Business Daily from THE HINDU group of publications
Friday, Dec 22, 2006
Markets - Regulatory Bodies & Rulings
Corporate - Corporate Governance
The international financial system is going through profound changes that are seeing the integration of markets. For instance, cross-listing of stocks in exchanges across countries is setting the stage for harmonising capital flows across borders.
The recent discussion on the possibility of cross-listing of scrips on South Asia's stock exchanges is a welcome move towards regional stock market integration.
It is not a new idea; economists have spelt out the benefits and rationale of financial integration, which leads to efficient utilisation of funds and offers opportunities for optimal price discovery.
Besides greater liquidity, financial integration leads also to a consolidation of expertise available among the participating countries. For corporates, this offers access to technical knowhow, and management skills.
But for this process to happen, there has to be a harmonisation of the policies of different financial sectors of the member countries. The South Asian countries will have to bring about not only a consistency in policies of different markets but also transparency and discipline.
For, capital movement in this case, buying/selling of stocks can affect corporates. Conversely, their actions in the market can have an impact on the economy concerned.
Means for evaluation
An equally, or more, important issue is to provide market participants with the means to evaluate and compare the exchanges, clearing houses, brokers and other intermediaries.
The next step would be to improve the co-ordination and communication among exchanges, clearing houses and their regulators.
The participating countries will have to harmonise the rules for internal risk management by the financial intermediaries brokers, depositories, merchant bankers, underwriters, institutional investors, as also the accounting standards, the disclosure norms and the listing conditions.
Obviously, the regulators will need to cooperate closely on setting accounting standards, creating and the systems necessary to monitor and contain risk.
Defaults, settlement problems
Financial markets face default and settlement problems, which can at times snowball into a full-blown crisis.
So the participating governments will have to strengthen their laws and procedures to curb market defaults and to protect investors. It is, therefore, necessary that all intermediaries working in the markets are completely transparent.
This calls for a uniform governance code, besides setting similar credit-rating standards. Else, there are possibilities of problems of one country being transmitted to all the participating nations.
For instance, the sudden collapse of a large participant in a payment system can cause unexpected problems for counter parties if netting arrangements prove not to be legally binding.
Even if all this involves a lot of work, the pay-off will be worth the trouble, as such an integration would create a financially strong bloc.
The European Union is an example. European countries have become more integrated thanks to standardisation of financial and non-financial regulations.
Especially, the creation of a common currency, the euro, allows portfolio managers to invest in the stocks of the corporates in the participating countries without concern for exchange rate risk.
Indeed, in the long run, South Asian countries will have to think in terms of a common currency if they want to build a common and powerful financial market.
But given the limited success of South Asian Association of Regional Cooperation, can a common financial market really emerge in South Asia?
One thinking is that the idea may succeed if Malaysia and Singapore are also involved as their presence might lead to sinking of regional differences, and lead to regional financial integration.
(The author is former Economic Advisor to SEBI.)
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