Banking Circular No 6 of 2008 - Introduction of the Interbank (“Horizontal”) Master Repurchase Agreement (MRA)

)' CENTRAL
BANK OF KENYA
BANKI
KUUYA
KENYA
September 9, 2008 Haile Selassie Avenue P. O. Box 60000 - 00200 Nairobi Kenya Telephone: 2860000 Telex: 22324 BANKINGCIRCULARNo.6 OF2008 TO:CHIEFEXECUTIVESOFCOMMERaALBANKS INTRODUCTIONOF THE INTERBANK ("Horizontal") MASTERREPURCHASE AGREEMENT(MRA).

A RepurchaseAgreement(Repo)is a money market financial instrument, usedto facilitate monetary operationsand the developmentof liquid financial markets. In June 2006, Central Bank of Kenya (CBK) entered into a Master Repurchase Agreements(MRA)with commercialbanks,to supportthe implementationof CBK's "Vertical" Repoprogram for monetarysystemliquidity managementand Intra-Day Liquidity Facility (llF) transactions.

The Central Bank of Kenya (CBK) has been facilitating the introduction of an additional Master RepurchaseAgreement(MRA) for commercialbanks, to govern repurchasetransactionsbetweencommercialbanks("Horizontal" Repo).To facilitate its introduction, preliminary assessment,deliberationsand related activities, were conductedthrough an InterbankRepoCommitteecomprisingrepresentationby CBK officialsand a TreasurersForum,representingapproximatelyten commercialbanks, whichwasconstitutedby CBKin June,2007: After extensivedeliberations,the Committeeagreedon the following key issuespertainingto the program:
i) The consensusto adopt the Global Master RepurchaseAgreement (GMRA) model developed by the International Securities Market Association(ISMA)and the BondMarket Association(BMA)in 2000.

This was customizedto suit the domestic market situation, taking cognizanceof technological levels of developmentand state of the market.

ii) The recommendationthat CBK should circulate the proposedMRA, along with associatedprogram description,explanatory notes,as well as a processflow document,to enablebank officers and associated 1 persons, appreciate the characteristics and operations of the proposed Horizontal Repo Program.

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Following the amendment of the Internal Loans Act (ILA)in October 2007, the process of gazettement of the regulations to the Act, to give it a commencement date, should be embarked upon. This is currently on course. The amended Act will explicitly recognize dematerialization and secondary trading of Government securities. Notwithstanding the preceding, the Bank, on considering the compelling mitigating factors for expedited rolling out Horizontal Repos, took a decision to fast track the implementation of this program, while awaiting gazettement.

Consequently therefore, the execution of the Master Repurchase Agreement (MRA)for Horizontal Repos and introduction of Horizontal Repos between banks should proceed. In the meantime the Bank will make a deliberate effort to ensure a speedy conclusion of the gazettement process.

iv) The importance of ensuring compliance with the Capital Markets Authority's (CMA)statutory provisions,with regard to Reposinvolving listed securities, was highlighted. Given the nature of the proposed facility, the Committeeexpressedthe expectation that the Horizontal Repotransactions would be processedin a secure and efficientmanner, which would result in Delivery versus Payment (DVP). Taking cognizance of that position,CBk sought and was granted approval by the Capital Markets Authority (CMA),for Repotransactionsinvolving Treasury Bonds,conducted under the MRA,to be transferred without going through the securitiesexchange. This approval was granted on the understanding that the HorizontalRepo Program currently being introduced does not constitute an outright sale of securities but are essentially financing arrangements with a predetermined repurchase date.

v) In customizing the MRA, the Committee recognized that certain provisionsin the GlobalMasterRepurchaseAgreement(GMRA)do not conform to the existing infrastructure and/or market practices. For example,one such variation is with regard to clause 6(h) and (i)of the GMRA which provides for 'Settlement Netting'. In Kenya, CBK's settlement platform operates on a "Gross Settlement" basis.

Accordinglyand in order to addressthe identifieddifferences,the CBK has introduced a SupplementaryAnnex No. I to the MRAto amend the relevant portions of the MRAwhilst providing an explanationfor the amendments. Also, whereas the GMRA provides for eligible2 collateral to include government securities and other financial instruments, the Repo being intiOducedwill allow only Government securities(Le.,Treasurybonds and bills)to be used as collateral.

Pursuant to this program being introduced, Horizontal Repos will be conducted between commercial banks. Banks participating in this facility will be required to execute and exchange Master RepurchaseAgreementsamong themselvesand notify CBK through a prescribed duly authorized letter listing counterparties to the agreement.

Any subsequent variations, amendments or changes to the Agreement will be dealt with similarly. < The purpose of this Banking Circular istherefore to; I. Forward to all commercial banks, the following documents, in connection with the program: .

i) Master Repurchase Agreement. ii) Guidelines for the operations of Horizontal Repo Transactions. Hi) Process Flow Document.

iv) Code of Conduct v) Letter of confirmation of executed MRAwith counterparts 2. Advise all commercial banks that, effective Friday. September 12, 2008, CBK will introduce a Horizontal Repo transaction platform for inter-bank participants. This facility will be under the Monetary Operations & Debt Management Department of the Bank. All dealings, delivery and settlement instructions shall be conveyed via the prescribed SWIFT message types as set out in the attached guidelines and that; 3. Advise that only banks which will have executed and exchanged Horizontal Repo MRAsand have formally confirmedas such to CBKwill be allowed to participate in HorizontalRepoTransactions.

?: JA. EKSONM. KITILI ~~M ..

DIRECTOR, MONETARYOPERATIONS&DEBTMANAGEMENTDEPARTMENT.