OPINIONBy Joseph S. Kitamirike
On April 5, the Governor, Bank of Uganda published a statement inviting commercial banks to open central securities depository (CSD) accounts at Bank of Uganda for their clients, issue and accept bid submission forms on their behalf, settle clients’ successful bids and buy and sell securities for their clients.
This may have passed as a positive development for the banking sector, but it is a huge setback for the securities industry.
If this is alarming, you will notice that the announcement did not disclose the law covering these BoU activities. And because all securities activities in Uganda are governed by laws, this article invites you to examine the role of BoU as delimited by the Constitution, banking, securities and public finance laws.
Articles 161 and 162 of the Constitution defines the role of BoU and sets boundaries for it. The framers must have wanted to provide that BoU operates free of external influence, while preventing the Bank from interfering with activities outside its mandate.
First, the Constitution stipulates that activities the Bank engages in must be prescribed in law, so BoU cannot lawfully undertake activities that are not explicitly assigned as its responsibility in the law. Second, the Constitution provides that the Bank cannot be directed by any authority or person, so BoU operates independently.
Now, since regulation always results in regulated entities receiving direction from other authorities, this means that BoU cannot be regulated and, by implication, cannot undertake activities regulated by others under various laws.
In keeping with the BoU Act and the Financial Institutions Act, BoU is the regulator of banking, is the banker and adviser to government. The BoU Act prescribes its role in securities as that of an investor in government-issued instruments and an issuer of securities in its own name.
Additional provisions in the Treasury Bill Act and the Public Finance Management Act prescribe BoU as an agent for the government in issuing securities in the primary market. To my knowledge, these roles are the only ones prescribed for BoU in securities issuing and trading.
When you turn to securities law, the Capital Markets Act (as amended) and the Securities Central Depositories Act are the laws that govern activities in the securities market.
Under these laws, there are regulations and rules designed to operationalise, inter alia, the creation of securities, their delivery to the public and management of securities trading.
Among the securities, that are supposed to be managed under these laws are those issued by the government.
Securities law does not provide a role for BoU, whose presence in the securities market is now comparable to Capital Markets Authority opening and operating a commercial bank.
To my knowledge, there are no other laws under which activity in treasury securities can be regulated and managed.
BoU’s announcement, in spite of the constraints in these laws, has the makings of an unregulated single asset-type securities market parallel to the regulated securities market.
It has been argued in some fora that since BoU issues securities, and it is a constitutionally independent body, its securities activities cannot be brought under the regulation of securities law.
This argument is flawed. The only BoU activities provided for are those that can be carried out by it acting as an agent of government, which itself does not operate independent of securities regulation.
Therefore, it is defective to argue that BoU’s role as an agent of government does exempt government-issued securities from regulation. It can, however, be argued that by circumventing securities law as it is doing now, BoU exposes its principal, the government, to charges of breach of securities law.
Most who have examined this challenge feel the need for corrective action. One school of thought favours the view that BoU should exit those activities, especially those relating to the secondary market, and leave them for the duly licensed parties.
Another school favours amendment of the Constitution to give BoU leeway to legalise its currently contentious securities market activities.
Yet another school advocates for deeper reforms which, if necessary, may result in the clarification of the roles.
However, in order not to advocate for reform of a legal environment where we have not yet fully complied, the change we need is first to ensure compliance with existing law.
Only then can we evaluate intentions of the framers of the Constitution and Parliament in enacting laws excluding BoU from trading and custody of government-issued securities. When we come into compliance, it will be clear that BoU is a regulator, a potential investor with latitude to invest in government-issued securities and a potential issuer with freedom to issue securities in its own name.
A body playing these roles cannot legally and without conflict operate securities market infrastructure or manage securities market activity.