Regional Capital Markets, Integration and Harmonization: Way Forward

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Regional Capital Markets, Integration and
Harmonization Way Forward

• SAM MENSAH
• Ministry of Finance and Economic Planning, Ghana
• 2006 Annual Conference of the African Stock
  Exchanges Association
• Johannesburg, South Africa

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What is Capital Market Integration?

• Regional financial markets are said to be
  integrated if there is perfect capital mobility
  such that there is no relation between domestic
  saving and domestic investment, as saving
  responds to the regional opportunities for
  investment while investment is financed by the
  regional pool of capital.
• Translated into regional terms, capital market
  integration means that capital should move freely
  across the boundaries in a region with minimal
  friction (transaction costs)

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In practice.

• Issuers and investors should be free to act
  across the region and in any member state
• Intermediaries should be able to act across the
  region and recognized elsewhere
• Convergence of accounting standards
• Integration of clearing and settlement systems

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What capital market integration is not

• A single market serving several countries does
  not necessarily imply integration unless
  impediments to the cross-border flow of capital
  are removed
• Therefore, both within region single markets and
  within region multiple markets can be fragmented

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Why integrate capital markets?

• Integrated capital markets mean
• Deeper capital markets
• a single pool of liquidity
• more competition
• a greater range of investment.
• Results in a more efficient financial system and
  increased output, more jobs and lower prices.
• A lower cost of capital for the businesses.

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Some urgency is required

• African countries are rapidly reforming their
  exchange control regimes with capital account
  liberalization
• Pace of technological change, market innovation
  and globalization
• Without competitive, liquid markets issuers and
  investors will look elsewhere

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Key Reforms to Foster Integration
Greater Capital Market Integration
Deep and More Resilient Capital Markets
Regional Cooperation

• Strengthening Capital Markets
• Regulatory reform
• Pensions sector reforms
• Corporate governance

• Minimizing risks
• Moving towards risk-based supervision
• Addressing cross-sectoral and cross-border issues
• Safeguarding market integrity

• Removing impediments
• Capital account liberalization
• Liberalizing trade in services

• Building infrastructures
• Clearing and settlement systems
• Credit rating agencies

• Harmonizing rules and practices
• Implementing global standards and best practices

Preconditions (e.g. sound economic, legal and
judicial, accounting and auditing frameworks
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Regional integrations rests on several pillars

• Preconditions
• Multidimensional approach to integration requires
  several related initiatives
• Strengthening capital markets
• Building infrastructures
• Minimizing risks
• Removing impediments
• Harmonizing rules and practices
• Regional cooperation required all these
  dimensions

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Strengthening capital markets

• developing institutional investors, especially
  pension funds
• strengthening corporate governance
• improving the transparency and consistency of
  financial statements.

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Building infrastructures

• enhance the depth and liquidity of capital
  markets
• establish links between national clearing and
  payments systems
• create regional credit rating agencies and
  benchmarks.

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Minimizing Risks

• Risks of Market integration especially as
  institutions and individual invest in new markets
  and instruments.
• potential for currency mismatches
• risks arising from country exposures,
• risks from institutions that are increasingly
  active in a variety of financial sectors and
  geographical regions.
• A strong framework for prudential regulation and
  supervision is necessary to ensure that risks
  arising from integration are being assessed and
  managed well.
• move towards risk-based supervision, and
• changes in prudential regulation and supervisory
  oversight to address crossborder activities.

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Removing Impediments

• Legal barriers remain
• Removal of capital and exchange controls could
  increase cross-border flows and competition and
  enable investors and firms to tap regional
  markets to find the lowest cost of funding and
  highest risk-adjusted return.
• Limits on the level of ownership and associated
  rights
• In many countries, the existing prudential
  requirements biases investment toward domestic
  assets (e.g. restrictions on foreign stock
  ownership and investments of mutual funds/unit
  trusts)

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Harmonizing Rules and Practices

• Address major differences in laws, regulations,
  and tax treatments that still prevent investors
  from building pan-regional portfolios.
• Emphasize convergence with globally accepted
  standards and best practices to facilitate easier
  global integration.

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Where are we now?

• African Regional Economic Communities (RECs)
• ECOWAS
• UEMOA
• WAMZ
• CEMAC
• EAC
• SADC
• COMESA
• ARAB MAGHREB UNION
• Some are overlapping e.g. SADC/EAC/COMESA
• Not all RECs have an active capital market
  integration program

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UEMOA/BRVM FRAMEWORK

• Union Economique et Monétaire Ouest Africaine
  (UEMOA) established in 1973 and made up of eight
  countries (Benin, Burkina Faso, Cote d'Ivoire,
  Guinea Bissau, Mali, Niger, Senegal, and Togo).
• BRVM opened in 1998
• Underpinned by UEMOA Treaty signed is 1973
• Common central bank BCEAO
• Common regulator -Regional Council for Public
  Savings and Financial markets
• Common Business Law (OHADA)
• Common Insurance regulator
• BVRM has branches in each UEMOA country and its
  headquarters in Abidjan, Cote D'Ivoire. Although
  the bourse is majority owned by the private
  sector, the member states own 13.4 of the
  capital.

