1 Approaches to Market Surveillance in Emerging Markets Final Report EMERGING MARKETS COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS DECEMBER 2009 2 CONTENTS Chapter Page Chapter 1 Objective and Approach 3 Chapter 2 Approach of market surveillance in emerging markets 5 2.1 Objective of Market Surveillance 5 2.2 Responsibility for conducting market surveillance 5 2.3 Surveillance systems and mechanisms 8 2.4 Supplementary efforts 9 2.5 Human capital and surveillance skills 9 2.6 Interventions and enforcement 10 2.7 Inter-market surveillance 11 2.8 Cooperation and information-sharing arrangements 12 Chapter 3 Regulatory issues affecting market surveillance 14 3.1 Changing landscape of surveillance 14 3.2 Making a case for market misconduct 16 3.3 Striking the balance 3.3.1 Skills vs. technology 18 3.3.2 Market integrity vs. Market liquidity 19 3.4 Inter-market surveillance 19 3.5 Impact of demutualisation on surveillance 20 Chapter 4 Conclusion 23 References 25 3 Chapter 1: Objective and Approach Background The Emerging Markets Committee (EMC) approved a mandate to examine the approaches to market surveillance in emerging markets to be conducted by the EMC Working Group on Regulation of Secondary Markets. This report examines the current approaches adopted by exchanges and/or regulators in conducting surveillance of markets. These include the role of the regulator versus the exchange in conducting the surveillance function, surveillance systems and mechanisms used, the importance of human capital and surveillance skills and supplementary efforts to complement the surveillance function. This report also examines the current methods used to intervene once market abuse is detected and international cooperation with foreign exchanges and/or regulators on matters involving market surveillance. It is also the intention of this report to provide emerging market regulators with a greater understanding of the key regulatory issues and challenges affecting market surveillance, and identify critical issues specific to emerging markets that could shape regulatory responses. Survey Coverage and Responses A project team1, led by the Securities Commission Malaysia, gathered information for this report via a survey questionnaire distributed to all IOSCO EMC members. The survey questionnaire comprised 31 questions which broadly covered the approaches to surveillance/monitoring, surveillance tools and other resources used for surveillance, and international co-operation. The survey questionnaire was formulated with a view to ascertaining the critical and core issues experienced by emerging markets in relation to their approaches to market surveillance. These include:  The current approaches - The survey sought to identify the current approaches adopted by the exchanges and/or regulators to monitor and detect adverse situations in their markets. The role of the regulator and/or the exchange in relation to market surveillance was also reviewed. 1 Project team members comprised regulators from China, Dubai, Brazil, India, Poland, Sri Lanka, South Africa and Thailand. 4  Key regulatory issues and challenges - The survey sought to gather information from emerging market regulators on regulatory issues and challenges which may arise when detecting market irregularities.  Regulatory reforms - The survey sought to identify and highlight perspectives from various emerging market regulators on some of the key initiatives taken in achieving their objective of maintaining a fair and effective trading environment. Responses were received from 32 jurisdictions2. In terms of geographical spread, there were 10 responses from Asia, 10 from Europe, 3 from South America, 5 from Africa and 4 from the Middle East. A summary of the survey responses was discussed at the EMC meeting in Marrakech in October 2008. At the Working Group meetings in Paris and Marrakech, the group also received feedback from exchanges in developed markets, including Euronext and the London Stock Exchange. 2 Responses were received from the IOSCO ordinary members from Brazil, Bulgaria, Chile, China, Chinese Taipei, Croatia, Czech Republic, Dubai IFC, Egypt, El Salvador, Hungary, India, Indonesia, Korea, Lithuania, Macedonia, Malaysia, Morocco, Nigeria, Oman, Pakistan, Papua New Guinea, Poland, Romania, Slovenia, South Africa, Sri Lanka, Tanzania, Thailand, Turkey, Tunisia, and United Arab Emirates. Responses from El Salvador and Tunisia were in Spanish and French, respectively. 5 Chapter 2: Approach of market surveillance in emerging markets In