio of T-Bills/T- Bonds as at 31 Jan 2009 (%)47/ /77.38 Foreign ParticipationYes No

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Proposed Legal and Regulatory Reforms in EAC  Regulation of OTC OTC bond market to be regulated by the capital markets authorities Continue to use exchanges for listing to ensure on going disclosure CMA’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 Brokers Need to interface Primary Dealers and Brokers Trading on equal terms CMA’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 systems Corporate bonds to be registered on Central Banks CDS initially Settlement in central bank money Move towards having a single CSD for all securities Second stage to move towards one EAC, CSD Legislative 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 market To 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 Reforms Establishment of a bond dealers association, objective is to promote market development. 17

Association to have a legal status Association 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

Conclusion  Implementation 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