Download Tom Lawless

CAPITAL MARKET DEVELOPMENT
The way forward - Policies & Strategies
AFRICA INVESTMENT CLIMATE
CONFERENCE
Johannesburg, 5 October 2006
Tom Lawless
CAPITAL MARKET DEVELOPMENT
Topics for discussion
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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
CAPITAL MARKET DEVELOPMENT
Over arching thoughts
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“One solution does not fit all”
You are different – craft your own policy &
strategy solutions to your country’s circumstances
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Do not be afraid to ask for help & be
practical - you cannot live long enough to make
the mistakes that others have made
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Be cautious of adopting US style SEC
regulations – they often are inappropriate &
unsuited for our markets – Rule based
CAPITAL MARKET DEVELOPMENT
Macro foundation issues
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Have sound transparent economic, monetary & fiscal policies
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Markets do not like surprises
Will & commitment of government to develop capital markets – need
to take bold steps
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Clarity of objectives - Do you need your own market?
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Debate, discuss with participants & decide – leadership comes from
both
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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
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Urge you to introduce financial literacy programmes in schools
Credible market legislation & regulation
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Improve the quality of banks & banking services
Develop, implement recognised accounting & auditing standards.
CAPITAL MARKET DEVELOPMENT
Market Structure & Regulatory environment
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Healthy interaction between regulators & participants
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Best market practice – IOSCO standards – be practical
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Sound bankruptcy laws – “soft infrastructure” – so important
Money markets come first
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Bond markets more difficult to develop than equity markets
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Need for pricing benchmarks – government bonds, big corporates
Role of primary dealers & auction process
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Market making can be done by Central Bank initially
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PDs are not necessarily the magic wand for take-off
Roles of pension funds & asset managers
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Prescribed assets – the good and bad aspects – think long term
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Build a competitive portfolio management environment
Diverse range of issuers
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Markets thrive on diversity
OTC or Exchange traded
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Attitude of bond participants is the key
 Not the equity brokers nor the regulator - Botswana
CAPITAL MARKETS TAKE TIME TO DEVELOP
CAPITAL MARKET DEVELOPMENT
Market Structure & Regulatory environment
Recognise the contradiction in that the objectives of
the market regulators may not always be the same as
those of the participants
REGULATORS WANT
More efficiency = tighter liquidity;
means
Narrower spreads = less profit
PARTICIPANTS WANT
Less efficiency = wider spreads;
means
More profit = OTC markets more attractive
However more participants = more liquidity = more opportunity
CAPITAL MARKET DEVELOPMENT
Policy constraints
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Taxation
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Take a hard cold look at the impacts on market development
 Non residents withholding tax on interest
 Stamp duties
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Trade off – revenue collection vs negative impact ?
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Incentives ?
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Regulations on Tap issues
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How practical are they – each auction issue is a new bond - Kenya ?
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Investors want large issues of fewer bonds – not many small ones
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Impacts on investors – prudential guidelines
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Access to markets
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Markets need diversity of participants – local and foreign
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Restrictions hinder development - ability to manage risk
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Reluctance to open markets to competition – protectionism?
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Foreigners prohibited access to money markets – Ghana
 What happens to their bond activity at short end of bond curve?
CAPITAL MARKET DEVELOPMENT
Infrastructure (Systems)- trading, clearing, settlement & custody
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Trading
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Do not create elaborate processes & systems – create the
environment, let the market develop
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Call auctions (2-3 per day) around a table ? – it is a start
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Use OTC trading processes
 Telephones, IDB & data vendor systems
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Market wide ATS not wanted / needed – expensive, difficult to
implement
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Centralised reporting of trades for dissemination & surveillance
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Clearing (Risk management)
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Fraught with complications in bond & money markets
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Equity markets have central counterparty systems – trade with
impunity
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Bond markets do not have that
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OTC market risk processes work for bonds– bi-lateral counterparty
limits
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Regulatory frameworks should be aligned to recognise this
CAPITAL MARKET DEVELOPMENT
Infrastructure (Systems)-Trading, clearing, settlement & custody
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Settlement & Custody
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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”
CAPITAL MARKET DEVELOPMENT
Infrastructure (Systems)-Trading, clearing, settlement & custody
Systems – concluding comments
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The easy part of market development
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Do not let them become a constraint
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Can become “the straw that breaks the camel’s back”
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OTC market systems / processes work – use them
Beware of free systems – there is no such thing as free !
CAPITAL MARKET DEVELOPMENT
Leadership
It starts at the top !
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Will and commitment of Central Government
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Clarity of objectives – critical
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Good market legislation and regulation
Who are your competitors and what are they doing?
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Could they be your partners?
Participants & authorities to have common objectives
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Discuss and decide
Leadership comes from both
Establish a Structure that encourages innovation, risk taking so that
participants can make a profit
CAPITAL MARKET DEVELOPMENT
Key Issues for growth of bond markets
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Sound economic, monetary and fiscal framework
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Good legal system – bankruptcy laws – “soft infrastructure”
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Effective, appropriate and harmonised financial market legislation
and regulations
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Money markets are the starting point – asset / liability matching /
mismatches
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Role of pension fund legislation is important
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Privatise the pension funds
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prescribed investments – promote but could also distort – be careful
Do not force a structure onto a market
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Recipe for disaster
ATTRACT PARTICIPANTS THAT CAN BE INNOVATIVE & PROFITABLE
CAPITAL MARKET DEVELOPMENT
Lessons & Observations – Be practical
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Be practical – if you do not have all the right things in place
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Do not re-invent the wheel !
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Size does matter – big balance sheets count !!
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Intermediaries / speculators are important participants – do not
squeeze them out
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Get practical training / exposure from those who have done it before
or do it now
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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
CAPITAL MARKET DEVELOPMENT
Lessons & Observations – Be practical
From my experience
 Exchanges are unusual places for listing & trading bonds
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understand the different dynamics wherein banks are major bond
participants vs brokers as major participants in equities
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If an exchange is the chosen route – issuers and investors should not be
members (users)– too many vested interests – they are clients!
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Consider combining equities, bonds and derivatives into one overall
Exchange structure – economies of scale / skills / scope – practical issues
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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!
THINK BIG
HAVE A PLAN
BUT START NOW
WITH SMALL THINGS
Thank you for your attention
TOM LAWLESS
TEL: +27-11-888-3568
+27-82-901-7777 (mobile)
FAX: +27-11-888-1411
[email protected]
Tom Lawless & Asscociates