Utilizing Capital M arkets in Regional Business Paul Muthaura Ag. Chief Executive Capital Markets Authority

1. Utilizing Capital Markets in Regional Business Paul Muthaura Ag. Chief Executive Capital Markets Authority

2. Presentation Outline • Understanding Capital Markets Integration • Progress Made Towards EAC Capital Markets Integration • Applicable products for regional business • Integration of Regional infrastructure

3. Understanding Capital market integration

4. [s1] Cross Country Comparison Of Key Capital Markets Indicators - 2013 

5. Value of IPOs (Million USD)

6. Comparative Analysis of Selected African Securities Exchanges-2012

7. Understanding Capital market integration • EAC Capital market integration needs to be understood and analyzed in the context of the broader regional economic integration. • Capital Market integration is central to the attainment of the Common Market, but also has a bearing on the functioning of the monetary union.

8. Understanding Capital Markets Integration • Capital markets integration: targets the establishment of a single market for investment allowing for cross border trade in securities within the integrated markets • If any restrictions apply to investment products and opportunities they should apply symmetrically across board with no discrimination based on the location where the securities are primarily acquired or traded

9. Benchmarks for an Integrated Capital Market • Issuers should be able to sell newly created securities to investors located in other parts of the market without encountering regulatory/administrative barriers or additional compliance costs. These opportunities should be open to all types of capital raising (including, initial public offers, SMEs and venture capital) • Investors should be able to purchase a financial asset offered or traded in a Member State market without impediment/delay, risk/uncertainty or costs when compared to the same transaction executed on a local market

10. Benchmarks for an Integrated Capital Market • Infrastructure suppliers, all providers of infrastructures (trading systems, clearing, settlement, depositaries) should be free to offer services/establish in partner countries on the basis of home country authorization. • Supervisors/regulators should be able to rely on a seamless web of market supervision which guarantees stringent and effective real-time enforcement of commonly agreed provisions to all securities related activities and structures.

11. Benchmarks for an Integrated Capital Market • Intermediaries should be able to transact freely with clients in other Member States on the same terms and conditions as business transacted in their home country, and should not be constrained for legal, administrative or fiscal purposes to establish a physical presence in the partner country • Intermediaries and service suppliers should also have non-discriminatory access, on commercial terms, to essential services or facilities required for the effective provision of investment services

12. Expected Benefits of Capital Markets Integration • Lower Prices for all financial services • More Efficient, More Liquid, and Broader Securities Markets • Increased innovation in Financial Products and Services • Cheaper Financing for companies, given lower transaction costs • More Efficient Allocation of Capital • Higher Returns on investments given lower transaction costs. • Enhanced Risk-Return Frontiers for investors who previously faced restricted opportunities, but who can now diversify their investments to a greater extent than before

13. Potential Casualties of Capital Markets Integration • Protected Industries will Lose Out, and lobby hard to resist the effects of regional capital market integration. • Some Individual Companies will lose out, if they prove not to be competitive in the integrated market. • Transition Costs may have to be borne by some market participants. • Unanticipated Regulatory Costs may be large. These may arise either directly in terms of regulatory fees, or indirectly in that the regulators enlarge, and market participants are required to pay these increased costs. • Unanticipated Protectionism: Even though the aim of regional integration is to enhance competition, the process to achieve this may be captured by vested interests.

14. Progress in the Harmonization of the EAC Capital Markets Legal and Regulatory Framework

15. Objective of harmonization of the EAC legal and regulatory framework • To facilitate regionalization of the EAC Capital Markets. • To support the implementation of the EAC Common Market Protocol, effective July 1, 2010. • To provide an opportunity for the growth and deepening of the capital markets of the EAC Partner States to promote economic growth. • To provide the necessary framework that will allow for the raising of funds from across the regional capital markets to finance major infrastructural development and commercial ventures.

16. Approach to harmonization of the EAC legal and regulatory framework • EAC regionalization is being implemented in legal and regulatory terms through a harmonized rather than a single overarching regime. • ‘Harmonization” is interpreted to mean the implementation of common minimum standards of regulation which may be captured in national laws for ease of implementation and enforcement at the national level.

17. Regulatory Framework for Issuance of Regional Fixed Income Securities (Regional Bonds) • East Africa Securities Regulatory Authorities (EASRA) developed and adopted a framework for issuance of regional bonds in 2011. • This framework includes a set of standardized regional principles on Eligibility Criteria and Approval Processes. • Standards transposed into respective national regulatory frameworks. In Kenya this was done by amending the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 and the Capital Markets (Licensing Requirements) (General) Regulations 2002. • These amendments were gazzetted on June 18, 2013 vide Legal Notices Nos. 112 and 113 of 2013.

