The good and bad of dealing in omnibus stock accounts
- Some of the benefits of an omnibus account, also known as a “cash management” or “asset management” account, involve potentially faster distribution of dividends and stock information.
- It should be mentioned that due to the changing environment and investment practices (global securities firms increasingly use omnibus accounts to process trading orders) there has been a growing need for omnibus accounts.
- That said, despite their obvious advantages, omnibus accounts present several challenges.
In his budget speech for fiscal year 2020/2021, Cabinet Secretary to the Treasury Ukur Yatani made several proposals regarding capital markets.
The main ones are the amendment of the law on central depositories to allow the opening of omnibus investment accounts, the creation of an electronic OTC secondary market platform for government securities and the amendment of the law on the Capital Markets Authority (CMA) to allow the court to and rule on any appeal within 90 days.
Out of the three, the omnibus suggestion stood out for me for three reasons; the ability to stimulate trade (sustainable turnover rates are less than 10%), facilitate the participation of foreign investors and possibly reduce transaction costs.
To begin with, omnibus investment accounts are a type of nominated account in which the operator (mainly the stockbroker or investment bank) manages the collective position of securities of several investors on a single account.
In other words, the trader receives trading orders from its underlying clients and places multiple orders through a single account.
Some of the benefits of an omnibus account, also known as a “cash management” or “asset management” account, involve potentially faster distribution of dividends and stock information.
It should be mentioned that due to the changing environment and investment practices (global securities firms increasingly use omnibus accounts to process trading orders) there has been a growing need for omnibus accounts.
That said, despite their obvious advantages, omnibus accounts present several challenges.
First, if the operator goes bankrupt, it can increase the risk for the investor of not being able to recover their assets.
Second, omnibus accounts can be used to hide the identity of people engaged in illicit activities. If proper controls are not in place, omnibus accounts can facilitate violations of CMA laws, such as manipulative stock trading and / or insider trading, as well as other illicit activities.
Third, when it comes to the operation of an omnibus account, the CMA may face other more complex issues such as the allocation of securities (as well as gains or losses from securities transactions) and the execution of securities. instructions from beneficial owners.
In addition, if the omnibus account becomes accessible to foreign investors, it will generally be quite difficult, if not impossible, for the regulator to identify or locate the real beneficial owners.
In short, the omnibus account is another way for investors to bypass some of the “paperwork” associated with buying and selling stocks.
Their introduction will make account management, trading and settlement procedures more convenient. For foreign investors, they will likely benefit from significantly reduced transaction costs as separate accounts for each of their orders are integrated into one account.
However, despite the government’s growing need to improve inclusiveness and open up access to investment opportunities, omnibus accounts come with risks.
As such, they should be viewed with caution, only after appropriate measures are in place.
The government will therefore need to work with all relevant stakeholders to establish specific policies created for omnibus accounts that all intermediaries can adhere to.
Mr. Mwanyasi is the Managing Director of Canaan Capital