Black, Bernard, 2001, “The Legal and Institutional Preconditions for Strong Securities Markets,” UCLA Law Review Vol. 48 (Los Angeles, California: University of California at Los Angeles), pp. 781–855.
Friedman, Felice B., and Claire Grose, May 2006, “Promoting Access to Primary Equity Markets: A Legal and Regulatory Approach”, Financial Sector Discussion Series, (Washington, D.C., World Bank).
Herring, Richard, and Anthony Santomero, 2000, “What is Optimal Regulation?” (Pennsylvania, Financial Institution Center, University of Pennsylvania).
IMF, 2002, “Experience with the Assessments of the IOSCO Objectives and Principles of Securities Regulation under the Financial Sector Assessment Program,” IMF Board Paper (Washington, D.C., IMF and World Bank)
International Organization of Securities Commissions (IOSCO), 1998, “Objectives and Principles of Securities Regulation” (Madrid, IOSCO).
La Porta, Raphael, Florencio, Lopez-de-Silanes, Andrei, Shleifer, and Robert, Vishy, 1999, “Investor Protection: Origins, Consequences, and Reform,” Financial Sector Discussion Paper No. 1 (Washington, D.C., World Bank).
LaPorta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2003, “What Works in Securities Law,” NBER Working Paper 9882 (Cambridge, Massachusetts, National Bureau of Economic Research).
Singh, Ajit, and J. Hamid, 1992, “Corporate Financial structures in Developing Countries,” IFC Technical Paper, No.1 (Washington, D.C., International Finance Corporation).
Yartey, Charles Amo, 2006, “The Stock Market and the Financing of Corporate Growth in Africa: The Case of Ghana,” IMF Working Paper No. 06/201 (Washington, D.C., International Monetary Fund). September 1, 2006
This paper is based on an internal staff note on IOSCO assessment results prepared jointly with Claire Grose and Felice Friedman, both from the Finance and Private Sector Development Unit of the World Bank. We are very grateful to Claire and Felice for their contribution to the work and their additional comments on this paper. The paper benefited from the excellent research assistance of Ivan Guerra and Claudia Jadrijevic, to whom we also extend our thanks. We also thank the IOSCO Implementation Task Force for their helpful comments. We take full responsibility for all errors and omissions contained in this paper.
Richard Herring and Anthony Santomero, 2000, “What is Optimal Regulation?” (Pennsylvania: Financial Institution Center, University of Pennsylvania).
See, for example, Charles Amo Yartey, 2006, “The Stock Market and the Financing of Corporate Growth in Africa: the Case of Ghana” IMF Working Paper No. 06/201 (Washington: International Monetary Fund), which following on earlier work by Ajit Singh and J. Hamid, 1992, “Corporate Financial structures in Developing Countries” IFC Technical Paper, No.1 (Washington: International Finance Corporation) uses empirical evidence to show that the stock market is the most important source of long-term finance for listed companies in Ghana. There is also an emerging body of work linking economic growth with sound corporate governance (a central part of securities regulation) and minority shareholder protections see Raphael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishy 1999 “Investor Protection: Origins, Consequences and Reform” Financial Sector Discussion Paper No. 1, (Washington: World Bank), Stijn Claessens, 2005, “Corporate Governance and Development” World Bank Working Paper (Washington: World Bank).
One exception is Rafael LaPorta, Florencio Lopez-de-Silanes and Andrei Shleifer, 2003, “What Works in Securities Law” Journal of Finance, American Finance Association, vol.61(1(pages 1–32, 02. The paper concluded that there is a connection between stock market growth and strong legislation that allows effective recourse to private enforcement (tort law), but that there was no connection between growth and the presence of a strong regulator in the market. We find the paper’s conclusions limited—there is little discussion of the connection between strong legislation and the regulator. It seems unlikely to us that jurisdictions in which legal protections for investors are high would not also have an effective regulator.
Effective securities regulation relies on the existence of a sound framework, including good contract and corporate law, a fair and timely judicial process, effective protection of property rights, good accounting and audit standards and sound taxation rules.5 We have observed that the lack of this basic framework has significantly affected the countries efforts to develop their markets and our observations are shared by others engaged in capital markets development work. We do not analyze these elements of a regulatory system, referred to as ‘preconditions’ in the paper, but do make mention of them where there is a direct and noted impact on the area of regulation. Annex 3 of the IOSCO Principles of Securities Objectives and Regulation sets out a list of matters to be addressed in domestic legislation.
A good overview of the approach to securities regulation can be found in Bernard Black, 2001 “The Legal and Institutional Preconditions for Strong Securities Markets,” UCLA Law Review, vol. 48, (Los Angeles, California: University of California at Los Angeles), pp. 781–855.
A list of the country assessments that we reviewed is provided in Appendix I. All of them are used in the statistics; except Canada because grades were not assigned to the assessment.
International Organization of Securities Commissions, 1998 “Objectives and Principles of Securities Regulation” (Madrid: IOSCO).
The grade of “broadly implemented” was introduced by IOSCO in 2002; this complicates the use of data comparing grades. In some cases a “not applicable” notation was made for a principle that did not apply (for example, in a country with no collective investment schemes, Principles 17–20 would not apply). Note also that this paper does not examine the findings related to Principle 30. Since the adoption of the IOSCO Principles and their Methodology a separate standard was develop to asses the robustness of clearing and settlement infrastructure.
The quality and consistency of assessments was examined in 2002. See 2002 “Experience with the Assessments of the IOSCO Objectives and Principles of Securities Regulation under the Financial Sector Assessment Program” IMF Board Paper (Washington, D.C.: IMF and World Bank). There is very little difference in our findings in 2002 from the findings enumerated in this paper.
For the purpose of this section, the categories of Implemented and Broadly Implemented have been taken together.
Principle 3, which measures adequacy of resources, also measures sufficiency of legal authority and capacity to perform regulatory functions. Assessments of this Principle do not provide uniform information on the level of financial resources and the impact this has on ability to function. A lack of resources at the regulator has been identified elsewhere, however, as a key challenge to developing market integrity. See Felice B. Friedman and Claire Grose and “Promoting Access to Primary Equity Markets: A Legal and Regulatory Approach”, World Bank, Financial Sector Discussion Series, Washington DC, May 2006.
Key to transfer of securities and credibility of market place is, of course, the clearing and settlement system. IOSCO Principle 30 evaluates clearing and settlement systems but this has been superseded by the more detailed CPSS/IOSCO Recommendations for Securities Settlement Systems. Since the adoption of these recommendations, the IOSCO Principles assessments have not included an assessment of Principle 30. We have, accordingly, left out any discussion of clearing and settlement systems.
In our introduction we identified pre-conditions to securities regulation, such as company and property law, accounting and auditing standards as important elements in effective regulation. We would reiterate here that these would seem to be more important in some assessed countries than the areas of concern discussed here but, again, these are beyond the remit of an IOSCO assessment or our analysis.
Completion of an assessment can take some time after the end of the in-the-field mission as the reports are reviewed by the Bank and Fund and the authorities. This paper relied primarily on completed assessments but also looked at those assessments still in draft form.