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Bond market reforms a long time coming

30 Apr 2019


New standards will improve listing requirements


About a decade after it acquired the Bond Exchange of SA and became what it now proudly calls the largest regulator of the continent’s listed debt market, the JSE is finally hammering out a new set of standards that will improve the listings requirements for such instruments.

This is significant because trade in the local debt market is, by no small measure, larger than that of the equity market. Globally, the bond market is the largest exchange of securities in the world, worth as much as $100-trillion, according to Pacific Investment Management Company, which runs one of the world's biggest fixed-income funds.

While the JSE accounts for a drop in that global ocean, about R25bn still goes through our market daily, compared to R16bn on the stock market. Take away Naspers, which accounts for about a quarter of the trade in stocks, and that gap is even bigger.

The total value of the local debt market is about R1.8-trillion, according to the JSE, and more than half of that is placed by the government, with the rest issued by by state-owned institutions such as Eskom; local companies and other African countries.

And the buyers of that debt are ordinary workers, who get exposed through their pension funds and unit trusts. Put more plainly, ordinary people lend to companies and governments when they buy their bonds.

In theory, the bond market, like the equity market, is a regulated, safe place where buyers and sellers can meet, on equal terms, armed with equal information. In practice, it is anything but, hence the push for change.

What they want is hardly controversial, a level of disclosure similar to that required from equity instruments, for a start. In short, more transparency. Stronger listings rules should make the bond market a better place for investors.

The equation goes something like this: better investment protections and stronger contractual terms will give investors more comfort to buy corporate bonds, which should ultimately see more corporate bonds being issued and traded. That will oil the wheels of industry by facilitating capital raising by companies.

Better disclosure from state-owned entities that issue debt would presumably do much to prevent the large-scale malfeasance that has ripped apart companies like Eskom and Transnet, to the detriment not just of bond investors, but the country as a whole.

This is why opposition to some of the reforms, mainly from local banks, is baffling.

After all, when it comes to writing a loan, banks have asset and liability committees that that go through a rigorous process before any money leaves their vaults. So why should it be different for listed bonds?

Well, for one, the banks are rarely the buyers of the debt that is listed. Another problem is that the banks that arrange and issue bonds also lend to the same companies who go to market to raise capital.

That means that they tend to protect their loans at the expense of institutions who trade in the listed debt. In the event of a default or what’s more politely known as a “credit event” the banks will make sure they stand in the front of the queue to recover money from a company.

The institutions who buy a company’s bonds generally stand last in the recovery line.

No wonder critics say the game is rigged.

To be fair to the JSE, balancing these warring demands is no easy task. But the exchange has clearly been slow to support investors in their call for better protections. And it is investors who the JSE should be protecting: without them there is no listed marketplace.

The banks resisting reform are on the wrong side of this argument.

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