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Panel Summary: Country Experiences with Capital Market Development
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Country Experiences with Capital Market Development Clemente Del Valle, chair of the panel and chairman of Colombia’s Securities and Exchange Commission, initiated the discussion by commenting that financial systems in most developing countries are fundamentally banking systems and that developing-country governments now recognize the need for capital markets. Yet despite this understanding, developing countries confront many problems as they attempt to cultivate their domestic capital market. The financial culture is so focused on banking that an investor base fails to develop and grow, as would-be investors are not accustomed to evaluating and buying securities. Many countries consequently lack the strong intermediaries and brokers that are keys to fostering growth in capital markets. Moreover, although market infrastructure has improved in the developing world, a clear segment of intermediaries and brokers has not yet emerged, and securities and exchange commissions need to have institutional capacity if they are to supply proper regulation while simultaneously facilitating market growth. In practice, it can be very difficult to strike the proper balance between these two. Del Valle then prompted the speakers to address the successes their countries have experienced in developing their markets, to explain how they have approached the obstacles to development, and to share their personal experience as regulators. Khalid Mirza, sector manager of the World Bank’s Financial Sector and Private Sector Development, East Asia Region, detailed his three-year tenure as chairman of Pakistan’s Securities and Exchange Commission (SEC), during which he revamped and upgraded the commission, the nation’s regulatory structure, and the stock exchanges. When he took the reins in March 2000, the commission’s regulatory capacity was weak or nonexistent, its reputation was undistinguished, and its capacity to undertake surveillance, monitoring, and enforcement was feeble. During his term in office, Pakistan’s SEC underwent a massive reorganization and revamping of staff as well as complete automation; however, much work remains to be done. The national stock exchanges had laid the groundwork for a strong capital market, including reasonable trading and settlement systems, automation, a smattering of strong brokerage houses with adequate research capabilities, and a cultural willingness of financial players to enact concrete solutions to deal with problems. Yet Pakistan faced a crisis of investor confidence, which impeded the country’s ability to attract capital and develop a capital market. Two core issues affected investor confidence. First, there was little public faith in the integrity of the market, particularly with regard to price discovery and settlement. The public believed that the market was run by brokers, for brokers. Second, companies were highly opaque, which led to the perception that they were being managed solely for the benefit of majority owners, not all stakeholders; the average investor and even the creditors enjoyed few of the gains. Given the imperfect state of the marketplace, Mirza sought to implement a radical reform agenda that addressed governance and risk management at the stock exchanges in order to improve market integrity. Ironically, a crisis caused by over-trading and weak risk management at stock exchanges took place a few months after he took office and gave the commission a mandate to implement these reforms, which were undertaken with the grudging collaboration of the exchanges. Among the highlights of the restructuring were placing independent, professional chief executive officers at the stock markets, greatly strengthening the margin requirements, imposing capital adequacy limits for the exposure of brokers equal to twenty-five times the capital employed in the firm, and redefining net capital and raising it tenfold to bring the definition roughly in line with international standards. Other important reforms included devising proper regulation for short selling, imposing appropriate circuit breakers, implementing a T+3 system to replace the archaic London-type structure, developing and implementing a national clearing and settlement system, requiring brokers to register with the SEC to [18.226.222.12] Project MUSE (2024-04-17 08:49 GMT) create a nexus between the two, and requiring brokers to adhere to a code of conduct issued under the broker registration rules. The commission issued numerous rules and regulations to protect investors, ensure transparency, curb insider trading, prevent money laundering , improve the reputation of the market, and bring the market closer to international respectability. By the end of these reforms, Pakistan complied with almost all thirty regulatory principles of the International Organization of Securities Commissions (IOSCO). Pakistan’s markets also comply with thirty-eight of forty-one international accounting standards, including IAS-39, the mandatory publishing of quarterly financial statements...