Y Bhg Tan Sri Zarinah Anwar
Chairman, Securities Commission Malaysia
11th Annual Emerging Markets Program
Conference Hall, Securities Commission, Kuala Lumpur
November 1-4, 2010
“The Changing Regulatory Landscape Post Global Financial Crisis:
The Role of Capital Market Regulators”
Introducing the EMP
Ladies and Gentlemen
Good morning and welcome to the Securities Commission and to the 11th Emerging Markets Programme (EMP). To all our speakers and participants from abroad, welcome to Malaysia.
I would like to take this opportunity to say a few words about the EMP itself. The EMP is now in its eleventh year. From feedback that we have been receiving over the years, I’m pleased that we have been able to offer participants a forum to learn and share experiences, exchange ideas and network. This year, the EMP also aims to help participants seek solutions to issues. The range of topics has been widened to include policy discussions on the first day, while the remaining days will cover more specific regulatory issues and their implementation. Continuing the practice we initiated last year, the first day is open to the media, as part of knowledge sharing and to encourage learning amongst a wider group of stakeholders. The following days are closed sessions, subject to “Chatham House Rules” to encourage frank discussions and open feedback needed to maximise learning from shared experiences.
I am greatly heartened that we continue to receive the unwavering support of many co regulators as well as industry participants who have given us their time so willingly to participate in this Program. Present with us at this 11th EMP are speakers from key capital market jurisdictions including Australia, Canada, Chile, China, Hong Kong, Japan, Malaysia, Singapore, Spain and the US. We are also pleased that 47 participants from 20 different countries are able to join us this week.
Recognising the pivotal role of the EMP that plays in capacity building, this Program is sponsored by the Malaysian Government through its Malaysian Technical Cooperation Programme (MTCP). Over the years, 473 participants from 61 countries have benefited from the EMP, of which, 112 participants from 54 countries were funded by the government and the MTCP programme . I am very pleased that this year the MTCP is sponsoring 16 participants. There is probably nothing quite like it in the world, and I am proud that we are able to make this unique contribution to the IOSCO capacity building agenda for emerging capital markets.
Ladies and gentlemen,
From balanced regulation to new regulatory philosophy and approaches
Last year, as the causes of the global financial crisis were being unraveled and debates intensified on issues of re-regulation and market discipline, the EMP had appropriately focused on the issues surrounding the search for an appropriate regulatory balance. The special circumstances of emerging economies where measures to develop the capital market and regulation to adequately protect investors and build market confidence are both required in equal measure, makes this regulatory balance critical for effective regulation and its enforcement.
As we saw, the financial sectors in emerging economies emerged from the crisis relatively favourably, but we must acknowledge that there are many lessons to be learnt by emerging markets, and it is necessary for us to study the regulatory reforms that are taking place in the more developed markets.
Today, a year later, the international community has made significant progress in efforts to build the resilience of financial sectors. There is now consensus on the need to define, identify and reduce systemic risks. While much more work and research is required, experts, including several from those from emerging markets, have come up with new approaches in regulation and supervision of financial sector institutions, markets and instruments. Hence, it is appropriate that this year’s EMP continues last year’s debate of diagnosis of the crisis and balanced regulation and follows up into the next stage of understanding and evaluating the new emerging regulations. How do we adapt our own national regulations and supervision framework while fulfilling our roles to develop the capital market within a changing regulatory landscape in financial sectors across the globe?
This year’s EMP is entitled “Aftermath: The Consequences of the Global Financial Crisis for Emerging Market Regulators”. The agenda recognizes the lessons from the last crisis and the need for developed and emerging economies to identify systemic risks, and build resilience in all our financial sectors. For emerging economies, we need to understand the new regulatory philosophy that is being expounded and the regulatory approaches that are now on the table for implementation. In a more connected world and integrated capital markets, it is not unexpected that emerging markets must also adjust their regulatory framework to be consistent with global standards. Development of capital markets in a safe and sound environment requires that our markets offer the same degree of protection in order to build confidence. If the name of the game is to build resilience of financial sectors, emerging market economies must also be measured against the same standards-that their financial markets are also more resilient in managing shocks through adoption of new standards of market surveillance and supervision.
