Review the capital markets law to promote globally competitive sector

An investor at the Nairobi Securities Exchange. Photo/File

By Paul Muthaura


IN SUMMARY
Exemption given to the Nairobi exchange sends wrong message.


The signing into law of the Capital Markets (Amendment) Act 2013 has been misunderstood to be a battle for supremacy between the Capital Markets Authority and the Nairobi Securities Exchange.

The divergence has centred on the inclusion of a three-year exemption for the NSE to carry out the business of a futures or derivatives exchange without compliance with the statutory and regulatory requirements issued by the National Assembly and the CMA.

The CMA would like to put in context its opposition to the exemption included in Section 36A of the Amendment Act 2013.

Both the Vision 2030 and the 10 Year Capital Markets Master Plan due to be published in the first quarter of 2014 are targeted at identifying the necessary actions to make the capital markets in Kenya more competitive so as to facilitate more investment flows.

The capital markets are expected to provide the critical arteries through which the domestic and international funds necessary to provide the life blood to drive economic development and wealth creation are to flow through.

Therefore, legal provisions must provide an environment through which investments can flow in a transparent, efficient and orderly mechanism.

In the Kenyan context, as a consequence of the three-year exemption from compliance, CMA is concerned that Kenya may be seen as a jurisdiction in which individual entity interests play a role in the creation of an uncompetitive and non-transparent environment in the capital markets.

The foundation of any leading investment destination is the existence of a level playing field for all entities.

All regulatory standards must be seen to be equally applicable across all players to avoid imbalances in the costs of compliance for competing players as well as inconsistencies in the level of investor protection that may be offered by different service providers.

In the above context, the CMA believes that it is a bad time to introduce different and conflicting standards of compliance with respect to the operation of a new sector as sensitive and potentially transformative to economic growth as the derivative markets.

As a case in point, in Brazil, over the last 30 years, the derivatives market has grown to become one of the most critical instruments in managing foreign exchange and interest rate risk which is central to allow for long-term economic planning.

These products have been central in supporting effective growth by businesses while providing an attractive investment option for local and international investors who have an opportunity to make money from the difference between the country’s benchmark interest rates and those in developed markets.

The nature and scope of the exemption granted to the NSE goes well beyond common “transition provisions.”

The Section 36A exemption grants a full waiver from compliance with the requirements for the establishment and regulation of a derivatives exchange set out in the Capital Markets Act and Capital Markets (Futures Exchanges) (Licensing Requirements) Regulations, 2013 including those dealing with good corporate governance, risk management, exposure management, investor protection, capital adequacy and market surveillance requirements while at the same time curtailing the powers of the CMA in regulating such an exchange.

These regulatory requirements seek to promote transparency and to ensure that the integrity of derivatives trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.