Post by Sapphire Capital on Jul 12, 2008 0:05:46 GMT 4
New CMA rules to restore market sanity
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Last Updated on May 6, 2008, 12:00 am
By James Anyanzwa
source: www.eastandard.net/mag/index.php?id=1143986041&catid=53%20
The Capital Markets Authority (CMA) has outlined a raft of tough measures to rein in rogue dealers in what is seen as a crucial transition from an archaic tradition, open to abuses, to a more modern system that is in tandem with the latest market dynamics.
The changeover, which has not been smooth sailing, is meant to restore sanity in the local capital markets and designed to ensure dealers are adequately equipped to handle the ever-increasing securities’ trading volumes.
At the centre of transition to a modern financial hub is Ms Stella Kilonzo, who, although in an acting
capacity as the CMA chief, has boldly pushed through a series of reforms that is expected to modernise the market.
However, this has been an uphill task, as she had to contend with heaps of accusations and criticisms sparked off by the emerging market challenges.
She reluctantly admitted to FS her struggle to dismantle some systems and processes that were not working properly for the market but could have rubbed some people the wrong way.
The latest initiative also comes in the wake of the collapse of two brokerage firms and reports of irregular dealings in clients’ shares by stockbrokers.
Kilonzo is presiding over the process at a time when there is dramatic increase in the number of investors — 1.5 million (expected after the close of the Safaricom IPO).
But even so, there is optimism that a well-structured system could position the local market to levels that it could rival the Far East Asian tigers.
The amendments to the CMA Act, which the regulator tabled before the stakeholders meeting last week, recommends raising capitalisation for stockbrokers from Sh5 million to Sh50 million, demutualisation of Nairobi Stock Exchange (NSE) and a requirement for brokers to make public quarterly financial statements. Also top on the list is regulating activities of agents that are expected to raise heated debate among the active 1,000 agents.
The changes come even as the market struggles to come to terms with the collapse of Francis Thuo & Partners brokerage firm and the placement of Nyaga Stockbrokers under a six-month statutory management.
Kilonzo reckons that the proposals would be open to public discussions for a period of one month before it is pushed to Parliament for enactment.
The new laws is expected to ruthlessly deal with the conduct of stockbrokers, investment banks, fund managers and dealers as it seeks to re-instate the rule of law and integrity in the market that holds about Sh874.3 billion investors’ wealth.
"The proposals are consistent with the authority’s objectives of promoting an effective and efficient securities market," Kilonzo told FS last week.
Under the proposed regulations, brokerage firms and investment banks will be required to re-capitalise their businesses to the tune of Sh50 million and Sh250 million, up from the current Sh5 million and Sh30 million, a move, market analysts say, would open up the market for increased mergers and acquisitions.
And any changes to the capital structure would have to be notified to the authority within five working days from the date of change.
The new measures also propose scrapping the investor compensation fund at the NSE. The fees, formerly payable to the NSE Compensation Fund, will now be channelled to the CDS Guarantee Fund.
The stockbrokers would also be required to maintain a register of their agents in order to ensure adequate oversight of their activities.
Every stockbroker shall be required to forward to CMA on an annual basis a register of agents contracted and shall notify the authority of any amendment to register within five days of such change.
"No person shall act as agent of more than one stockbroker. Prior to contracting any agent, stockbrokers shall have to satisfy themselves that such person is not an agent of any other stockbroker," read the recommendations in part.
It has been argued that the growth of stock broking agents has been necessitated by the existence of unfulfilled investor needs. The growth in numbers, however, lacked regulations to check their activities under the free market system adopted by the regulators.
The new requirement is expected to lead to a massive shakeout that is likely to see major realignments and mergers in the industry.
However, preliminary market reaction has been that the proposed rules are a tall order, especially for medium-sized stockbrokerage firms. Given the prevailing unhealthy finances of a number of the brokerage firms, industry sources say many of these brokers may close shop for failing to meet the Sh50 million capitalisation rule being advocated by the regulator.
This may see a number of the players settle for a merger to remain in business and probably open a window for the highly capitalised commercial banks to enter the lucrative capital markets.
"It will be difficult especially for brokers. Banks might buy them out," commented a broker who sought anonymity because of the sensitivity of the matter.
