BSE eyes automated trading of bonds

Isaac Pinielo | Friday August 7, 2015 16:29

It is understood that the issue has become a key priority at the local bourse, considering that worldwide bond markets are being automated.

BSE’s deputy Chief Executive Officer, Thapelo Tsheole told journalists at a business seminar yesterday that although the exchange introduced the automated trading system (ATS) in 2012, no bonds have been traded through this system since then.

“Centralisation of the bond market has many advantages as it provides more counterparties and contributes to transparency while also solving the shortfall in the liquidity,” he said.

Tsheole also said the bond market centralisation reduces costs for investors, adding that electronic system can aggregate a greater number of bids. He however stated that it requires a coordinated effort between many banks and investors, adding that with it, standardisation is impossible.

Tsheole stated that the paper they wrote in 2011 highlighted the need to promote efficiencies in the bond market by improving information dissemination, transparency in trading, price discovery and ultimately liquidity in the bond market. “There still remains strong inclination to maintain fragmented markets for government bonds and for corporate bonds when there is an opportunity to leverage on the existing infrastructure, ATS and central securities depository (CSD) to increase efficiencies and further develop the market,” he said. According to Tsheole, Botswana’s bond market has grown from P2.5 billion to over P10.6 billion in the past 10 years and market activity improved twofold in 2015 although trades were solely on account of government bonds.

The BSE introduced three bond indices in 2013 mainly to address the problem of lack of a neutral benchmark for bond portfolios. Bond market conventions and bond pricing formulae were formulated in 2012.

Tsheole reiterated that these initiatives are expected to contribute towards improving liquidity in the bond market.

He added that in 2010, the BSE together with market participants identified and documented several challenges impeding the bond market development in Botswana.

“These included lack of a robust risk free curve, infrequent issuance of government bonds and treasury bills, pricing issues, lack of benchmark bond index and lack of fair values, poor information dissemination, lack of transparency, trading and settlement as well as lack of skills,” he said.

Tsheole explained that this was for government to close maturity gaps and issue across different maturities which is an issue taken up with government.

“We now have quarterly auctions although hardly any new bonds are issued, most are tap issuances,” he said.

In addition, he said standard bond pricing formulas were drafted in 2012 along with market conventions and that BSE introduced bond indices in April 2013 and usage is improving.

Meanwhile, the deputy CEO said turnover in Exchange Traded Funds (ETFs) improved in 2015 relative to 2014 on a comparable basis. Significant inflows were into the BettaBeta ETF which traded 7.8 million units at a value of P326.5 million followed by NewGold, which traded 232,000 units at P26.2 million and then NewPlat traded 735,000 units at P82.1 million.

Cumulatively, trades in ETFs since 2010 have now exceeded the P1 billion mark. The BSE is looking to list more ETFs in the near term.

On average, he said top five companies, representing 20 percent of listed domestic companies, contribute more than 70 percent to total turnover. “Ideally, the contribution to turnover has to be broad-based, and liquidity should be across all the counters,” he said. The BSE has started the process of demutualisation, which is expected to lead to the BSE becoming a company that can eventually list on the Exchange.