Presentaci

1
Lessons from emerging markets how applicable is
the regulatory framework for emerging debt
markets Washington, June 2nd 2003 Clemente
Del Valle Chairman Securities Commission, Colombia
2
AGENDA

• Lessons from developed markets

Colombian debt market experience an illustrative
case of its achievements and mistakes
Colombian debt market ongoing reforms
Final remarks
3
Well-developed capital markets provide benefits
for the entire economy
Derivative market
and are an essential tool for growth

• Better financial management practices
• Leads to low interest rates

Private sector bond market

• Expands investors options
• Leads to a more balanced domestic financial
  architecture

Government bond market

• Provides short-term bonds and standardized
  issues for the money market
• Provides the market benchmark yield curve
• Supports the development of capital markets
  infrastructure

Money market

• Provides liquidity
• Supports the building of the short-term yield
  curve
• Reduces the cost of GS

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Macroeconomic policy
Basic legal framework and infrastructure
Primary market
Issuer
Investor
Secondary market
Intermediaries
Money market
Level of development of the financial sector
SOURCE Developing Government Bond Markets
Handbook, World Bank IMF, 2.001
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Principles of the legal framework

• Prevent improper market conduct (market
  manipulation insider trading)

Fair, efficient and transparent market

• Intermediaries with minimum capital
  requirements
• Internal control procedures

Objectives of regulatory framework
Minimization of systemic risk

• Transparent information disclosure
• Reliable systems for settlement of cash and
  securities transactions
• Fit and proper rules for management in
  securities firms

Protection for investors and consumers of
financial services
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A well-developed debt market implies

• High levels of professional standards,
  self-discipline, ethics and size of the
  intermediaries ( a professional market)
• A well functioning money-markets
• Good enforcement capacity of the legal and
  regulatory framework (e.g. ordinary justice, SEC
  capacity)
• And /or effective self-regulatory schemes

However a major hurdle in many emerging markets
going forward is that those pre-requisites have
not been properly assess or have been taken for
granted
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Measures in the short and medium term
Secondary Gov. Bond market liquidity

• Debt Policy
• Debt strategy
• Market oriented funding strategy
• Auction procedures
• Transparency
• Gov. Bond standardization
• Short-term yield curve

Macroeconomic Stability
Infrastructure and Regulation upgrade
Secondary intermediaries
Financial Stability

• Debt Policy
• Strength government debt teams
• Use of primary dealers
• Risk management
• Extend bonds maturities

Credit Rating System
Money Markets (repos market)
Disclosure System
Competition
Expand Investor base
Bankruptcy Law
Infrastructure and Regulation
TIME
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AGENDA
Lessons from the developed markets

• Colombian debt market experience an illustrative
  case of its achievements and mistakes

Colombian debt market ongoing reforms
Final remarks
9
The domestic sovereign debt has experienced a
major development in the last decade
SOURCE Ministry of Finance.
10
It has deepened the capital market
SOURCE Ministry of Finance.
11
Most of the fixed income securities are
dematerialized
Evolution of securities under custody and and
dematerialized securities - DECEVAL Billions of
dollars
SOURCE DECEVAL.
12
Main electronic transactional systems have
deepened the market
MEC
Daily Average 1997 - 2003
SEN
Private Debt Public Debt
Daily Average 1998 - 2002
Millions of dollars
Millions of dollars
Source BVC and Banco de la República
13
Developing the secondary market
SOURCE Superintendence of Securities.
14
However, showing a high concentration of TES
Stock Market
The TES market has increased its participation
in the stock market from 6 in 1.993 to 40 as of
December 2.002.
TES
TES
SOURCE Superintendence of Securities.
15
Debt portfolio profile has been extended
TES PORTFOLIO PROFILE
Average Term
The strategy used has improved the portfolio
structure, increasing duration conditions, and
average term.
Duration
SOURCE Ministry of Finance
16
Likewise the yield-curve has been extended
SOURCE Ministry of Finance, April 2003
17
In the same way, Institutional Investors have
grown
Fondos Comunes Ordinarios, Fondos de Pensiones y
Cesantías, Fondos de Valores, Compañías de
Seguros y Patrimonio Autónomo ECOPETROL
SOURCE Superintendence of Securities and
Superintendence of Banks
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Investor Base Structure
2.002
SOURCE Ministry of Finance
19
The size of securities market has consistently
increased during the last years
SOURCE Superintendence of Securities and
Superintendence of Banks
20
Likewise, development of proprietary trading in
banks has brought increased sophistication of the
market
INCOME STRUCTURE (CREDIT ENTITIES)
As well as in the brokerage firms
PROPRIETARY TRADING
PROPRIETARY TRADING
COMMISSION
SOURCE Asobancaria and Superintendence of
Securities
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Nevertheless, some problems have put the market
in a risky situation in recent years

• Industry standards
• Low professional standards of the market
  intermediaries
• Absence of market integrity
• Improper use of securities and public resources
• Distortion of the financial operations and
  statements
• Absence of proper Chinese-walls
• Shortage of capital adequacy and proprietary
  trading rules
• Inadequate risk management skills (prudential
  issues)

