Kazakhstan’s financial regulator was scrutinizing trades carried out by firms that include those run by billionaire Timur Turlov as part of a probe into possible manipulation of bond prices.
(Bloomberg) — Kazakhstan’s financial regulator was scrutinizing trades carried out by firms that include those run by billionaire Timur Turlov as part of a probe into possible manipulation of bond prices.
The inquiry centered on transactions last fall involving securities issued by Kazakhstan Sustainability Fund JSC, a state entity controlled by the central bank, according to people familiar with the matter.
Turlov’s Freedom Holding owns Kazakhstan’s biggest brokerage, which was an underwriter and acted as a market-maker for some of the bonds, they said, meaning it managed buying and selling of the bonds. Besides Freedom, only one other Kazakh broker served as a market-maker in the fund’s debt in recent years, a Bloomberg analysis of stock exchange filings shows.
Nasdaq-listed Freedom Holding’s units also invested in the debt for use as collateral in repurchase agreements to raise money-market funding. A steep monetary-tightening cycle that took the central bank’s benchmark seven percentage points higher in 2022 risked saddling it with losses, since debt prices fall when interest rates rise.
The regulator was probing trades that may have kept yields on the securities artificially low, the people said, declining to be identified because the information isn’t public.
If it determines that any manipulation took place, the market players involved will likely face fines, they said.
In a statement to Bloomberg, Freedom said it’s so far received no complaints from the regulator over yields on securities issued by the sustainability fund. The company denied that any of its transactions — which it said are routinely audited — amounted to manipulation.
Market liquidity and duration terms were among factors that dictate the yields on the fund’s debt, according to Freedom. Yields for its long-term instruments are in accordance with market expectations, it said.
The sustainability fund separately said it has no information and plays no role in secondary trading of its debt and offers it to an unlimited pool of investors during primary issuance.
The regulator didn’t respond to two requests for comment.
The investigation puts a spotlight on a brokerage whose US shares have rallied almost 900% in the past five years and made Russian-born Turlov a fortune estimated at $2.8 billion.
Freedom has already drawn scrutiny before, including over relations with customers who were told to buy its own shares in exchange for access to US stock listings. In the past, it’s responded to such criticism by saying its business is in line with market practice.
Three Freedom auditors were also fined by US officials for failing to include some disclosures regarding a Belize affiliate and other violations. Freedom said it’s addressed a significant part of those issues in the 2021 and 2022 financial results.
Freedom, based in Almaty, has offices from Germany to Azerbaijan and became prominent by providing retail investors access to stocks and initial public offerings abroad.
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In recent years, Freedom has been buying the debt of state entities like Kazakhstan Sustainability Fund, according to the people with knowledge of the details. Investors tend to view bonds that are fully backed by central banks as a safer investment.
But the sharp lift-off in Kazakh interest rates last year risked driving bonds lower. Policymakers hiked rates six times in 2022.
The extent of monetary tightening has resulted in the inversion of Kazakhstan’s bond yield curve, when short-dated yields eclipse those on longer maturities. The gap forces investors to book losses on existing holdings that dropped in value in the process.
Freedom’s position in the Kazakh fixed-income market reached a “sizable” $950 million as of end-September last year, Roman Rybalkin, an analyst at S&P Global Ratings, said by email. Besides debt issued by the Finance Ministry and Kazakhstan Sustainability Fund, it also owned a range of mostly tenge-denominated corporate bonds, he said.
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