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Regional Capital Markets, Regional Capital Markets, Integration and Integration and Harmonization: Way ForwardHarmonization: Way Forward

SAM MENSAHSAM MENSAH

Ministry of Finance and Economic Planning, GhanaMinistry of Finance and Economic Planning, Ghana

2006 Annual Conference of the African Stock Exchanges 2006 Annual Conference of the African Stock Exchanges Association Association

Johannesburg, South AfricaJohannesburg, South Africa

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What is Capital Market What is Capital Market Integration?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….In practice….

Issuers and investors should be free to act Issuers and investors should be free to act across the region and in any member stateacross the region and in any member state

Intermediaries should be able to act across Intermediaries should be able to act across the region and recognized elsewherethe region and recognized elsewhere

Convergence of accounting standardsConvergence of accounting standards Integration of clearing and settlement Integration of clearing and settlement

systemssystems

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What capital market What capital market integration is notintegration is not

A single market serving several countries A single market serving several countries does not necessarily imply integration does not necessarily imply integration unless impediments to the cross-border unless impediments to the cross-border flow of capital are removedflow of capital are removed

Therefore, both within region single Therefore, both within region single markets and within region multiple markets and within region multiple markets can be fragmentedmarkets can be fragmented

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Why integrate capital Why integrate capital markets?markets?

Integrated capital markets mean:Integrated capital markets mean: Deeper capital markets Deeper capital markets a single pool of liquidity a single pool of liquidity more competitionmore competition a greater range of investment. a greater range of investment.

Results in a more efficient financial system and Results in a more efficient financial system and increased output, more jobs and lower prices.increased output, more jobs and lower prices.

A lower cost of capital for the businesses.A lower cost of capital for the businesses.

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Some urgency is requiredSome urgency is required

African countries are rapidly reforming African countries are rapidly reforming their exchange control regimes with their exchange control regimes with capital account liberalizationcapital account liberalization

Pace of technological change, market Pace of technological change, market innovation and globalizationinnovation and globalization

Without competitive, liquid markets Without competitive, liquid markets issuers and investors will look elsewhere issuers and investors will look elsewhere

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Key Reforms to Foster Key Reforms to Foster IntegrationIntegration

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 Regional integrations rests on several pillarsrests on several pillars

PreconditionsPreconditions Multidimensional approach to integration Multidimensional approach to integration

requires several related initiativesrequires several related initiatives Strengthening capital marketsStrengthening capital markets Building infrastructuresBuilding infrastructures Minimizing risksMinimizing risks Removing impedimentsRemoving impediments Harmonizing rules and practicesHarmonizing rules and practices

Regional cooperation required all these Regional cooperation required all these dimensionsdimensions

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Strengthening capital Strengthening capital marketsmarkets

developing institutional investors, developing institutional investors, especially pension funds especially pension funds

strengthening corporate governancestrengthening corporate governance improving the transparency and improving the transparency and

consistency of financial statements.consistency of financial statements.

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Building infrastructuresBuilding infrastructures

enhance the depth and liquidity of capital enhance the depth and liquidity of capital markets markets

establish links between national clearing establish links between national clearing and payments systems and payments systems

create regional credit rating agencies and create regional credit rating agencies and benchmarks.benchmarks.

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Minimizing RisksMinimizing Risks

Risks of Market integration especially as institutions Risks of Market integration especially as institutions and individual invest in new markets and instruments. and individual invest in new markets and instruments. potential for currency mismatches potential for currency mismatches risks arising from country exposures, risks arising from country exposures, risks from institutions that are increasingly active in a variety of risks from institutions that are increasingly active in a variety of

financial sectors and geographical regions. financial sectors and geographical regions. A strong framework for prudential regulation and A strong framework for prudential regulation and

supervision is necessary to ensure that risks arising supervision is necessary to ensure that risks arising from integration are being assessed and managed from integration are being assessed and managed well. well. move towards risk-based supervision, andmove towards risk-based supervision, and changes in prudential regulation and supervisory oversight to changes in prudential regulation and supervisory oversight to

address crossborder activities.address crossborder activities.

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Removing ImpedimentsRemoving Impediments

Legal barriers remainLegal barriers remain Removal of capital and exchange controls could Removal of capital and exchange controls could

increase cross-border flows and competition and increase cross-border flows and competition and enable investors and firms to tap regional markets to enable investors and firms to tap regional markets to find the lowest cost of funding and highest risk-find the lowest cost of funding and highest risk-adjusted return. adjusted return.

Limits on the level of ownership and associated Limits on the level of ownership and associated rights rights

In many countries, the existing prudential In many countries, the existing prudential requirements biases investment toward domestic requirements biases investment toward domestic assets (e.g. restrictions on foreign stock ownership assets (e.g. restrictions on foreign stock ownership and investments of mutual funds/unit trusts)and investments of mutual funds/unit trusts)

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Harmonizing Rules and Harmonizing Rules and PracticesPractices

Address major differences in laws, Address major differences in laws, regulations, and tax treatments that still regulations, and tax treatments that still prevent investors from building pan-prevent investors from building pan-regional portfolios.regional portfolios.

