Treasury to craft tax rules for securities lending and borrowing

CMA chief executive Paul Muthaura (left) and Financial Services Volunteer Corps CEO Andy Spindler at a workshop in Nairobi on March 9, 2017. PHOTO | SALATON NJAU

What you need to know:

  • CMA is working with The Treasury to ensure that there is tax neutrality for those looking to borrow or lend stocks.
  • This is mainly to those looking to do margin trading or short selling— so that they don’t enjoy a tax advantage over normal board traders.
  • Uneven taxes in a securities market can cause distortion by driving activity to one segment at the expense of the other.

The Capital Markets Authority (CMA) is working on a tax framework for securities lending and borrowing that will ensure the product will not distort normal trading at the NSE once it goes live.

CMA chief executive Paul Muthaura said Thursday that the CMA is working with The Treasury to ensure that there is tax neutrality for those looking to borrow or lend stocks.

This is mainly to those looking to do margin trading or short selling— so that they don’t enjoy a tax advantage over normal board traders.

Securities lending and borrowing is a system in which traders borrow shares that they do not already own, or lend to other investors the stocks that they own but do not intend to trade on immediately. 

Uneven taxes in a securities market can cause distortion by driving activity to one segment at the expense of the other.

“With regards to a facilitative tax framework, we are in engagement with the National Treasury with a view to ensuring that there is tax neutrality for all SLB transactions in line with international best practice,” said Mr Muthaura.

“The framework itself is already with the Treasury awaiting passage and we remain hopeful that it will be adopted as part of the budget statement for this year which will be presented in the next coming weeks.”

Under short selling, savvy investors are able to sell borrowed shares or bonds in the hope of a future price drop that will allow them to buy back the same stock at a profit.

Short selling will only be carried out by regulated persons, as per draft regulations released by the CMA in October 2016.

Speaking on the side-lines of a capital markets stakeholders forum on market liquidity in Nairobi, Mr Muthaura said significant progress has been made in putting in place the SLB framework.

“We have had a number of meetings with the National Treasury budget team and they have recognised the opportunity presented by introduction of SLB,” he said.

The CMA and other players in the market are banking on the introduction of short selling to increase the liquidity in the market, especially on the corporate bonds segment.

Corporate bonds lag behind government securities in terms of activity in the market, accounting for less than half a per cent of total bond turnover at the NSE.

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