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THE ROLE AND PRINCIPLES OF A SECURITIES EXCHANGE IN EMERGING CAPITAL MARKETS Workshop on Northern African Emerging Capit

What is the basic role of a Securities Exchange? . Facilitate the mobilization of funds by:Bring buyers and sellers together to facilitate secondary trading Provide liquidityProvide price discovery Provide Transparency Reduce costs of capital formation . Attracting foreign investments may be a goal but should not be the primary goal of a capital market. A fair, efficient and effective domestic capital market is the best way to attract foreign capital. .

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THE ROLE AND PRINCIPLES OF A SECURITIES EXCHANGE IN EMERGING CAPITAL MARKETS Workshop on Northern African Emerging Capit

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    1. THE ROLE AND PRINCIPLES OF A SECURITIES EXCHANGE IN EMERGING CAPITAL MARKETS Workshop on Northern African Emerging Capital Markets Cairo, Egypt March 31, 2004 Ester Saverson, Jr.* Assistant Director SEC Office of International Affairs * The Securities and Exchange Commission (“SEC”), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the Commission.

    2. What is the basic role of a Securities Exchange? Facilitate the mobilization of funds by: Bring buyers and sellers together to facilitate secondary trading Provide liquidity Provide price discovery Provide Transparency Reduce costs of capital formation

    4. Principles for a Fair, Efficient, Transparent and Safe Market

    5. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight Oversight of Market to ensure fairness, efficiency, transparency and investor protection. Oversight should include (minimum): Admission of Products to trade Admission of participants Provision of trade information Trade disruption

    6. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

    7. Regulation should promote transparency of trading Transparency of firm bids and offers in both quote and order driven markets Price and volume of all transactions actually concluded Timely access to relevant information

    8. Regulation should be designed to detect and deter manipulation and other unfair trading practices

    9. Manipulation and Other Unfair Trading Practices Market manipulation Misleading conduct Insider Trading Fraudulent or deceptive acts which may distort the price discovery system, distort prices and unfairly disadvantage investors

    10. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption Identify large market exposures Make market default procedures available to all market participants The government regulator, the exchange and the depository, clearing and settlement organization should work together to minimize adverse effects of market disruption

    11. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk Systems for clearing and settlement should have the capacity to: facilitate the prompt and accurate clearance and settlement of securities transactions for which it is responsible safeguard securities and funds under its responsibility comply with the securities laws and regulations

    12. A clearance and settlement facility shall have fair and effective rules that: Admit all qualified market participants needing access to its facilities Provide fair and adequate disciplinary procedures to enforce violations by its members of the securities laws and rules and its own rules Foster cooperation and coordination with clearance and settlement facilities

    13. Clearance and Settlement (Continued) Remove impediments to and perfect the mechanism of a central system for the clearance and settlement of securities transactions Protect investors and the public interest Provide fair representation of its membership in the election of its directors and in the administration of its affairs Provide for the equitable allocation of reasonable dues, fees and other charges

    14. How Can An Exchange In An Emerging Market Fulfill Its Role?

    15. Sharing Technology and Facilities Across Markets   Establish common computer facilities among exchanges and depository, clearance and settlement organizations Joint operation of shared computer facilities, infrastructure and technology Sharing infrastructure reduces the cost of trading, clearance and settlement which tends to increase trading and thus liquidity Allows for harmonization of procedures across markets

    16. Harmonization of Laws, Regulations and Procedures Easier access to more markets (cross-listing) Lowers the cost of raising capital Lowers cost to market participants Tend to increase number of participants in market which helps exchange meet its role in improving liquidity, price discovery, lower transaction cost and capital formation

    17. Diversity of Products Encourage diversity of products Government bonds Corporate bonds Preferred shares Government project financing Mortgage backed securities and other forms of asset backed securities Government divestiture of commercial enterprises

    18. The SEC is ready to work with you to enhance your Capital Markets Ester Saverson, Jr E-mail: saversone@sec.gov Telephone: (202) 942-2770 Fax: 942-9524

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