CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

1. Introduction securities on behalf of the National Treasury.
Section 50 (9) gives the Cabinet Secretary powers
This document provides general guidelines to inform the
to appoint and to enter into agreements with
public on the issuance of Kenya Government Securities.
agents for the purpose of raising loans and issuing,
managing, or redeeming national government
2. Definition of Terms
securities.
a. Bid - an offer of a price at an auction.
Pursuant to the PFMA Section 53 (8) (c) Government
b. Multiple price method - an auction in which
securities are issued by the Central Bank of Kenya
each successful bidder pays the price/rate at
as a borrowing agent appointed by the Cabinet
which they bid.
Secretary on behalf of the Government.
c. Competitive bid - a participating bid in the
auction which is allocated according to the 3.2 Central Bank of Kenya Act (CBKA)
price/rate indicated in the bid.
The Central Bank of Kenya Act (CBKA) Section
d. Non-competitive bid - a bid, which is 44 authorizes the Bank to act as fiscal agent of
allocated at the weighted average interest rate and banker to the Government. The Bank in its
determined during the auction. capacity as fiscal agent is assigned the function to
e. Cut-off rate - interest rate limit (maximum rate) administer the public debt including issuance of,
above which the bids will not be accepted. payment of a return on, and redemption of, bonds
and other securities of the government under
f. Weighted average interest rate - weighted
Section 45 (c).
average rate, calculated according to the
successful competitive bids of the auction.
3.3 Agency Agreement between National
g. Coupon - the fixed interest rate of a Treasury Treasury & Central Bank of Kenya
Bond, which the owner of the bond receives at
In line with the above-mentioned legal provisions,
predetermined dates.
there is in place an agency agreement between the
h. Settlement date - the day when the Central
National Treasury (NT) and Central Bank of Kenya
Bank receives payment for the government
(CBK) through Financial Markets Department. The
security/securities awarded/allocated at the
agreement appoints CBK as the fiscal agent of NT
auction.
for the purpose of implementing the government
i. Maturity Date - the date when the redemption
borrowing program as well as issuance,
of government securities must take place.
management and redemption of government
j. Value Date - the date when the security starts securities on behalf of the National Treasury.
to accrue interest.
4. Institutional Framework: Principal-Agent
3. Legal and Regulatory Provisions
Responsibilities
3.1 Public Finance Management Act, 2012 (PFMA)
4.1 The Roles & Responsibilities of the National
The Public Finance Management Act, 2012 (PFMA) Treasury
Section 53 (4) states that the authority of the
As the principal, the overall responsibility for
Cabinet Secretary to borrow money includes the
issuance, management and redemption of public
authority to borrow money by issuing national
debt belongs to the National Treasury. NT will be
government securities.
responsible for:
Section 63 (e) of the PFMA provides that the
a) Formulation of the Medium-Term Debt
Public Debt Management Office (PDMO) shall be
Strategy (MTDS).
the principal in the issuance of government debt
CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

b) Formulation of the domestic debt j) Establishing and maintaining register of
borrowing requirement for government government securities as stipulated in no.
securities. 5 below.
c) Provide CBK with domestic borrowing k) Provision to NT of a detailed analysis of
requirement to cover new borrowing and government securities raised and settled in
redemption obligations. formats agreed upon by the two parties.
d) Design strategies for government securities 5. Government Securities Depository
market development.
Central Bank of Kenya (CBK) has established an
e) Approve government securities auctions
electronic register, Central Securities Depository (CSD)
carried out by CBK.
which is used to account for ownership of Securities.
f) Approve cut off rates in close consultation
Once payment takes place, the register of securities
with CBK.
is updated at CBK and statements are availed to CSD
g) Avail funds for redemptions and coupon account holders via CBK DhowCSD.
payments.
6. Government Securities Instruments
h) Maintain domestic debt data in the debt
database system
Central Bank of Kenya issues Kenya Shilling denominated
4.2 The Roles & Responsibilities of the Central Treasury Bills and Treasury Bonds to raise money for the
Bank of Kenya Government.
As the agent, CBK is primarily responsible for: 6.1 Treasury Bills (T-Bills)
a) Implementation of the borrowing program Treasury Bills are short term government
approved by NT. securities. CBK currently issues T-Bills with
b) Preparation of a borrowing program maturities of 91-, 182-, and 364-day. These
upon receipt of the domestic borrowing securities are issued at a discount and redeemable
requirement from NT. at face value on maturity. The bills are currently
issued weekly subject to applicable terms as
c) Undertaking auctions of domestic
specified on the CBK website.
government securities.
d) Provision of auction results and any other Treasury Bills are traded Over the Counter (OTC).
required information to NT in formats The OTC trading guidelines are available on the
agreed between the two parties. CBK website.
e) Announcing the auction results on behalf
6.2 Treasury Bonds (T-Bonds)
of NT.
Treasury Bonds are medium to long term
f) Preparation of prospectuses for government
government securities. CBK currently issues
securities and facilitate their listing at the
T-Bonds with maturities of between 2 and 30 years
Nairobi Securities Exchange (NSE).
on a monthly basis subject to applicable terms as
g) Preparation of auction rules and guidelines
specified on the prospectus.
in liaison with NT.
h) Implementation of market development An investor earns a return during the life of the
strategies for government securities. security which is redeemed at face value on
maturity. Currently T-Bonds pay interest semii) Preparation, provision and publishing
annually. T-Bonds may be issued at a discount, par
information as required by NT and the
or premium depending on the auction outcome.
market.
CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

