Regional Capital Markets, Integration and Harmonization: Way Forward

1. 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

2. 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)

3. 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

4. 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

5. 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.

6. 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

7. 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 • Building infrastructures • Clearing and settlement systems • Credit rating agencies • 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 • Harmonizing rules and practices • Implementing global standards and best practices Preconditions (e.g. sound economic, legal and judicial, accounting and auditing frameworks

8. 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

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

10. 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.

11. 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.

12. 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)

13. 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.

14. 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

15. 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.

16. 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.

17. 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 l’Assurance (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)

18. 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)

19. 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

20. 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

21. 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

22. 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)

23. 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

24. Lessons from EU Harmonization Model? • Basis of EU’s 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

25. 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

26. THANK YOU!