Repo reform quickens in Kenya

Repo reform quickens in Kenya

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A recent cross-currency repo trade in Kenya could help to establish a blueprint for a more stable interbank market in the East African country.

Commercial Bank of Africa (CBA) and Standard Bank of Southern Africa (SBSA) executed a repo, or repurchase, transaction last month.

Under the deal, guaranteed by Frontclear, Kenyan commercial bank CBA will receive $25m in funding from SBSA and provide Kenyan government bonds as collateral - a type of insurance on the loan.

The method used differs from the country’s current ‘horizonal repo’ structures which appear to be secured by a pledge, whereas CBA’s trade is secured by the transfer of title to collateral by means of a true sale.

"As there is no sale of collateral in a pledge, horizontal repos do not allow the collateral-taker/cash lender to re-use the collateral," Richard Comotto, senior fellow at the IMCA Centre, explained in a recent note.

"Any coupons, dividends or other income on the collateral are paid directly to the collateral-givers/cash borrowers," he added.

In the CBA trade, Frontclear has issued a guarantee to SBSA to cover any residual credit risk on the transaction.

Run by Philip Buyskes, a former investment officer at the Development Bank of South Africa, Frontclear covers repos, derivatives and securities lending trades lower than $35m with max duration of twelve months.

Its own guarantees are in turn counter-guaranteed by Germany’s KfW, a AAA-rated financial institution.

A joint statement on Monday described the CBA and SBSA trade as a “step-up” from the Kenyan horizontal repo, paving the way to a more “robust, stable and inclusive interbank market” in Kenya. 

“We see this type of transaction as key to developing deep and liquid financial markets in Kenya and across Africa as a whole,” said Standard Bank’s Reggie Mlangeni, regional head East Africa, client solutions.

Raphael Agung, head of treasury at CBA said the repo transaction had allowed CBA “to term out our funding by a considerable magnitude thereby infusing the much needed stability to our balance sheet.”

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