Many measures have been introduced in this regard. The Basle Committee has issued the new capital standards for banks, and IOSCO has introduced many measures to build resilience of capital markets. The G30 has made recommendations on implementation of macro-prudential surveillance and supervision, the World Bank has strengthened assessment standards on corporate governance and financial management while the IMF has submitted the Report requested by G20 on systemic institutions, markets and instruments. Notwithstanding the different macro-economic conditions and different levels of development and sophistication of markets in emerging economies, I believe that it is essential for us to understand the new regulatory approaches that are emerging. It is only through diligent study and understanding of its implications that we can adopt these approaches, suitably modified to ensure its effectiveness given our economic circumstances and legal frameworks.
This year’s EMP speakers and panelists have therefore been drawn from a balance of developed and emerging markets to provide their perspectives of the new regulatory landscape. They will debate and share their perspectives and the options for regulators in the emerging economies as we aspire to continue to develop our capital markets to better service the financing needs of our expanding economies.
The new regulatory changes-what it means for emerging market regulators
Ladies and gentlemen
I would like to take this opportunity to highlight several significant areas of work that will impact the regulatory landscape in the near-term. Let me start with the important initiatives by IOSCO post crisis, to guide regulators in improving capital market oversight. To some extent, the IOSCO recommendations are not dissimilar to the macro-prudential supervision measures recommended by the G30.
In June this year, the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles), which are recognized as the international regulatory benchmark for all securities markets, were revised to incorporate eight new principles, based on lessons learned from the financial crisis and subsequent changes in the regulatory environment. These new principles cover areas such as hedge funds, credit rating agencies and auditor independence and oversight, in addition to broader areas of systemic risks; conflicts of interest and misalignment of incentives.
In addition to the IOSCO Multilateral Memorandum of Understanding (IOSCO MMOU) which has been instrumental in facilitating cross-border cooperation amongst securities regulators, IOSCO recently published a set of Principles Regarding Cross-Border Supervisory Cooperation which emphasise the importance of enhanced supervisory cooperation and information-sharing among securities market regulators to better supervise the entities they regulate that have expanded their operations across borders.
IOSCO has also examined ways to address some of the regulatory gaps highlighted by the crisis and focuses its work in addressing concerns regarding abusive short-selling; transparency of markets and disclosure with respect to financial products.
The Emerging Markets Committee of IOSCO has also led various streams of work to identify issues specific to emerging market jurisdictions. Several projects have been undertaken following the EMC Report of September 2009 on the Impact and Responses of Emerging Markets to the Financial Crisis. The study which was led by Chile and Malaysia highlighted the need to strengthen regulatory and investor protection frameworks, as well as effective prevention and management of systemic risks. The study showed that it was increasingly apparent that emerging markets must actively cooperate with developed jurisdictions in international financial coordination and have a greater voice in the decision-making processes in both regulatory issues as well as in identifying relevant responses to a crisis.
Following on from this review, several projects have been undertaken by the Emerging Markets Committee to look at specific issues, including OTC and Derivatives Trading, securitisation and securitised debt and the effectiveness of market interventions in emerging markets. This last Report on the Effectiveness of Market Interventions, which examines various measures to reduce instability in stock markets during the crisis as well as to reduce the risk of sudden disruptions and erroneous trades has proved especially relevant in the light of the US flash crash of 6 May 2010.
Another significant global initiative revolves around dealings with systemically important financial institutions, markets and instruments. The IMF Report to the G20 is the first of the reports to provide guidance to countries to identify systemically important institutions, markets and instruments and assess the adequacy of legal, institutional, regulatory and supervisory frameworks to deal with systemic issues. Although the work is still at a high level, a start is being made to help countries adjust regulations towards higher diligence of these institutions and markets. The guidelines are potentially relevant for defining the perimeters and intensity of regulation and supervision and the design and operation of policy responses in the event of a financial crisis. Use of these guidelines duly customised, would provide a common approach and standard, thereby limiting regulatory arbitrage.
