CMA Issues Policy Guidance Note for Asset-Backed Securities

Nairobi May 11, 2017…In its drive to widen the scope of available capital markets products in the Kenyan market, in line with the 10-year Capital Market Master Plan, the Capital Markets Authority (CMA) has published a Policy Guidance Note (PGN) to facilitate the issuance of Asset-Backed Securities (ABS).

The PGN, which was approved by the CMA Board in April 2017, has undergone extensive stakeholder consultation and engagement to ensure that the final product has the input of industry stakeholders, including a 30-day public exposure period in August to September 2016.

The CMA Chief Executive, Mr. Paul Muthaura, disclosed that the principle-based approval approach, which underpins the PGN, empowers the Authority to fast-track roll-out of new products and services in capital markets. This approach ensures that the market is more diverse in terms of the portfolio of investable products, by ensuring a more timely response to the changing capital market dynamics.

The principle-based approval approach is in line with recent amendments to the Capital Markets Act, effected in December 2013 that enhanced CMA’s role in facilitating market development in relation to the introduction of new products.

The ABS Policy Guidance Note has been developed in line with the powers of the Authority under Sections 12A and 30Z of the Capital Markets Act. Section 12A empowers the Authority to issue guidelines to regulate capital market activities and products.  Section 30Z further empowers the Authority to issue guidelines in relation to the form or structure of a special purpose vehicle and documentation requirements for asset backed securities.

The PGN sets out guidance on how the Authority intends to interpret and apply the securitisation provisions of the Act and exercise its powers under the Capital Markets Act. The PGN also provides important clarifications of areas where the Act or its application were deemed to be unclear, following industry engagement. Mr Muthaura noted, ‘’This is expected to facilitate ABS transactions to be brought forward based on a clear regulatory regime on the legal structure of special purpose vehicles among other key refinements.’’

He explained that the PGN has addressed the conflicts that were identified between the Act and

the Capital Markets (Asset Backed Securities) Regulations, 2007, and confirmed that with the

benefit of the PGN the Authority had submitted proposals to the Cabinet Secretary for the repeal

of the 2007 regulations.

Mr Muthaura observed, ‘’Any further amendments to the Capital Markets Act as it applies to

Asset-Backed Securities will be developed once the market has been fully operationalized. The

issue of the PGNs on diverse products is expected to accelerate the increase of the scope of

available capital market products in Kenya’s capital markets, in close consultation with industry

stakeholders. The first product to be introduced through this approach were Exchange Traded

Funds in October 2015.’’

The publication by CMA paves the way for the rollout of ABS in Kenya, which is expected to support investment in capital intensive infrastructure assets as well as cater for the repackaging of future cashflows to raise capital. Mr. Muthaura reiterated that the Authority will be using the same approach of principle-based approval to catalyze the transformation of Kenya into a capital markets hub as envisaged in the 10-year Capital Market Master Plan. The PGN is available on the CMA website at www.cma.or.ke

ENDS

NOTES TO EDITORS:

Asset-Backed Securities

Asset-backed securities are securities backed by future cash flow generating assets such as road, water and other infrastructure levies, mortgage loans, credit card receivables, automobile loans and leases, education loan receivables, equipment loans and health care receivables, whose cash flows are used to repay both the principal and interest on the securities issued to purchase those assets. The securities are issued as part of a securitization process which is the process by which relatively illiquid assets with common features are packaged into interest bearing securities with marketable investment characteristics.

Some of the benefits of securitization include-

1. For a seller of assets or originator it may be an alternative source of funding to borrowing, allow reduction of risk to a particular geographic area or maturity or type of lending, or reduce exposure to a particular borrower or trade creditor;
2. For a non-seller, originator who originates assets directly into a special purpose vehicle (SPV) the objective is to earn fees from origination of assets into the SPV & earning fees as Servicer;
3. Creates new long term asset products for investment for pension funds, insurance companies, collective investments that traditionally have long term liabilities to hedge;
4. Mobilises capital for economic development;
5. Spreads risk by allowing investors exposure to sectors they are not currently invested in or exposed to through a liquid instrument;
6. Allows banks and other providers of short term risk capital to manage liquidity and interest rate risk;
7. Reduces pressure on Central Banks to waive single risk or sector exposure limits by providing funding mechanism to repackage and divest from such a risk or sector;
8. Provides an additional funding mechanism for various projects e.g. infrastructure and promote the provision of credit;
9. Ensures far greater transparency for Central Banks, Insurance, Pension & other regulators & investors with regard to balance sheet risk and asset performance;
10. Helps develop secondary markets for securities;
11. Develops other service professions & diversifies the financial services sector in Kenya; and
12. Allows new entrants into financial services sectors to fund via issuing ABS.

Background Information on the Capital Markets Authority

The Capital Markets Authority (CMA) was set up in 1989 as a statutory agency under the Capital Markets Act Cap 485A. It is charged with the prime responsibility of both regulating and developing an orderly, fair and efficient capital markets in Kenya with the view to promoting market integrity and investor confidence. The regulatory functions of the Authority as provided by the Act and the regulations include; Licensing and supervising all the capital market intermediaries; Ensuring compliance with the legal and regulatory framework by all market participants; Regulating public offers of securities, such as equities and bonds & the issuance of other capital market products such as collective investment schemes; Promoting market development through research on new products and services; Reviewing the legal framework to respond to market dynamics; Promoting investor education and public awareness; and Protecting investors’ interest.