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. The framework is designed to deter market manipulation, prevent the failure of a clearing house to meet its financial obligations, reduce the risks of a loss of market integrity due to inadequate or failed internal processes and systems, mitigate the failure of counter parties and brokers to meet their obligations and ultimately, to guard the stability of the wider financial system through proper risk management. In the absence of strict compliance of a derivatives exchange with the regulatory requirements will erode the competitiveness and attractiveness of the market. The impact of the exemption of the NSE from compliance, sends a message that Kenya is not advancing in its goals to provide the level playing field necessary to support the higher levels of investment to fund the Vision 2030. Of greatest concern is the inconsistency of the statutory treatment of one entity in preference to all others which may be deemed to be in conflict with the constitutional principles on equality and freedom from discrimination and fair administrative action. The inclusion of this exemption also appears to be in contradiction with the many positive new attributes arising from the Act. First, streamlining the structures for the public offer of securities and facilitating the issuance of more complex products targeting institutional and sophisticated investors. Second, revision of the disclosure standards that may be applied to offers of securities subject to the nature of target investors. Third, strengthening the capacity of CMA to support market development and product diversification through the use of "principle based" as opposed to solely "rule based" approvals. Fourth, improving the quality and avenues for investor protection through the introduction of investor recourse for unfair prejudice, criminal liability for defective prospectus, judicial powers to order compensation arising from false or misleading prospectus and increased regulatory powers relating to the quality of disclosures to be made to investors. Fifth, a complete overhaul of the securitisation framework to support cash flow based, asset backed and structured financing to support large scale funding for infrastructure as well as to create greater access to credit that will be critical for the attainment of the Vision 2030. Sixth, a revision of the rules and requirements applicable to the identification and prosecution of insider dealing as well as market manipulation to ensure greater investor confidence in the operations of the capital markets. CMA will, therefore, continue to engage with the members of the National Assembly through its parent ministry, the National Treasury, to revisit the provisions under Section 36A of the Capital Markets (Amendment) Act, 2013 with a view to ensuring that the substantial strides that have been taken to improve the environment for globally competitive capital markets bear fruit. This approach will be critical if Kenya is to remain well placed to achieve its potential as the heart of capital markets investment on the continent and to attain the International Financial Centre status. Mr Muthaura is the acting Chief Executive, Capital Markets Authority .
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