Report On Cross-Border Activities Of Market Intermediaries In Emerging Markets

REPORT ON CROSS-BORDER ACTIVITIES OF MARKET INTERMEDIARIES IN EMERGING MARKETS EMERGING MARKETS COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS MARCH 2005 2 Table of Contents Introduction................................................................................................... 3 Objectives of the Report............................................................................... 4 Cross Border Activity and Global Experience .......................................... 5 Cross Border Activity and Emerging Markets .......................................... 8 Major Impediments to Cross Border Trading ............................................................ 8 Cross Border Activity and Regulatory Issues .......................................................... 10 Regulatory Jurisdiction ............................................................................................ 10 Regulatory Treatment of Foreign Intermediaries .................................................... 13 Investor Protection and Failure of Market Intermediaries ....................................... 13 Cross Border Trading and Money Laundering ........................................................ 14 Cross Border Cooperation, Information Sharing etc. .............................................. 15 Conclusion and Recommendations ........................................................... 18 ANNEXURE I .............................................................................................22 Methodology/Action Plan ........................................................................................ 22 ANNEXURE II............................................................................................ 26 SURVEY QUESTIONNAIRE ............................................................................... 26 ANNEXURE III ........................................................................................ 128 List of Respondent Jurisdictions to the Survey: .................................................... 128 ANNEXURE IV ........................................................................................ 129 Sources for Desk Research .................................................................................... 129 3Introduction Cross border activity in securities trading has increased manifolds in recent times. Due to advancements in technology, financial intermediaries now have virtually uninhibited access to customers independent of their geographical location. Similarly investors can invest in any international market through remotely located financial intermediaries with consummate ease. The proliferation of cross border trading has given rise to newer challenges for regulatory oversight. Misconduct, such as fraud, market manipulation, insider trading and other illegal activities, aided by modern telecommunication, crosses jurisdictional boundaries frequently in a global market. Markets especially emerging markets are prone to such effects of cross border trading. It is, therefore, necessary that emerging market regulators must be in a position to assess the nature of cross border transactions and should be equipped to take action against any possible misconduct. Cross-jurisdictional cooperation and information sharing mechanism is essential to ensure efficient and transparent markets while at the same time leading to reduction of potential systemic risk. Prevailing legislation and enforcement capacity of the regulator should be sufficient to ensure that cases of cross border misconduct can be effectively dealt with. In October 2003, in the meeting of Emerging Market Committee (EMC), it was decided to give to the EMC Working Group on the Regulation of Market Intermediaries (WG 3) the mandate to assess cross border trading in emerging markets. In this regard it was decided that WG 3 would prepare a report encompassing, inter alia, the impact of cross border activities of financial intermediaries on the securities markets based on actual experiences in jurisdictions where such activities are allowed. Moreover, issues relating to cross border activities of intermediaries in markets where such activities are not allowed was to be explored. Such issues would encompass investor protection mechanisms especially in case of dispute between an investor and the brokerage firm not sharing 4a common jurisdiction. Moreover the mandate was also to focus on the prescription of framework to enhance cooperation of regulatory authorities across the jurisdictions in order to facilitate cross border activities in a fair, transparent and efficient manner. The responde