Emphasize convergence with globally Emphasize convergence with globally accepted standards and best practices to accepted standards and best practices to facilitate easier global integration.facilitate easier global integration.

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Where are we now?Where are we now?

African Regional Economic Communities (RECs)African Regional Economic Communities (RECs) ECOWASECOWAS

UEMOAUEMOA WAMZWAMZ

CEMACCEMAC EACEAC SADCSADC COMESACOMESA ARAB MAGHREB UNIONARAB MAGHREB UNION

Some are overlapping e.g. SADC/EAC/COMESASome are overlapping e.g. SADC/EAC/COMESA Not all RECs have an active capital market integration Not all RECs have an active capital market integration

programprogram

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UEMOA/BRVM FRAMEWORKUEMOA/BRVM FRAMEWORK

Union Economique et Monétaire Ouest Africaine (UEMOA) Union Economique et Monétaire Ouest Africaine (UEMOA) established in 1973 and made up of eight countries (Benin, established in 1973 and made up of eight countries (Benin, Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, Niger, Senegal, Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo).and Togo).

BRVM opened in 1998BRVM opened in 1998 Underpinned by UEMOA Treaty signed is 1973Underpinned by UEMOA Treaty signed is 1973 Common central bank BCEAOCommon central bank BCEAO Common regulator -Regional Council for Public Savings and Financial Common regulator -Regional Council for Public Savings and Financial

marketsmarkets Common Business Law (OHADA)Common Business Law (OHADA) Common Insurance regulatorCommon Insurance regulator

BVRM has branches in each UEMOA country and its BVRM has branches in each UEMOA country and its headquarters in Abidjan, Cote D'Ivoire. Although the bourse is headquarters in Abidjan, Cote D'Ivoire. Although the bourse is majority owned by the private sector, the member states own majority owned by the private sector, the member states own 13.4% of the capital.13.4% of the capital.

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UEMOA/BRVM FRAMEWORK (2)UEMOA/BRVM FRAMEWORK (2)

Computerized with satellite links, which allow Computerized with satellite links, which allow brokers to transmit orders from any of the brokers to transmit orders from any of the member countries to the central site in Abidjan, member countries to the central site in Abidjan, to check and interact with the order book and to check and interact with the order book and to see information about the market and the to see information about the market and the central depository. central depository.

15 brokerage firms. 15 brokerage firms. Trades are cleared and settled at the Trades are cleared and settled at the

Depositaire Central/Banque de Reglement SA. Depositaire Central/Banque de Reglement SA.

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UEMOA Financial Sector UEMOA Financial Sector Regulatory FrameworkRegulatory Framework

Regional BodiesRegional Bodies the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO), the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO), the Banking Commission, the Banking Commission, the Conseil Regional de l'Epargne Publique et des Marchés the Conseil Regional de l'Epargne Publique et des Marchés

Financiers (CREPMF), Financiers (CREPMF), the Conférence Interafricaine des Marchés de l’Assurance (CIMA, the the Conférence Interafricaine des Marchés de l’Assurance (CIMA, the

regional insurance regulator regional insurance regulator the Conference Interafricaine de la Prevoyance Sociale (CIPRES), the Conference Interafricaine de la Prevoyance Sociale (CIPRES),

which oversees national social security systems. which oversees national social security systems. OHADA (Organisation pour l'Harmonisation en Afrique du Droit OHADA (Organisation pour l'Harmonisation en Afrique du Droit

des Affaires) Treaty harmonizes business law in 14 countriesdes Affaires) Treaty harmonizes business law in 14 countries Full capital account liberalization based on common currency Full capital account liberalization based on common currency

(CFA Franc)(CFA Franc)

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

CEMAC, a regional grouping whose membership CEMAC, a regional grouping whose membership comprises Cameroon, Central African Republic, Chad, comprises Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon. Republic of Congo, Equatorial Guinea and Gabon. CEMAC CEMAC

Common central bank, the Banque des Etats de Common central bank, the Banque des Etats de l'Afrique centrale (BEAC) with common currency l'Afrique centrale (BEAC) with common currency pegged to the euro. pegged to the euro.

