The government is set to revise its securities law under a new bill to liberalise and expand the operations of the Central Securities Depository (CSD), allowing participation from entities other than the National Bank of Rwanda, according to the Ministry of Finance and Economic Planning. The bill, which governs central securities depositories, qualified financial contracts, collateral arrangements, and close-out netting agreements, broadens the definition of “securities” to include shares in a company's share capital and various debt instruments, such as bonds, debentures, treasury bills, and mortgage-backed securities. The bill was passed by the lower chamber of Parliament on Tuesday, May 27, and awaits publication in the official gazette for it to become a law. ALSO READ: How new financial instruments can boost Rwanda's stock market As per the bill, debt securities include bonds; debentures; debenture stock; loan stocks; certificates of deposit; commercial paper; treasury bills issued by the Government of Rwanda; subordinated and limited recourse debt securities issued by a trustee in respect of a trust; asset-backed securities and mortgage-backed securities; investment instruments in real estate investment trusts regardless their structure; and eligible long-term insurance contracts. Securities also include bills of exchange; promissory notes, other than if structured as asset backed securities; and certificates of deposit issued by a bank. Background In an explanatory note of the bill, the government indicated that the revision of the law governing the holding and circulation of securities was in line with the country’s broader goal to attract new international players to the Rwandan capital market industry. To this end, it indicated that the country has embarked on revising policies and legal frameworks that will allow it to be competitive on the international market. Apart from liberalising and opening central securities depository (CSD) operations to other operators, the country also seeks to separate the regulatory role of the central bank from its operational role of the CSD. It stated that the central bank cannot be an operator of a CSD and at the same time be its regulator, hence proposing the granting of the regulatory mandate to Rwanda’s Capital Market Authority (CMA). ALSO READ: How envisioned capital market academy will contribute to Rwanda’s long-term prosperity In addition to the capital markets strategy prepared by CMA, the draft law is also based on key regulatory guidelines, including the international principles laid out by the International Organisation of Securities (IOSCO) of May 2017, it pointed out, adding that the bill introduces new concepts in the CSD law to cover qualified financial contracts, close-out netting provisions and financial collaterals. ALSO READ: Rwanda’s Capital Market: How investors are protected Although the CSD operated by the central bank is exempted from the requirement to be licensed by CMA, other participants are subject to regulation by CMA in relation to CSD related activities. Legal framework for CSDs to handle repurchase agreements The bill also provides for a legal framework for the CSDs to handle repurchase agreement (REPO) transactions especially in case of insolvency of one of the parties. A repurchase agreement (REPO) is an agreement to sell securities and buy them back later at a higher price. The main issue that has been raised by stakeholders is the enforceability of the netting provisions in case of default by one of the parties in a REPO transaction, according to the explanatory note of the bill. The new draft law provides for the protection of parties in a REPO transaction against enforcement of the insolvency law in case of insolvency of one of the parties to the contract. CSD operator requirements The authority may grant a license to an applicant that is a company incorporated in Rwanda or a company registered as a foreign company in the country, which wishes to establish CSD in Rwanda if it determines that they met the set conditions. They include that the company applying for a license must have the required paid-up capital determined by authority; the shareholders have the adequate means to support the conduct of CSD activities in case of need; and the applicant has submitted to the regulatory authority certification that its systems and proposed CSD rules comply from the commencement of its operations with the provisions of the law. They also include that the projections concerning the financial status of the operator of CSD in respect of the future conduct of CSD activities are documented and demonstrate a sound financial basis for carrying out the CSD activities for which it is applying for a license. Securities’ economic potential MP Théogène Munyangeyo, the Chairperson of the parliamentary Committee on Economy and Trade which analysed the bill said that the benefits expected from it include helping establish a safe and efficient system for securities investors in Rwanda. So far, he said, securities in CSD including those of companies registered on capital market, and government treasury bonds/bills amount to $3.3 billion (approx. Rwf5.5 trillion), which accounts for 26 per cent of Rwanda’s gross domestic product (GDP). “90 per cent of the investors are domestic,” he said adding “this is a huge number that requires good laws in order to safeguard these securities for the protection of investors’ interests.” The move, Munyangeyo said, could back the government and private sector’s plan to get long-term investments mobilised domestically. “Also, this contributes to the government’s plan for self-reliance and reducing reliance on external grants or loans,” he observed. MP Jean Claude Ntezimana wondered whether liberalising CSD operation powers from central bank monopoly will not result in abuse and loss of trust by securities holders, which may derail business. “You realise that the powers were so far held by NBR as a major national entity. If they were granted to other, private entities, will it not create a problem,” he asked. Munyangeyo responded that there was a concern where the central bank as the sole CSD operator was also serving as the securities regulator in the country, adding that the bill aims to make the country improve operations and meet international standards which could also contribute to the Kigali International Financial Centre performance. He added that entities that meet the requirements to be CSD operators can do that, including foreign ones, as long as due diligence was made to ensure they qualify for the service provision.
