Illustration: Colin Daniel

There is a gilt-edged battle taking place over the future of South Africa’s R10-trillion bond market to make it far more transparent and fair to investors than is currently the situation.

Effectively, it is the primary bond dealers, which are predominantly the banks, that initially purchase bonds and then sell them in the secondary market, mainly to institutional investors such as retirement funds and life assurance companies, which look after your long-term savings.

The market is awash with tales about how the primary dealers play off the secondary market dealers against each other while holding the advantage and manipulating prices, using poor disclosure as a weapon.

Seeking reforms are the National Treasury, the Financial Services Board (FSB), the Association for Savings & Investment SA (Asisa) – representing much of the secondary market directly or indirectly – and the JSE.

Since it bought out the Bond Exchange of South Africa in 2009, the JSE is the only local securities exchange on which bonds can be traded, and off-the-exchange trades must be reported. However, attempts by the JSE to bring the listing requirements and trading methods for bonds into the same strict environment that applies to equities have been partially frustrated in the ongoing dispute.

Underlying the dispute is the fact that most trades in the bond market take place in over-the-counter deals between buyers and sellers, which allow the banks to see market information before it is visible to the public. Concluded deals, however, must be reported to the JSE within 30 minutes.

This lack of real-time transparency allows banks to trade on this price-sensitive information, to their advantage, secondary market players say.

The treasury recently published for comment an interest rate strategy policy and principles document containing recommended reforms. In the policy paper, the treasury says both it and the JSE regulator, the FSB, view “the lack of pre-trade transparency and price discovery on the regulated exchange as one of the shortcomings of the existing bond market.

“Neither the JSE nor the FSB has oversight over the pre-trade services, systems and processes of the market participants operating in the bond market space, both in respect of the government and the corporate bond markets.”

Pre-trade transparency means all bond market dealers should be able to see tradeable bids and offers in an accessible, transparent manner on computer screens.

Currently, secondary market dealers must call the primary dealers, who then know what the secondary dealer wants and is prepared to pay or be paid – information that provides them with flows and direction in the market not available to other secondary dealers.

The treasury says the FSB wants the improvements “to extend investor protection to the most vulnerable sector of the economy – the retail consumer”.

Asisa has formed a sub-committee to seek reforms to the bond market. It is also concerned that the easing of the limits on how much retirement funds may invest in debt issued by individual banks in the revised prudential investment regulation 28 of the Pension Funds Act may have created unintended risks for retirement funds.

Andrew Canter, the chief investment officer of bond market specialist Futuregrowth and the head of the Asisa sub-committee dealing with bond market reform, has raised the issue at a number of recent presentations.

He says the issue is particularly important for the long-term (retirement) savings industry because bonds are used as the assets to match the industry’s long-term liabilities, such as retirement fund benefits for members.

Canter says the Asisa view is that the bond market should be fair, transparent and efficient, and it should allow for equal access and for surveillance.

He says Asisa supports the view that trades in bonds should take place on one central order book (the JSE), which would allow anyone to immediately see the volume (size) and price paid in the last trade in real time.

He says that currently there is no true market where prices are freely available. Instead, there is a system of telephone trading, and sometimes misinformation is provided. Different prices are made available to different players, and smaller institutional investors are losing out because of the lack of price transparency.

Canter says that there is no confidentiality prior to an actual offer or trade, when an institutional investor is seeking to buy with the information being made known by dealers, allowing the dealers to profit from the information flow.

Canter says a “corrupt system corrupts all players”.

He says, however, that bonds remain a relatively low-risk asset class and form an important part of “credit” investments that can provide sustainable, stable and excess returns for long-term savers.

The benefits for savers will increase if changes are made to the debt market to improve liquidity and protection.

“Efficient public capital markets increase the availability of funds for businesses and government agencies. Anything that can be done to improve trust and transparency will benefit the country’s competitiveness,” Canter says.