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It will also offer technical assistance in partnership with regulators and industry players, to build skills, regulatory frameworks and market infrastructure
Interbank borrowing is expected to become less risky after 15 financial institutions, including Bank of Uganda at the weekend signed a memorandum of understanding to join TradeClear, a platform that ensures repayment of money borrowed between banks.
The platform, which offers an Umbrella Guarantee Facility, created by Frontclear, a development finance company that seeks to improve money markets, will provide credit guarantees to cover counterparty credit risk in repo, derivative and securities lending.
It will also offer technical assistance in partnership with regulators and industry players, to build skills, regulatory frameworks and market infrastructure.
In May 2019 – Frontclear and Bank of Uganda formalised their partnership through a memorandum of understanding, which paved the way for accelerated development of Uganda’s money markets.
Speaking at the launch of the Umbrella Guarantee Facility in Kampala at the weekend, Bank of Uganda deputy governor Michael Atingi-Ego, said TradeClear will cover the risk of interbank defaults, noting that if a bank fails to pay the lender in a secured transaction, they will be secured from default.
“The establishment of the facility in Uganda’s money market has been long overdue,” he said, noting that guaranteeing mark-to-market losses upon default will be mitigated and trading lines are expected to increase across the market.
“We hope that a meaningful interbank market will be develop on the back of TradeClear, and in particular, that a deep and efficient repo market will take off. Whilst Uganda enjoys a relatively developed swap market, the horizontal repo market remains in its infancy with very few transactions occurring regularly (with roughly 10 percent of total secondary market trades for the year to May 2022),” Dr Atingi-Ego said.
In advanced markets, turnover in repo markets can account to as much as 40 percent of total secondary market activity.
Repo markets are critical for the functioning of the financial system as a liquid and deep repo market will improve monetary policy transmission, facilitate depth in the secondary bond market and allow for meaningful interest rate benchmarks to be established.
TradeClear is an interbank trading platform managed by financial services company, Frontclear and is regulated by Bank of Uganda.
Mr Charles Katongole, the Uganda Bankers Association treasurer forum, said by financial institutions joining TradeClear, it will improve flow of money in equity markets as well as improve management of capital.
According to Mr Philip Buyskes, the Frontclear chief executive officer, so far 15 out of the 23 commercial banks, have joined the platform. However, he said, because of the platform’s importance to Uganda’s money markets, he is optimistic that other banks will soon join because the platform cushions them against risks.