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Launch of CBK Settlement Model

Wednesday, 26 October 2016 09:21
Governor of Central Bank of Kenya– Prof. Njuguna Ndung’u,
Chairman KASIB Mr. Jimnah Mbaru,
CDSC Board Members present here today,
Acting Chief Executive CMA- Mr.Paul Muthaura,
Acting Chief Executive,NSE- Mr. Andrew Wachira,
Chief Executive, KASIB -Mr. Willie Njoroge,
Chief Executive, Kenya Bankers Association- Mr. Habil Olaka,
Chief Executives of CDA’s present here today, Settlement Banks Representatives, CDSC Staff, invited guests, Ladies and Gentlemen. Good morning. Thank you for joining us this morning as we celebrate the achievement of settlement of funds for securities traded at the Nairobi Securities Exchange through the Central Bank of Kenya’s Real Time Gross Settlement (RTGS) System.

When CDSC commenced its operation ten year ago, (10th November 2004), it opted to use a single Commercial Bank Model for funds settlement and appointed CFC Stanbic Bank as the settlement bank. All settlement participants were required to open a settlement account with the bank. Global best practice however dictates that settlement processes should as much as possible mitigate against credit and liquidity risk, and the use of a single commercial bank for settlement was therefore seen as a weakness in our settlement process due to concentration of risk in a single commercial bank.
We therefore took the interim measure in September 2012 of appointing additional settlement banks to mitigate against the risk of a single point of failure in our settlement process. We appointed three additional settlement banks, Equity Bank, Co-operative Bank and Barclays Bank of Kenya.

However, the risk of settling in commercial bank money still prevailed. Although there has not been a bankruptcy from a settlement bank that has caused a loss to a participant or investor, this issue has become more relevant recently due to the exposure that participants have to face when settling in commercial bank money. The recent financial crisis in the west also proved the vulnerability of commercial banks as many had to be bailed out by their governments.
The manner in which settlement of funds is undertaken was included in the CPMIIOSCO Principles for Financial Market Infrastructures (PFMI) which clearly favour the use of central bank money. Principle 9 states that; “an FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risks arising from the use of commercial bank money”. While we all acknowledge that the main drivers of an effective capital market
are pricing, demand and supply considerations, market participants are increasingly appreciating the importance of an adequate and robust support infrastructure. In other words, where capital markets provide the fundamental infrastructure to bring investors together, the clearing and settlement infrastructure ensures the effectiveness and efficiency of the system.

Once neglected as a boring but necessary element of dealing in the capital markets, the settlement process has caught the attention of both the public and the private sector. The rise of emerging markets, the growth of financial markets and the increased focus on cross border activity in different parts of the world has made the settlement process considerably more complex but also made investors fully aware that operational support systems form a critical part of an effective and efficient capital market. Against this background, CDSC has worked in consultation with the Capital Markets Authority and the Central Bank of Kenya to develop a more robust settlement model. A technical team made up of representatives from CDSC,
CMA, CBK and NSE was constituted with the mandate of proposing the best settlement model for our market, benchmarked against best practice and international standards.
I am therefore very pleased to report that the transition from commercial money settlement to central bank money settlement took place on 15th January 2015, with no disruption or interruptions to the settlement cycle, and this significant achievement is testament to the hard work and efficient process flows that the technical team have put in place. The cash side of the settlement process for transactions concluded on the Nairobi Securities Exchange is now being carried out through the Central Bank’s Real Time Gross Settlement System (RTGS).
Through their design, RTGS settlement systems eliminate counterparty risk. They provide the ultimate risk free means of discharging payment obligations between parties due to the finality and irrevocability of debits and credits to participants’ accounts. The securities leg of the settlement process, which entails the transfer of securities between the buyers and sellers, will continue to be carried out at CDSC. The settlement cycle remains unchanged at T+3. Allow me to draw your attention to the Capital Markets Master Plan which lays out a blue print for the growth and development of the Kenyan capital market. CDSC is gearing up its systems to prepare for the delivery of new products outlined in the master plan and echoed in CDSC’s own strategic plan. Implementation of the new system commenced this week, and it is expected to be a nine months project with the switch over expected to happen at the end of Q3 2015. The new system will provide a more robust delivery and settlements platform to the market, and enable to introduction of products such as securities lending and borrowing, day trading– and here the RTGS becomes significant in that day trading requires the ability to settle several times in the course of the day; we also plan to introduce depositary receipts, and
additionally, the system will be capable of settling derivatives and commodities.
These new products portend significant and exponential growth for our capital market, and as CDSC we look forward to working with all the market players to implement and realize the gains we all aspire to attain for our market, and the positive impact this will have on our economy.
In conclusion, I would like to very sincerely thank the Chairman and Board of CDSC for their support and counsel in making this project achievable. I am also extremely appreciative of the support of Prof. Njuguna Ndung’u, Mr. Paul Muthaura and Mr. Andrew Wachira, for the synergies that enabled us conclude and launch this new settlement model in a very short time. Saving the best for last, I’d like to give a very special thanks to the technical team that worked tirelessly to bring this project to completion , and I request them to stand up and be recognized.

Asanteni Sana

Last modified on Monday, 21 November 2016 09:25