The International Organization of Securities Commissions (IOSCO) has unveiled a series of recommendations to help emerging markets regulators and policy makers build up their capital markets, drawing on participation from international institutional investors.
Through its Emerging Markets Committee (EMC), IOSCO examined the state of capital markets development in global emerging markets. The EMC is chaired by the China Securities Regulatory Commission (CSRC), with member organisations including securities regulators from Malaysia, Morocco, Pakistan and South Africa.
“In light of the challenges ahead, the development of institutional investors in the emerging markets calls for concerted efforts by both regulators and the market,” said the report. “It requires a pragmatic and sequenced approach by regulators to ensure that such efforts do not destabilise the financial system, and that adequate safeguards are establish at both market and regulatory levels.”
The key recommendations included ensuring legal protection of ownership rights, promoting proper corporate governance standards, introducing market making mechanisms, removing artificially imposed price fluctuation bands, lowering transaction costs by reducing taxes and bid ask spreads and encouraging the use of derivatives to reduce market volatility through hedging.
IOSCO also emphasised the need to simplify offering procedures and speed up approval and registration procedures, build up a multi-pillar pension system with appropriate tax incentives and a broader range of distribution channels, promote product innovation by supporting foreign institutional investors, encourage competition, establish best practice standards, improve transparency by standardising products, promote investor education and ensure financial stability is properly monitored.
Market openness should be supported by levelling the playing field between foreign and domestic institutional investors and removing quota systems and ownership limits, while domestic investors should also be encouraged to invest abroad. Regulators should be reviewing regulations constantly, while market abuse should be countered by surveillance.
“By pooling assets, institutional investors can achieve economies of scale, employ high quality investment professionals, develop better investment strategies and build solid risk management systems, all of which result in higher and more stable returns for investors,” added the IOSCO report.
Meanwhile, the CSRC is reported to be already investigating ways to open up China’s capital markets, in conjunction with the Shanghai Stock Exchange. The Chinese watchdog is recruiting domestic and international experts to a new research organisation dedicated to the task, called the Beijing Institute of Securities and Futures. In April, China doubled its qualified foreign institutional investor quota, raising it to US$80bn from approximately US$30 billion.