They are listed at the Nairobi Securities Exchange institutions, NGOs and entities established by statutes,
to facilitate secondary trading. which are mainly State Corporations.
There are several types of T-Bonds that are Investors may choose to open the CSD accounts directly
available: with the Central Bank of Kenya where no fee is charged
or they may open a client account through an authorized
a) Fixed Coupon Bonds: At present, most
custodial institution including commercial banks and
T-bonds auctioned by the Central Bank
investments banks who may charge a maintenance fee.
of Kenya are fixed coupon bonds, which
means that the interest rate associated All requisite documents and reading materials on how
with the bond will not change over the to invest are available on the CBK website, Financial
bond’s life, therefore semi-annual interest Markets counter at the head office, branches and centres.
payments from these bonds will remain
The Central Bank of Kenya will establish the requirements
constant.
for opening and managing CSD accounts and may make
b) Infrastructure Bonds: Are fixed coupon
changes from time to time to these requirements as the
bonds whose proceeds are used to fund
situation warrants. When such changes are implemented,
specified infrastructure projects. These
Central Bank of Kenya will keep the public informed.
bonds typically see a lot of market interest
because returns from them are currently tax 8. Auction Process
exempt.
8.1 Advertisement
c) Savings Development Bonds: Are fixed
coupon bonds of long dated tenures The purpose of an auction announcement is
targeting savers. to notify the public of the sale of government
d) Zero Coupon bonds: These bonds are securities and provide details of each auction. The
issued at a discount. They do not have fixed announcement, which is published on the CBK
interest and investor’s return is only the website contains the following information:
discount amount equivalent to the yield
a) The issue numbers
quoted.
e) Floating Rate bonds: These bonds pay b) Value date
semiannual interest based on a benchmark
c) Auction date
rate, for example average rate of 91-days or
182-days Treasury bill plus some margin. d) Bids closure date and time
e) Offer amounts
7. Eligibility for Investment in Government
f) Minimum bid amount
Securities and Key Documents
g) Maximum bid amount where applicable
Participation in an auction is open to all categories of
investors provided they have an active CSD account at h) Payment date and time
the Central Bank of Kenya. CSD accounts may be opened
i) Bids submission requirements
in the names of individual investors or corporate entities.
j) Coupon rate where applicable
Individual investors may open CSD accounts either
individually or jointly, while the corporate investors k) Coupon payment dates
include companies, co-operatives and other societies,
insurance companies, banks, non-bank financial
CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

8.2 Bids Submission It is the responsibility of investors to ensure they
obtain their individual auction results from the
Submitted bids must comply with the following
transactions tab on the CBK DhowCSD investor
Rules and Guidelines:
portal and make payment by the stipulated
a) Submission of bids by Commercial Banks deadline.
and Investment Banks for their own
8.5 Settlement
investments and client accounts shall be
through the CBK DhowCSD Graphical User a) For successful bids by commercial banks,
Interface. custody accounts including those under
b) Submission of bids by retail investors shall statutory management and liquidation,
be through the CBK DhowCSD investor the Central Bank of Kenya will directly debit
portal available via mobile app or web- their settlement accounts at the CBK with
based platform or the Treasury Mobile the amount due for successful bids.
Direct (TMD). b) Investors should instruct their commercial
banks to remit payments on their behalf
8.3 Auction Decision
indicating the following account holder’s
a) The method used to conduct auctions is
details; account name, CSD account
the multiple price method.
number, payment key and amount
b) Competitive bids are ranked by the yield payable.
bid, from lowest to highest. The weighted
c) Maturing securities held in a CSD Account,
average interest rate of competitive bids is
amortizations and coupon payments may
computed, and the consideration reports
be rolled over into new securities offered
presented to the Auction Management
by activating the netting (rollover) flag on
Committee to determine the cut off rate
the CBK DhowCSD. Payment for successful
and amount to be accepted.
bids will automatically be processed and
c) Allotment of bids is done in the following any refund amount paid to the investors
manner: commercial bank account.
• Competitive bids up to the cut-off rate d) Investors who do not honor payments for
are allotted at bid rate. their successful bids will be barred from
• Competitive bids above the cut-off investing in government securities for a
rate are rejected. period prescribed by the Bank.
• Non-competitive bids are allotted at 8.6 Rediscounting
the weighted average rate at the cutIn the event an investor needs to redeem their
off rate determined at the auction.
securities before they mature and is unable to
• All non-competitive bids are accepted find a buyer in the secondary market, the Central
in full. Bank will buy the securities back as a last resort
• Where several bids fall at the cut- at 3% above the higher of either the prevailing
off rate, bids may be prorated at the market yield or the coupon rate.
discretion of the Auction Management
8.7 Discretion
Committee.
8.4 Results Announcement With the approval of The National Treasury, The
Central Bank of Kenya has the right and discretion
After the conclusion of the auction, the auction
to:
outcome is published on the CBK website.
CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

a) Accept or reject, any bids submitted in an 10. Enquiries and Additional Information
auction.
For enquiries, please contact Central Bank of Kenya,
a) Accept more or less than the amount
Financial Markets Department on 020 286 0000 or any
specified in the auction announcement.
Central Bank of Kenya Branch in Mombasa, Kisumu or
a) Change the terms and conditions of an
Eldoret or Centre in Nyeri, Nakuru, Meru and Kisii or send
auction and inform the public.
an email to or visit the CBK
a) Modify the terms and conditions of new website on www.centralbank.go.ke
securities and the pattern of their offerings
at any time.
a) Cancel an auction.
9. Amendment Clause
Any part of this document may be amended by CBK
through issuance of a notice specifying the amendment
thereof.
CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities

CENTRAL BANK OF KENYA

Auction Rules and Guidelines for the Issuance of Kenya Government Securities