Efforts to create regional market have floundered with Efforts to create regional market have floundered with Cameroon going it alone:Cameroon going it alone: Douala Stock ExchangeDouala Stock Exchange the Commission des Marchés Financiers (the Securities the Commission des Marchés Financiers (the Securities

Commission)Commission) Separate bourse established in Libreville (Gabon)Separate bourse established in Libreville (Gabon)

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SADCSADC

Established Committee of SADC Stock Established Committee of SADC Stock Exchanges (1997)Exchanges (1997)

Harmonized Listing requirementsHarmonized Listing requirements On the drawing boardOn the drawing board

Common framework for clearing and Common framework for clearing and settlementsettlement

Common standards for market dealersCommon standards for market dealers

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EAST AFRICAN EAST AFRICAN COMMUNITYCOMMUNITY

1997 MOU between Regulators of Kenya, Tanzania, 1997 MOU between Regulators of Kenya, Tanzania, and Uganda setting out cooperation goals for theand Uganda setting out cooperation goals for the

three countries’ securities markets and the set up the three countries’ securities markets and the set up the East African Member States Securities Regulatory East African Member States Securities Regulatory Authorities (EASRA) as the coordinating regulatory Authorities (EASRA) as the coordinating regulatory body for capital market;body for capital market;

Article 80 of the 1999 Treaty of East African Article 80 of the 1999 Treaty of East African Cooperation recognizes EASRACooperation recognizes EASRA

Cooperation occurring at various levelsCooperation occurring at various levels Cross border listing of debt and equity instrumentsCross border listing of debt and equity instruments

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West African Monetary West African Monetary Zone (WAMZ)Zone (WAMZ)

Ghana, Nigeria, Sierra Leone, Gambia and Ghana, Nigeria, Sierra Leone, Gambia and GuineaGuinea

Two stock exchangesTwo stock exchanges Nor formal regional cooperation except MOU Nor formal regional cooperation except MOU

between stock exchanges and SECs of Ghana between stock exchanges and SECs of Ghana and Nigeriaand Nigeria

Heads of state directed a cross listing of Heads of state directed a cross listing of securities as part of implementation WAMZ securities as part of implementation WAMZ monetary union but no progress has been monetary union but no progress has been mademade

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In Summary……In Summary……

BRVM single market comes closest to BRVM single market comes closest to integrated regional market because of integrated regional market because of Convergence on preconditions (macroeconomic, Convergence on preconditions (macroeconomic,

judicial, auditing and accounting, etc)judicial, auditing and accounting, etc) Common regulatory frameworkCommon regulatory framework

Single market does not guarantee all benefits Single market does not guarantee all benefits of integration (e.g. liquidity)of integration (e.g. liquidity)

Mixed results in other regional economic Mixed results in other regional economic communities (SADC, EAC, COMESA, WAMZ)communities (SADC, EAC, COMESA, WAMZ)

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Possible reason for slow Possible reason for slow progressprogress

Preoccupation with harmonizationPreoccupation with harmonization Regional efforts have overemphasized Regional efforts have overemphasized

harmonization while elimination of impediments harmonization while elimination of impediments to capital flows has been largely overlookedto capital flows has been largely overlooked

““Putting the cart before the horse”?Putting the cart before the horse”? Harmonization is not necessary for financial Harmonization is not necessary for financial

market integrationmarket integration Principle of “Mutual Recognition” and “Home Principle of “Mutual Recognition” and “Home

Country Control” is importantCountry Control” is important

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Lessons from EU Lessons from EU Harmonization Model?Harmonization Model?

Basis of EU’s integration is that minimal harmonisation of rules and Basis of EU’s integration is that minimal harmonisation of rules and mutual recognition, should lead to gradual convergence over timemutual recognition, should lead to gradual convergence over time

Financial Services Action Plan (1999) implemented through a series of Financial Services Action Plan (1999) implemented through a series of directives (agreements) adopted one at a time after long periods of directives (agreements) adopted one at a time after long periods of negotiationnegotiation Regulation on International StandardsRegulation on International Standards Financial Conglomerates DirectiveFinancial Conglomerates Directive Market Abuse DirectiveMarket Abuse Directive Pension Fund DirectivePension Fund Directive Markets in Financial Instruments Directive (effective November 2007)Markets in Financial Instruments Directive (effective November 2007) Under PreparationUnder Preparation

Prospectus Directive Prospectus Directive Investment Services Directive Investment Services Directive Transparency Directive Transparency Directive Takeovers Directive Takeovers Directive

Principle of home country supervision Principle of home country supervision Single passport allows financial institutions to do business across EU Single passport allows financial institutions to do business across EU

armed only with the approval of their home authoritiesarmed only with the approval of their home authorities

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Possibilities going Possibilities going forward…..forward…..

Make haste slowlyMake haste slowly Keep multidimensional integration needs in focus and Keep multidimensional integration needs in focus and

avoid obsession with harmonizationavoid obsession with harmonization Agree on common principles setting minimal standards Agree on common principles setting minimal standards

for mutual recognitionfor mutual recognition Agree on the key national rules which must be removedAgree on the key national rules which must be removed Agree on mutual recognition of all regional regimesAgree on mutual recognition of all regional regimes Coordination of supervision to facilitate the resolution of Coordination of supervision to facilitate the resolution of

differences in application and interpretationdifferences in application and interpretation Remove discrimination against nonresident investors Remove discrimination against nonresident investors

and issuersand issuers

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THANK YOU!THANK YOU!