Another milestone in efforts to improve the regulatory and supervisory architecture are the recommendations of the recently released G30 Report which makes convincing arguments for implementing macro-prudential policy, surveillance and supervision. Current prudential regulation and supervision focus on liquidity and solvency of institutions while macro-economic policy focus on whole systems. There is a gap between these, which can be addressed by developing macro-prudential policies. There are many issues addressed in the G30 Report that are relevant to capital market regulation which raises issues that can actually be debated by participants at the different sessions this week. A large share of risks falls under the pro-cyclical bias of financial markets. An important macro-prudential policy target is to address this behavior of markets and instruments and mitigate risks from pro-cyclicality of homogenous behavior. Instruments and measures that lead to risky herd behavior include securitization, and how it is structured in building complex instruments. The regulatory challenge is not to do away with securitization, but to optimize the value of this instrument in supporting liquidity in the money and capital markets, while ensuring its structure as well as behavior of those involved do not raise institutional and market crisis. These are a few of the examples that regulators need to examine and assess to manage the unintended consequences of regulation.
Different levels of development and sophistication of emerging markets
Ladies and gentlemen
Emerging markets today present better medium and long-term risks to global sources of funds for perhaps the first time in history. Michael Spence, a Nobel Prize-winning US economist viewed prospects for Brazil, China and India as favourable because he says, “they were less sophisticated financially and so they were not holders of complex securitised financial instruments; their economic managers displayed a high degree of competence and their central banks responded as swiftly to tightening credit as those in the West.” As such, these economies will keep growing. However, he quipped “I wouldn’t have said that 10 years ago.”
The same situation applies to many other emerging economies. Going forward, emerging economies all aim to become developed and advanced. Our economies will become technology based. We will continue to liberalize to enhance competition. Production of goods and services, whether undertaken by large corporations or small enterprises, must be directly connected to global supply chains to become cost effective. Our companies must evolve to be regional and global in order to build scale and compete effectively. To become advanced economies, the financial sector cannot remain “less sophisticated”. Emerging market regulators no longer can disallow complex structured products because we do not understand them. We need to become more sophisticated ourselves to provide the more diverse instruments that will be demanded by equally sophisticated business enterprises. They need sophisticated financial products to finance economic activities, hedge their currency and trading positions and invest their profits and reserves.
Regulators of emerging economies therefore, cannot remain complacent. We need to meet the diversified demands of a sophisticated entrepreneurial class, and our regulatory framework must evolve to meet the changing requirements. Remaining less sophisticated will not isolate emerging economies from global risks. As capital market integration deepens, managing these global risks will be key to building resilience of capital markets in emerging economies.
Ladies and gentlemen,
Preventing a tragedy of failure of the markets because of poor systemic regulation
Good regulation in emerging markets is about finding the right balance between encouraging innovation and fostering growth and investor protection. Above all, it is about creating free, fair, efficient and transparent markets. However, as we have discovered, it is also about recognizing the limits to free markets and realising that free markets fail because prudential regulations on individual institutions can miss the impact of institutional behaviours on markets and systems. This gap in capital market regulation and supervision, if not corrected will inadvertently cause market failures, and adversely impact investors and savers, while leading to other systemic contagion on the economy.
Ladies and gentlemen,
I have raised only a fraction of the regulatory and supervisory issues that are currently being discussed by the international community. The 11th EMP, however, has been designed to cover much more wide-ranging issues. Over the next four days you will have a unique opportunity to listen to experts sharing their experiences and debate on the values of the new approaches to capital market regulation. I would like to urge all participants to maximize the opportunities to interact with them, to raise issues that are peculiar to your countries and benefit from their perspectives of options that you can consider.
The timeliness of this year’s EMP should be taken advantage of as we all start to review national regulatory frameworks in the face of the changing global regulatory landscape to reign in systemic risks and build financial sector resilience across the globe.
Before I go, I would like to express my immense appreciation once again to all the speakers who have agreed to take time from their very busy schedules to be with us this week. Naturally a Program of this nature will not be successful if not for your participation and contribution, and I thank you for your support and assistance.
Lastly let me wish all participants a very productive and enjoyable programme.