Rallying call for improved integration of regional stock exchanges
Mr.Vajira Kulatilaka (Chairman-South Asian Federation of Exchanges )
Traditionally, stock exchanges were natural monopolies, non-profit outfits. The local stock exchange is owned, and governed by its members who enjoy a high monopoly in the trading of domestic securities and are secluded from meaningful cross-border competition.
But now the story is becoming different.
Competition is acting as a spur for exchanges to persistently enhance the quality of their trading platforms and rule books. Good regulation entail that regulators, exchanges and investors all share responsibility of upholding the quality of the market place.
Both domestic and foreign investors see the benefits of more open, linked markets that make the most of scale and increased liquidity. Advocates say a regional market would also help raise funds for large-scale infrastructure investments, reduce the cost of capital-raising and attract greater participation from foreign funds.
In this light, leaders from the South Asian capital markets were united in their call for improved integration of regional markets as they shared their views on the way forward for exchanges in South Asia, at an event recently held at the Colombo Stock Exchange (CSE). The views were expressed by CEOs of stock exchanges from around South Asia, who gathered in Colombo for the Executive Committee Board Meeting and workshop of the South Asian Federation of Exchanges (SAFE).
“As we all know, capital markets globally, regionally and even in our nations, are constantly evolving and embracing transformation. The role and impact of an exchange today, is well beyond what was defined at the inception of SAFE as an organisation. This is even more so for emerging and developing countries, which many of us are a part of. It is therefore quite relevant that SAFE today looks at evolving as an organisation,” Vajira Kulatilaka, Chairman of SAFE and CSE, told the gathering.
Thilak Karunaratne Chairman (SEC) addresses the meeting.
New law
Chairman of the Securities and Exchange Commission of Sri Lanka (SEC), Thilak Karunaratne who graced the event as the Chief Guest, said that countries which have been overly dependent on traditional bank credit for many years are now gradually turning their attention to capital markets. But in Sri Lanka the situation is different, increasing interest rates are luring investments away from the capital market. “Fair and efficient functioning of exchanges is of significant benefit to the public. Therefore failure of an exchange to perform its regulatory functions properly can have a far reaching impact on the economy as a whole. Regulatory functions of traditional exchanges include rule-making in respect of members, products and trading itself. But as exchanges move from mutual entities to for-profit enterprises, as most of you have already done, they can create a number of challenges in respect of the regulatory roles the exchange perform. These concerns include the compatibility of for-profit operation of Exchanges with public interest objectives to the adequacy and efficiency of regulation,” he said adding that the SEC is in the process of introducing a new SEC Act and that it’s to be passed by Parliament in the 03rd quarter 2017.
“This will align our regulatory framework with international benchmarks and will include provisions to enable the licensing and regulation of a demutualised exchange. In this process, we will focus on governance arrangements as the primary means of ensuring stock exchanges have robust arrangements for maintaining a proper balance between the commercial interests and its regulatory responsibilities.”
Regulator is best able to establish the general principles for safeguarding the integrity of securities markets – cracking down on behavior such as insider trading and promoting fair competition, analysts say.
Mr. Karunaratne added that Demutualisation of Stock Exchanges evolved into profit seeking commercial enterprises which will explore arrangements to establish global alliances to remain profitable and internationally competitive. “For that reason, there is a need towards greater integration of markets where there are no barriers to the movement of capital and there is easy access to each other’s stock markets.”
SAFE aims to foster collaboration and co-operation among its members in order to develop their respective capital markets. Presently SAFE has members comprising stock and commodity exchanges across South Asia and several depositories and clearing houses in the region as associate members. Sri Lanka has held the Chairmanship of the SAFE Secretariat since 2015.
Mr. Kulatilaka added that all SAFE members are at different junctures in their bid for growth and improvement, which is something that works to its advantage. It also outlines the importance and relevance of an organisation such as SAFE. “Our diversity is our strength, and our ability to learn from each other through collaboration and knowledge sharing is a key benefit of being a part of an organisation of this nature. Smaller exchanges in the region for an instance, have the ability to benchmark more developed peers, while our more developed peers have the privilege of shaping the future of fellow regional exchanges – a process that is brought into the table through affiliation.”
Nayan Mehta, CFO of Bombay Stock Exchange (BSE) commenting on the success story of the BSE, credited the transformation of the exchange to the Indian Government’s strong commitment to the capital market since 1991, which sparked a reform process that transformed the exchange from several operational low points to the largest operation in India and South Asia today. He added that stakeholder management, investment in technology and a strict commitment to compliance and transparency were key drivers that propelled the exchange.
Aftab Ahmed, Secretary General of SAFE, who was involved with the process that saw a merger between the Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange to form the Pakistan Stock Exchange said, “It is critical that we also improve the governance of our exchanges and in our region through demutualisation, mainly to relieve brokers from the governance aspects of the exchange so that the exchanges have the ability to provide products and services that are in the best interest of the investors.” He also went on to highlight the importance of South Asia exchanges embracing the increasing influence of SMEs and start-ups in global affairs, stating that exchanges around the world are already reaping the benefits of providing fund raising opportunities to such enterprises.
Saifur Rahman, Managing Director of Chittagong Stock Exchange Ltd, Bangladesh, commenting on the high level of activity surrounding Initial Public Offering (IPOs) at his exchange, said “The regulators have worked to change the rules and regulations to create a strong and transparent primary market. We therefore now have the platform ready to create a robust IPO market and have experienced a strong demand for IPOs in our country. A number of large companies are in the pipeline of getting approval from regulators for listing on the exchange.”
Shalini Gokhool, Manager – Stock Exchange of Mauritius had a slightly different take on regulation. “I would say that regulation and market development are inextricably linked. Too much regulation can stifle market development, hence the need for the right balance. To take the example of Mauritius, since 2010 we have embarked on an internationalisation strategy where we are trying to innovate in terms of products and getting more players to come to our market. We have had the very strong support of our regulator, the Mauritius Financial Services Commission to bring many changes so that we could implement our new strategy. Today we have created a flexible and enabling regulatory environment to list a variety of products ranging from global funds, depository receipts, and a number of specialist securities such as specialist debt securities, exchange traded funds, etc.”
More recently, capital market integration has continued to accelerate, as new investing opportunities emerge, but South Asia is the most malintegrated region in the world as a result of highly restrictive national policies governing financial markets, SEC’s Mr. Karunaratne said.
“Domestic markets can derive substantial benefits from regional integration including better allocation of capital, efficient sharing of risks, enhanced portfolio diversification and lower cost of capital. On the other hand various barriers including regulatory, information, infrastructure and taxation pose serious challenges to integration. Here one word of caution on the possibility of exposing exchanges to cyber-attacks. The above process will bring both opportunities and challenges to regulators, therefore it is important to move towards this way recognizing the differing needs and development levels of the various regional markets. Moreover a strong framework for prudential regulation is necessary to ensure that risks arising from integration are being assessed and managed well.”
Removal of controls on capital transactions within the region, harmonisation of capital market infrastructure including regulations, taxation, accounting, trading systems and cross-listings of securities are necessary steps to move towards regional financial integration, he said.
South Asia remains the fastest-growing region in the world as reported by the World Bank with economic growth forecasted to accelerate from 7.1 per cent in 2016 to 7.3 per cent in 2017. Sri Lanka’s growth rate is currently less but it is expected to be around 6.5 per cent in 2018. Although the region’s economic growth projections are promising for the next few years, countries in the region will need to explore further opportunities to sustain this economic growth momentum. The event was sponsored by Ironone Technologies.