Securities Lending and Borrowing and Short-Selling Introduced in Kenya


Securities Lending and Borrowing and Short-Selling Introduced in Kenya


On 12th January 2018, the Cabinet Secretary for the National Treasury enacted the Capital Markets (Securities Lending, Borrowing and Short-selling) Regulations, 2017 (the Regulations). The Regulations now enable the development of securities lending and the resultant short-selling on Kenya’s sole securities exchange, the Nairobi Securities Exchange (NSE). Below are some of the key features of the Regulations.

What is securities lending and borrowing?

Securities lending and borrowing (SLB) refers to the temporary transfer of securities such as company shares from one person (lender) to another (borrower), based on a written agreement to return those securities to the lender upon demand or at specified future date.

What is short-selling?

Short-selling is the sale of a securities that have been borrowed under an SLB transaction.

For example, if a listed company’s shares are currently trading at KES. 50/- on the NSE and an investor believes that they are overvalued with their price expected to drop in the near future, the investor can now borrow, for example, 100 shares from a lender. The investor then sells those 100 shares at the current price of KES. 50/- (Total price: KES. 5,000/-). After a certain period of time, the price of the company’s shares then actually drop to KES. 25/-. The investor now buys 100 of the company’s shares at a cheaper price (Total price: KES. 2,500/-) and returns the shares to the lender, as agreed. The investor books the KES. 2,500/- profit from the short-sale, assuming there are no fees and commissions paid.

What benefit does the lender gain from lending their securities?

The lender is entitled to claim a lending fee from the borrower in return for lending the securities. This is determined in the lending agreement between them.

What kind of securities can be loaned?

The Capital Markets Authority (CMA) has been mandated to prescribe the criteria for the securities that may be loaned under SLB transactions.

Who can participate in securities lending and short-selling?

An SLB transaction can only be entered by regulated persons under the Capital Markets Act (Chapter 485A, Laws of Kenya) or other persons permitted by the CMA. A short-selling transaction can also only be entered by regulated persons and other persons permitted by the CMA.

Regulated persons include listed companies and licensees of the CMA such as stockbrokers, fund managers and investment banks. Arguably, these are amongst the largest participants in Kenya’s capital markets but the criteria for participants may be expanded by the CMA. The NSE has already released a media statement on 17th January 2018 indicating retail investors with significant company shareholdings will also be permitted to short-sell.

What are the conditions of lending securities?

An SLB transaction must include, but not be limited to, the following details:

(a) identification of the lender and borrower;

(b) securities to be loaned and their number;

(c) the term//tenor of the transaction;

(d) nature of the collateral which must be one hundred percent (100%) of the securities’ value;

(e) specification of the minimum surplus collateral above the value of loaned securities (margin) attached to the SLB transaction;

(f) details on exercise of voting rights attached to the securities to be loaned;

(g) nature and consequences of default by the borrower in the SLB transaction; and

(h) procedure for recalling and returning loaned securities.

When will this new capital markets product be active?

The Regulations gained the force of law on the date of their gazettement. However, the NSE is yet to formulate trading rules and transaction fees for this new product. In a media release on 18th January 2018, the NSE instead indicated that the trading systems are in place, targeting a short-selling market launch in June 2018.

Are there any other restrictions on securities lending or short-selling?

No person shall be permitted to hold a short position (securities borrowed and sold but not yet replaced) of more than ten percent (10%) of the securities issued for trading. Any short position of five percent (5%) or more will have to be reported to the CMA.

The CMA will also have power to impose control on prices or suspend trading that can be traded in short-selling:

(a) where extreme price fluctuations on a security are noticed; or

(b) to generally maintain market order and fairness.

Such suspensions and restrictions will be reviewed every week by the CMA.

Bernard Musyoka & Juliet Mazera