Chairman SEC’s Speech at the 6th Theme Conference of the South Asian Federation of Exchanges “Strengthening Stock Exchange Listing Regimes and Regional Harmonization” LAHORE – 3 December 2003 Excellencies: Distinguished guests: Ladies and Gentlemen: Assalam-o-Alaikum! It gives me immense pleasure to be here today at this auspicious event. It is indeed a great privilege and honour for me to address the sixth theme conference of the South Asian Federation of Exchanges (SAFE) in Lahore. Over the past few years, SAFE has provided a platform for enhanced cooperation among stock exchanges in South Asia, which has helped in promoting the development of securities markets in the region. The theme of today’s conference – “Strengthening Stock Exchange Listing Regimes and Regional Harmonization” – is an issue of great concern to exchanges worldwide, and particularly to the developing economies in the South Asian region. When we talk about regional harmonization in terms of listing regimes- from a global perspective, it entails an all-encompassing view of disclosure and transparency standards. In this regard, SAFE has undertaken a study to assess the listing regulations of member bourses in comparison to international and regional best practices. The objective is to identify the strengths, weaknesses and developmental needs in each of the concerned jurisdictions. In today’s conference, we will benefit from a discussion of the findings of this study and proposed recommendations. Efforts like these are essential prerequisites in addressing the deficiencies in the listing regimes and achieving greater harmonization across the region. We hope that the expert recommendations along with the feedback received from today’s session are appropriately processed and implemented to achieve the objectives of the study. The Geographical location of stock exchanges is fast losing relevance in the new market place. The ensuing trend is towards enhanced regional and global integration of capital markets. On the international front, trends show that as a minimum, common trading platforms become a regional necessity where multiple markets can share the use of the same technological infrastructure/base. This would lead to harmonized listing requirements, standardized trading and settlement procedures, and rationalized common qualifications for membership. The forces of globalization, technology and changing investor demographics and new forms of competition have dramatically transformed capital markets worldwide. Global economic integration facilitates the importation of capital and intermediate goods that may not be available in a country’s home market at comparable cost. Similarly global markets improve the efficient allocation of resources. In addition, countries gain better access to financing, and the suppliers of capital – institutional investors and/or individual savers – receive better returns on their investments. Finally, worldwide integration allows for the rapid transfer of ideas and technology, which are critical ingredients of today’s knowledge-based economies. Hence, regional integration would provide significant advantages in the form of: 1. lower prices for financial services, 2. a more efficient, liquid and broader securities markets, 3. innovative financial products and services, 4. industrial transformation of markets, cheaper corporate financing, 5. more efficient allocation of capital, 6. higher returns, 7. enhanced risk return frontiers, and 8. improved macro-economic performance. However, it must be borne in mind that increased international capital flow leads to regulatory problems which are not solely market-based, such as, foreign exchange control, taxation treatment of foreign holdings and governmental attitudes towards foreign investment generally. As a result, the establishment of regional capital markets requires a plethora of reforms, primarily to remove restrictions on capital movement and on dividends and profits together with the harmonization of general taxation, regulatory and legal requirements. While it is not possible to have the same standards in regulations in all economies in South Asia, much less worldwide, it is essential to have some sort of equivalence that allows investors to gauge the prospects of investing in a particular country. At a minimum, greater coordination and exchange of information between regulators of securities market regulators – both front line as well as apex – are cardinal factors in achieving consistencies in regulatory frameworks. The outcome of the increasingly integrated markets is cross-border listings and cross-border flows. While traditionally companies wishing to list their securities on a stock exchange opted for the stock exchange of their country, certain factors - particularly technological advancements – have allowed companies to contemplate secondary and multiple listings in other countries. The cross-border flows of capital are accompanied with a host of regulatory issues. One such aspect – the regulation of cross-border financial intermediaries – is being looked into by the International Organization of Securities Commissions (IOSCO) through its Working Group of Emerging Markets Committee, which is headed by the SEC, Pakistan. I would like to emphasize that the SAFE – as a federation of exchanges in the South Asian region – should study issues emanating from integrated markets and cross- border financial activities. It may also encourage its members to sign Memoranda of Understanding that allow flexibility in networking, coordination, cooperation and exchange of information. Concerted efforts like these would be essential to preempt financial crises and prevent regulatory failures. In this regard, the SEC has initiated a process to enter into Memorandum of Understanding with our counterpart authorities in other jurisdictions for information sharing and cooperation. I thank all the representatives from regulatory authorities who have consented to be signatories to these MOU. It is felt that such agreements/understandings would undoubtedly enhance co-operation and facilitate in the achievement of the SAFE objectives for the mutual benefit of all the member states. Before I conclude, I would like to briefly highlight the recent reforms in Pakistan that have immensely contributed towards a well-performing stock market. An overall policy of deregulation has been adopted in the financial sector, which has led to rationalized procedures and decreased government intervention. Liberal policy frameworks for privatization and private sector development have been formulated, which are expected to broaden and deepen the capital market. Protection of investors’ interest is the primary focus of the SEC and all reforms introduced over the past years have been targeted at preventing the market from systemic risk and promote business enterprises, thus mobilizing capital for investment. As a result, price discovery, trade settlement and investor dispute resolution have become visibly efficient, fair and transparent. To address governance and risk management issues at the exchanges, the SEC has introduced a number of measures which include, restructuring of the boards of the stock exchanges to ensure adequate representation of non-member directors (50%), enhanced net capital requirements and capital adequacy limits on stock brokers, and prohibition of blank selling. Moreover, carry-over-transactions are in the process of being phased out and replaced with margin financing, while demutualization of the exchanges is also in the offing. On the developmental front, brokers are urged to establish offices in smaller towns and cities and on-line trading is being facilitated. Pakistan’s stock exchanges now largely comply with the 30 Principles of Securities Regulation prescribed by IOSCO. In order to make Pakistani companies more attractive for investment, a Code of Corporate Governance has been introduced. The Code is based on internationally recognized principles and emphasizes openness, transparency and accountability in the affairs of listed companies. This has been accompanied with enhanced enforcement of International Accounting Standards and improved audit services. We have so far adopted 38 out of 41 International Accounting Standards. The SEC is continuously striving to raise standards of regulation and protect market integrity by ensuring a fair, efficient, transparent and vibrant capital market for all stakeholders. The stock exchanges are playing their due role in this regard. I trust that the regional exposure gained by the stock exchanges in Pakistan through the platform of SAFE would further assist them in being a fair and stronger front line regulator of capital market. I thank you all for your time!