Model to reduce EA capital markets risks
Traders at the trading floor at Uganda Securities Exchange in Kampala. File Photo.
What you need to know:
The structural differences between regional markets is partly responsible for the low trading activity of cross-listed securities in the region.
East African capital markets regulators have resolved to adopt a risk-based securities markets supervision approach of regional capital markets to help in early identification of risks to mitigate risks and grow strong capital markets.
According to a media statement, regional market regulators agreed during the 38th East African Securities Regulatory Authorities (EASRA) meeting in Nairobi, Kenya recently to develop and implement Risk-Based Supervision (RBS) framework across the region.
The framework will include financial resources rules, conduct of business and governance rules, formulation of a standardised risk based capital adequacy reporting mechanism and harmonisation of paid up share capital for various licence categories across the region.
Additionally, the regulators will work to harmonise market infrastructure systems in preparation for the adoption of RBS and boost trade in cross-listed securities.
The evolving technology and an increase in product development and innovation across capital markets in the region have resulted in the emergence of various forms of risks, necessitating adoption of risk-based supervision to deal with them accordingly.
EASRA chairman Japheth Katto said the RBS model would aid in early identification of emerging risks and provision of a consistent framework for risk evaluation to develop sound regional capital markets.
A risk-based approach requires that oversight of capital market intermediaries be directed to the areas where supervision of capital, client money, and public confidence may be at risk.
The financial sector globally is moving towards risk-based supervision as it has proved to be the most reliable approach of mitigating risks that affect financial institutions.
Uganda’s insurance industry also announced plans to shift from compliance-based to risk-based supervision in April to ensure transparency in the sector and improve the sector’s public image. The banking industry has already adopted the risk-based supervision model.
The meeting further adopted a 2014-17 strategic plan with a vision of enabling the EAC capital markets to be the driver of regional economic growth and development and the investment hub of Africa. It is expected to be launched early next year.
Initiatives
EASRA has undertaken a number of initiatives to harmonise regional stock trading including approving a proposal for a harmonised licensing requirement framework for stock brokers and dealers and agreeing to amend respective Memorandum of Understanding to pave way for the creation of Supervisory Colleges to administer joint inspection programmes and investigations to offer coordinated surveillance for cross listed companies where need arises.
The prevalence of structural differences between regional markets is partly responsible for the low trading activity of cross-listed securities in the region.
Although the Uganda Securities Exchange has attracted a number of cross-listed firms from the Nairobi Securities Exchange (NSE), most of their counters have not been registering much activity like that on the NSE.
