CAPITAL MARKET DEVELOPMENT The way forward - Policies & Strategies AFRICA INVESTMENT CLIMATE...

CAPITAL MARKET DEVELOPMENT

The way forward - Policies & Strategies

AFRICA INVESTMENT CLIMATE

CONFERENCE

Johannesburg, 5 October 2006

Tom Lawless


Topics for discussion Over-arching thoughts Macro foundation issues Market structure & Regulatory environment Policy constraints Market infrastructure – trading, clearing,

settlement & custody Leadership Key issues for growth of bond markets Lessons and Observations


Over arching thoughts “One solution does not fit all” You are different – craft your own policy &

strategy solutions to your country’s circumstances

Do not be afraid to ask for help & be practical - you cannot live long enough to make the mistakes that others have made

Be cautious of adopting US style SEC regulations – they often are inappropriate & unsuited for our markets – Rule based


Macro foundation issues Have sound transparent economic, monetary & fiscal policies

Markets do not like surprises Will & commitment of government to develop capital markets – need

to take bold steps Clarity of objectives - Do you need your own market? Debate, discuss with participants & decide – leadership comes from

both What are your competitors doing or could they be your partners?

Good governance – “soft infrastructure” – “sine qua non” Asian experience – deep respect for education, innovation, high

savings rates Urge you to introduce financial literacy programmes in schools

Credible market legislation & regulation Improve the quality of banks & banking services

Develop, implement recognised accounting & auditing standards.


Market Structure & Regulatory environment Healthy interaction between regulators & participants Best market practice – IOSCO standards – be practical Sound bankruptcy laws – “soft infrastructure” – so important

Money markets come first Bond markets more difficult to develop than equity markets Need for pricing benchmarks – government bonds, big corporates

Role of primary dealers & auction process Market making can be done by Central Bank initially PDs are not necessarily the magic wand for take-off

Roles of pension funds & asset managers Prescribed assets – the good and bad aspects – think long term Build a competitive portfolio management environment

Diverse range of issuers Markets thrive on diversity

OTC or Exchange traded Attitude of bond participants is the key

Not the equity brokers nor the regulator - Botswana

CAPITAL MARKETS TAKE TIME TO DEVELOP


Market Structure & Regulatory environmentRecognise the contradiction in that the objectives of the market regulators may not always be the same as those of the participants

REGULATORS WANTMore efficiency = tighter liquidity; means Narrower spreads = less profit

PARTICIPANTS WANTLess efficiency = wider spreads; means More profit = OTC markets more attractive

However more participants = more liquidity = more opportunity


Policy constraints Taxation

Take a hard cold look at the impacts on market development Non residents withholding tax on interest Stamp duties

Trade off – revenue collection vs negative impact ? Incentives ?

Regulations on Tap issues How practical are they – each auction issue is a new bond - Kenya ? Investors want large issues of fewer bonds – not many small ones Impacts on investors – prudential guidelines

Access to markets Markets need diversity of participants – local and foreign Restrictions hinder development - ability to manage risk Reluctance to open markets to competition – protectionism? Foreigners prohibited access to money markets – Ghana

What happens to their bond activity at short end of bond curve?


Infrastructure (Systems)- trading, clearing, settlement & custody Trading

Do not create elaborate processes & systems – create the environment, let the market develop

Call auctions (2-3 per day) around a table ? – it is a start Use OTC trading processes

Telephones, IDB & data vendor systems Market wide ATS not wanted / needed – expensive, difficult to

implement Centralised reporting of trades for dissemination & surveillance

Clearing (Risk management) Fraught with complications in bond & money markets Equity markets have central counterparty systems – trade with

impunity Bond markets do not have that OTC market risk processes work for bonds– bi-lateral counterparty

limits Regulatory frameworks should be aligned to recognise this


Infrastructure (Systems)-Trading, clearing, settlement & custody Settlement & Custody

Manual systems work although may not be ideal - Botswana

Do you need your own systems ? Look around in region – can you use them? This is a volume business – harness economies of

scale Can be the costly part of the trading cycle Easier to adapt regional systems than developing,

building / buying your own Use equity systems if available – settlement

processes similar

Secure delivery vs payment – “Sine Qua Non”


Infrastructure (Systems)-Trading, clearing, settlement & custody

Systems – concluding comments The easy part of market development Do not let them become a constraint Can become “the straw that breaks the camel’s back” OTC market systems / processes work – use them

Beware of free systems – there is no such thing as free !


LeadershipIt starts at the top ! Will and commitment of Central Government

Clarity of objectives – critical Good market legislation and regulation

Who are your competitors and what are they doing? Could they be your partners?

Participants & authorities to have common objectives Discuss and decide Leadership comes from both Establish a Structure that encourages innovation, risk taking so that

participants can make a profit


Key Issues for growth of bond markets Sound economic, monetary and fiscal framework Good legal system – bankruptcy laws – “soft infrastructure” Effective, appropriate and harmonised financial market legislation

and regulations Money markets are the starting point – asset / liability matching /

mismatches Role of pension fund legislation is important Privatise the pension funds

prescribed investments – promote but could also distort – be careful Do not force a structure onto a market

Recipe for disaster

ATTRACT PARTICIPANTS THAT CAN BE INNOVATIVE & PROFITABLE


Lessons & Observations – Be practical Be practical – if you do not have all the right things in place

Do not re-invent the wheel !

Size does matter – big balance sheets count !!

Intermediaries / speculators are important participants – do not

squeeze them out

Get practical training / exposure from those who have done it before

or do it now

Banks, traders, Exchanges, Regulators, settlement people

Importing big trading systems and market structures from Europe

may be inappropriate for you

“One solution does not fit all” – BE PRACTICAL


Lessons & Observations – Be practicalFrom my experience Exchanges are unusual places for listing & trading bonds

understand the different dynamics wherein banks are major bond participants vs brokers as major participants in equities

If an exchange is the chosen route – issuers and investors should not be members (users)– too many vested interests – they are clients!

Consider combining equities, bonds and derivatives into one overall Exchange structure – economies of scale / skills / scope – practical issues

But as separate markets – Different rules and Members (brokers in equities, banks in bonds and derivatives)

Recognise that trading and risk methodologies are not the same for each market

Create structures that attract

Widest range of participants = more liquidity = more opportunity!

THINKTHINK BIGBIGHAVE A PLAN

BUT START NOW

WITH SMALL THINGS

TOM LAWLESS

TEL: +27-11-888-3568

+27-82-901-7777 (mobile)

FAX: +27-11-888-1411

[email protected]

Tom Lawless & Asscociates

Thank you for your attentionThank you for your attention

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