18. Regulatory Framework for Issuance of Regional bonds continued… This framework provides for the following among others – • Single primary regulator coordinates the approval process. • Share Capital - local currency equivalent of USD 850,000 • Net Assets - local currency equivalent of USD 1,700,000 • Issue size - local currency equivalent of USD $850,000 • Issuance by a Special Purpose Vehicle without history allowed subject to effective disclosure on financial projections. • Currency of Offer and Application of Funds – may be offered in any member state currency(ies) and invested in one or more Partner State in line with the Common Markets Protocol subject to making disclosures in the information memorandum.

19. Regulatory Framework for Issuance of Regional bonds continued… • Listing- mandatory for all public offers but where the issuer chooses to issue to institutional investors only listing on a regulated OTC platform allowed. • Credit ratings – offers to the general public must be rated in order to improve the quality of available financial information. • Continuous disclosure obligations – ongoing observance is mandatory • Fees–to support market development and promote increased issuances fee: Rate of 0.1% of the value of the offer subject to a maximum of USD $200,000 and a minimum $20,000 (the local currency equivalent) to be shared equally amongst all the jurisdictions approving the offer.

20. Council Directives on Securities Legal and Regulatory Framework • The EAC Sectoral Council on Finance and Economic Affairs (SCFEA) had in 2012 sanctioned the commencement of the harmonization of the EAC Capital Markets Legal and Regulatory Framework through council directives. • A Technical Working Group (TWG) was constituted by the EAC Capital Markets Insurance and Pensions Committee (CMIPC) • The TWG developed first set of Council Directives which were taken through stakeholder input in each of the EAC Partner State and thereafter approved by the CMIPC and the SCFEA in March 2014.

21. Completed EAC Council Directives • Council Directive on Public Offers for Equity Securities • Council Directive on Public Offers for Fixed Income Securities • Council Directive on Public Offers for Asset Backed Securities • Council Directive on Collective Investment Schemes • Council Directive on Corporate Governance for EAC market Intermediaries • Council Directive on Listing • Council Directive on Licensing of Market Intermediaries • Council Directive on Admission to a Secondary Exchange •  The TWG is working on Directives to harmonize the capital markers legal regime in the outstanding areas.

22. Depositary Receipts (DRs) and Depositary Notes (DNs): Facilitating Global Access to local securities

23. Depositary receipts (DRs) • Depositary receipts (DRs) are certificates issued by a depositary bank that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the company’s home country. • DRs are structured to have the attributes of typical stocks with respect to transferability without exposure to cross border investment relating to differences in currency, accounting practices, language barriers, or other risks associated with investing in foreign stock directly.

24. Depositary Notes (DNs) • Depositary Notes (DNs) are debt instruments created by a depositary bank that evidences ownership of a local currency-denominated debt security. • GDNs emulate the terms (interest rate, maturity date, credit quality, etc.) of particular local bonds; however, they trade, settle, and pay interest and principal in the currency of the place of issue and allow for clearance through Euroclear/Clearstream/DTC.

25. Harmonization Of Regional Capital Markets Infrastructure

26. Background • The journey commenced in 2008 with discussions on proposal to have a Regional Exchange and CSD (reduce costs of replicating infrastructure); • Subsequently agreed that the model for integration of the regional stock exchanges and Central Securities Depositories (CSD) would be through linking the national platforms rather than establishing a single regional stock exchange • Road map supported by the East African Community Financial Sector Development and Regionalization Project (EAC FSDRP).

27. Proposed Infrastructure • The Partner states settled on the following infrastructure to support regional cross boarder trading; • Smart Order Router – (Regional Exchange) • CSD interface – Linkage to regional CSD’s • SWIFT – use swift as a communication platform to send messages

28. Smart Order Router – (Regional Exchange) • In this module all trading participants/brokers will be connected to a smart order Router (SOR) which will acts as a virtual exchange that gives access to the other Securities Exchanges. • A smart order router allows stockbrokers to trade in all EAC markets via counter parties operating in other markets. • The model allows for the settlement of cross border trades to be effected based on the rules and regulations of the market where the trades have been executed

29. SMART ORDER ROUTER

30. CSD LINKAGE MODEL • The CSDs are to be linked through an interface using the SWIFT messaging platform. • This linkage will ensure secure exchange of instructions among the CSDs in the region • The interface will facilitate on-line processing thereby eliminating paper work- Replacing other manual processes e.g. Inter Depository Transfers. • The SWIFT platform will be accessible to trading participants, Depositories, Exchanges and other authorized users.

31. CSD Linkage

32. Time lines

33. Website: www.cma.or.ke Email: corporate@cma.or.keTel:+254202264900