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UEMOA/BRVM FRAMEWORK (2)

• Computerized with satellite links, which allow
  brokers to transmit orders from any of the member
  countries to the central site in Abidjan, to
  check and interact with the order book and to see
  information about the market and the central
  depository.
• 15 brokerage firms.
• Trades are cleared and settled at the Depositaire
  Central/Banque de Reglement SA.

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UEMOA Financial Sector Regulatory Framework

• Regional Bodies
• the Banque Centrale des Etats de l'Afrique de
  l'Ouest (BCEAO),
• the Banking Commission,
• the Conseil Regional de l'Epargne Publique et des
  Marchés Financiers (CREPMF),
• the Conférence Interafricaine des Marchés de
  lAssurance (CIMA, the regional insurance
  regulator
• the Conference Interafricaine de la Prevoyance
  Sociale (CIPRES), which oversees national social
  security systems.
• OHADA (Organisation pour l'Harmonisation en
  Afrique du Droit des Affaires) Treaty harmonizes
  business law in 14 countries
• Full capital account liberalization based on
  common currency (CFA Franc)

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Communauté Économique et Monétaire de l'Afrique
Centrale (CEMAC)

• CEMAC, a regional grouping whose membership
  comprises Cameroon, Central African Republic,
  Chad, Republic of Congo, Equatorial Guinea and
  Gabon. CEMAC
• Common central bank, the Banque des Etats de
  l'Afrique centrale (BEAC) with common currency
  pegged to the euro.
• Efforts to create regional market have floundered
  with Cameroon going it alone
• Douala Stock Exchange
• the Commission des Marchés Financiers (the
  Securities Commission)
• Separate bourse established in Libreville (Gabon)

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SADC

• Established Committee of SADC Stock Exchanges
  (1997)
• Harmonized Listing requirements
• On the drawing board
• Common framework for clearing and settlement
• Common standards for market dealers

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EAST AFRICAN COMMUNITY

• 1997 MOU between Regulators of Kenya, Tanzania,
  and Uganda setting out cooperation goals for the
• three countries securities markets and the set
  up the East African Member States Securities
  Regulatory Authorities (EASRA) as the
  coordinating regulatory body for capital market
• Article 80 of the 1999 Treaty of East African
  Cooperation recognizes EASRA
• Cooperation occurring at various levels
• Cross border listing of debt and equity
  instruments

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West African Monetary Zone (WAMZ)

• Ghana, Nigeria, Sierra Leone, Gambia and Guinea
• Two stock exchanges
• Nor formal regional cooperation except MOU
  between stock exchanges and SECs of Ghana and
  Nigeria
• Heads of state directed a cross listing of
  securities as part of implementation WAMZ
  monetary union but no progress has been made

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In Summary

• BRVM single market comes closest to integrated
  regional market because of
• Convergence on preconditions (macroeconomic,
  judicial, auditing and accounting, etc)
• Common regulatory framework
• Single market does not guarantee all benefits of
  integration (e.g. liquidity)
• Mixed results in other regional economic
  communities (SADC, EAC, COMESA, WAMZ)

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Possible reason for slow progress

• Preoccupation with harmonization
• Regional efforts have overemphasized
  harmonization while elimination of impediments to
  capital flows has been largely overlooked
• Putting the cart before the horse?
• Harmonization is not necessary for financial
  market integration
• Principle of Mutual Recognition and Home
  Country Control is important

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Lessons from EU Harmonization Model?

• Basis of EUs integration is that minimal
  harmonisation of rules and mutual recognition,
  should lead to gradual convergence over time
• Financial Services Action Plan (1999) implemented
  through a series of directives (agreements)
  adopted one at a time after long periods of
  negotiation
• Regulation on International Standards
• Financial Conglomerates Directive
• Market Abuse Directive
• Pension Fund Directive
• Markets in Financial Instruments Directive
  (effective November 2007)
• Under Preparation
• Prospectus Directive
• Investment Services Directive
• Transparency Directive
• Takeovers Directive
• Principle of home country supervision
• Single passport allows financial institutions to
  do business across EU armed only with the
  approval of their home authorities

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Possibilities going forward..

• Make haste slowly
• Keep multidimensional integration needs in focus
  and avoid obsession with harmonization
• Agree on common principles setting minimal
  standards for mutual recognition
• Agree on the key national rules which must be
  removed
• Agree on mutual recognition of all regional
  regimes
• Coordination of supervision to facilitate the
  resolution of differences in application and
  interpretation
• Remove discrimination against nonresident
  investors and issuers

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THANK YOU!