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Nevertheless, some problems have put the market
in a risky situation

• Deficient supervisory capacity
• Imbalance between supervision and regulatory
  capability
• Weak enforcement and surveillance
• More focus on equity markets and brokerage
  activity (instead of fixed income market)
• Scarce budgetary autonomy
• Lack of a self-regulation scheme
• A Weak SRO system in place ( stock exchange)
• There is not enough independence between the SRO
  role and the commercial and association roles
• Weak oversight capacity of the supervisor

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Nevertheless, some problems have put the market
in a risky situation

• Limited development of the money markets
• Unclear legal definition of the Repo contract
  guarantee loan or temporary buy-sell back
  guarantees
• Regulatory arbitrage given lack of coordination
  between Superintendence of Banks and SEC
  (terms, discount, operation limits)
• Unsecure and inefficient settlement system for
  securities lending and repos (not assume
  counterparty risk)
• Inappropriate haircuts and margin calls
• Inadequate transparency for creditors

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Nevertheless, some problems have put the market
in a risky situation

• Price formation distortions (Mark to market)
• Regulatory arbitrage. Two different regimes
  between Superintendence of banks and the SEC
• Inflexible accounting structure impedes an update
  to international standards
• Numerous mark to market methodologies that do not
  reflect market conditions
• Absence of a pricing system
• Mark to market methodology completely outdated
  with respect to the international trend

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AGENDA
Lessons from the developed markets
Colombian debt market experience an illustrative
case of its achievements and mistakes

• Colombian debt market ongoing reforms

Final remarks
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Priority given to issuance of prudent regulation

• Mark-to-market valuation
• SV and SB already issued identical rules to value
  securities (to avoid regulatory arbitrage) -
  September 2002
• SV has approved the methodology developed by BVC
  to act as a price vendor for TES - January 2003
• Development of a methodology to provide market
  prices needed to apply the valuation rules
• Establishment of a private sector advisory
  committee - May 2003
• Proprietary position
• Rules of capital adequacy have been issued with
  industries approval (March 2003 - August 2003)
• Standard ratio of capital to weighted risk assets
  and market risk
• Based on IOSCO principles and the new Basel
  Capital Accord

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... And to develop the money-market

• Coordination with State entitites Ministry of
  Finance, Central Bank, Superintendence of Banks
  and Superintendence of Securities to align
  regulation with respect to
• Limits
• Participating agents
• Collateral
• Risk factors
• Work orientated towards development of Repos
  market, as base for other markets.

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Increase the professionalism standards of the
industry

• Identify the risky areas within the industry
  activities
• Establish the standards for the participants that
  would diminish those risks (e.g. brokers,
  dealers, clearinghouses, rating agencies,
  advisors)
• Discourage and sanction improper trading and
  practices
• Separate treatment and management of intermediary
  and client assets
• Brokers, asset managers and advisors must acquire
  licenses to operate ( professional exams)

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Governance of the Colombian Stock Exchange - BVC

• Strengthen the governance of BVC
• Clear mandate for the independent directors
• Auditing committee
• Detach self-regulation arm from BVC
  administration
• Diversify the composition of the independent
  members
• Spin off their association activity

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Modernize the regulatory framework

• Securities Law
• Adoption of IOSCO principles
• Regulation based on activities and not on
  entities
• Adoption of standards applicable to the market
  participants
• Adoption of new sanctioning procedures
• Strengthening of the supervision capability
  introducing international accounting standards
  and improving oversight of the auditing industry

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Strengthening of the Superintendence of
Securities (SV)

• Internal function specialization.
• Reassignment of functions such as surveillance,
  enforcement and authorizations.
• Creation of the Collective Investment Schemes
  division
• Reducing red tape.
• Avoiding duplicity.
• Abolishing some previous authorizations.
• Developing an automated system for the
  surveillance function
• Strengthening the oversight capacity over the
  BVC.

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AGENDA
Lessons from the developed markets
Colombian debt market experience an illustrative
case of its achievements and mistakes
Colombian debt market ongoing reforms

• Final remarks

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Final remarks

• Primary emphasis should be focused on a sound
  legal and regulatory framework to develop an
  adequate debt market
• Building that framework and a professional market
  takes time and requires a strong commitment of
  the industry and the regulator
• The Ministries of Finance as issuers should
  involve early in the process the securities
  regulatory agency
• Regulatory agencies should reassess the relative
  priority in terms of supervision (equity market
  vs. debt market), given the reality of their
  market.
• The regulatory framework should take into account
  the enforcement capability of the supervisor
• There is a need to strengthen the SRO scheme
  given the lack of resources of the supervisor
  (administrative restrictions and budgetary
  capability).

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Lessons from emerging markets how applicable is
the regulatory framework for emerging debt
markets Washington, June 2nd 2003 Clemente Del
Valle Chairman Securities Commission, Colombia