FR09/10 Effectiveness of Market Interventions in Emerging Markets

Effectiveness of Market Interventions in Emerging Markets Final Report EMERGING MARKETS COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR09/10 OCTOBER 2010 2 Contents Chapter Page 1 Objective, Background and Approach 4 2 Types of market interventions in emerging markets 6 2.1 Trading Halts 7 2.2 Market Closures 8 2.3 Price Limits 9 2.4 Circuit Breakers 11 2.5 Alternatives to address market volatility 3 Regulatory issues in emerging markets 14 3.1 Changing trading landscape and the impact on regulatory approaches 14 3.2 Trading Halts 15 3.3 Market Closures 16 3.4 Circuit Breakers 17 3.5 Coordination mechanisms across equities and derivatives exchanges 20 3.6 Communication and coordination for multi listed services 21 3.7 Effectiveness of market 22 4 Conclusions 24 3 List of Figures Figure Name Page 1 Types of Market Intervention Measures in Place in Emerging Markets Surveyed 7 List of Tables Table Name Page 1 List of Jurisdictions‘ Whose Circuit Breakers were triggered in the last two years 10 List of Abbreviations ASIC Australian Securities & Investments Commission KLCI FTSE Bursa Malaysia KLCI KOSPI The Korea Composite Stock Price Index MiFID Markets in Financial Instruments Directive SET The Stock Exchange of Thailand SVS Chile Superintendencia de Valores y Seguros TA-25 Tel Aviv 25 Index 4 Chapter 1 Objective, Background and Approach Introduction A striking feature of the global financial crisis of 2007-2008 was the speed at which financial market volatility was transmitted across the globe. The contagion effect of the crisis resulted in severe volatility being observed across geographical boundaries as well as across different asset markets, with such fluctuations continuing over extended periods during the peak of September and October 2008. Although the root of the crisis stemmed largely from a number of developed markets, emerging markets were also affected, with almost all emerging market jurisdictions reporting at least one if not more episodes of volatility in their capital markets during this period. While many of the world‘s stock exchanges experienced the worst declines in their history, with an average drop of around 40% in most indices, the MSCI Emerging Markets Index fell about 20% during the height of the crisis. The IOSCO Emerging Markets Committee (EMC) Report on the Impact on and Responses of Emerging Markets to the Financial Crisis1, published in September 2009, had observed that trading halts, circuit breakers and market closures were among some of the principal measures taken by emerging market regulators, to reduce instability in their markets during the global crisis. While a large proportion of emerging markets have some form of market intervention framework in place, the extent to which such interventions are imposed differ across jurisdictions. The IOSCO EMC Working Group on the Regulation of Secondary Market (EMCWG2) was been tasked to examine the effectiveness of intervention measures such as trading halts and circuit breakers to control price volatility. In addition, where measures were taken to close markets, EMCWG2 was also asked to review the effects of such closures in mitigating the impact of the market volatility. The significance of the mandate was further reinforced and has increasing relevance in light of the US flash crash on 6 May 2010. The mandate takes into account the discussion and issues that have been raised, as well as some of the market intervention measures that have been taken by regulators and/or exchanges to reduce the risk of sudden disruptions and erroneous trades. Against this backdrop, the mandate examined the application and effectiveness of market interventions, and the regulatory issues arising. The report considered other related work conducted by IOSCO, including the IOSCO Technical Committee Report on Trading Halts and Market Closures2 published in 2002, which examined the application of interruptions in developed markets. 1 Impact On and Responses of Emerging Markets to the Financial Crisis, Report of the Emerging Markets Committee of IOSCO, 18 September 2009, available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD307.pdf 2 Report on Trading Halts and Market Closures, Statement of the Technical Committee of IOSCO, November 2002 , available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD138.pdf 5 Scope and Approach A project team3, led by the Securities Commission of Malaysia, gathered information for this report via a survey questionnaire distributed to all EMC members. The survey questionnaire was formulated with a view to ascertai