The minimum capital requirement for commercial banks stands at Sh250 million, but even so most banks have surpassed CBK’s minimum threshold.
Total assets for commercial banks surged 26.8 per cent to Sh971.1 billion in February from Sh766 billion in January 2008, according to official data from CBK Monthly Economic Review, while deposit liabilities climbed 23.1 per cent to Sh773.5 billion over the same period.
The capital markets offer these banks a new frontier to enhance their financial package so as to remain competitive in a crowded sector where close to 45 banks are active players.
Lately, the banks have shown keen interest in the sub-sector, with a number of them already buying out financially distressed brokers.
CMA, however, believes that the proposed laws are meant to instil professionalism in the stockbrokerage business.
But despite spelling doom to stockbrokers in terms of propping up their investments and agents who will now be restricted to dealing with a single broker, close market observers hailed the tough rule, which they said would bring in professionalism in the management of the country’s emerging market.
They blamed the current woes facing the industry on laxity among the players.
According to market analysts, the new directive will see consolidations and mergers of stockbrokerage firms.
"This will leave a viable number of stockbrokers to survive on the available volume of business," said an observer, who declined to be named.
The brokers are likely to be troubled by the new "capitalisation" rule with respect to minimum capital requirement.
Besides capitalisation, the NSE will be conditioned to dimutualise, a process that has been long overdue.
Eighteen stockbrokers and investment banks currently own the stock exchange. This ownership structure will have to change over to a public listed company — a company owned by shareholders — to de-link NSE from its owners.
A consultant was hired to advise on the best way to do this, but no action has since been taken towards this initiative.
For sometime now, there has been friction between the brokers and agents with each side blaming the other for the market woes.
The brokers claim that agents misrepresent themselves to investors through advertising (pretending to be actual stockbrokers).
This latest rift between the agents and the brokers has led to the view amongst industry observers that the CMA takes charge and formulate regulations for the agents, as opposed to the NSE, which could be partisan owing to its close association with the brokers.
Whereas brokers are expected to be market professionals with the technical ability to analyse trends and advise their clients accordingly, cases of unprofessional conduct have been rampant. Many thrive on irregular dealing in clients’ shares and failing to credit their accounts, thus tarnishing the image of the industry.
This is what Kilonzo sought to address by introducing the tough rule.
She contends that once the rules are in place, the CMA would police the sector to ensure compliance to professionalism and ethical practices. The measures are meant to make it harder for weak institutions and ensure a strong industry.
Brokers and investment banks whose paid-up share capital falls below the requirement at the time of the commencement of the sub-regulation would be expected to come into compliance within six months from the date of commencement.
The proposed regulations have already been approved by the CMA board, but are awaiting the input from the stakeholders before getting the final nod from the Finance minister, Mr Amos Kimunya.
It is expected that if everything goes as planned, part of the proposed regulations could be implemented beginning July next year.
"These laws are still provisional and are all subject to amendments once the stakeholders and Minister for Finance looks at them," explained Kilonzo, adding, "The CMA board will decide which ones to adopt."
Under the proposed rules, the level of paid–up share capital for stockbrokers and investment banks will not be allowed to fall below their lower limits, but could be raised in accordance with the authority’s prescription.
The Capital Markets Authority been under intense pressure from certain quarters of the market to pay increased attention to the market, particularly on issues of risk management to protect investors’ hard earned cash.
The regulations also require every licensee to designate a compliance officer that will be responsible for liaising with the authority on all compliance matters.
Stockbrokers would be required to report any overdrawing of clients’ accounts within 24 hours.
All intermediaries dealing directly with public funds would be required to publish their audited financial statements in the Press for scrutiny to increase transparency in the market. This measure will also give investors an opportunity to make an informed decision as to which intermediaries to deal with.
And to ensure the authority has greater oversight over changes in key personnel of licensees, any person licensed by the authority shall not change its shareholders, directors, chief executive or key personnel before receiving confirmation in writing that the authority has no objection.
According to the proposed regulations, no licensed person shall open a branch or a new office or change the location of a branch or existing place of business without the explicit approval of the authority.
Such approvals also cover closure of any of the operators’ places of business. The authority must be informed of such development within three months’ in a written notice.
In order to exclude persons with substantial ownership in entities that handle clients’ funds from its management, CMA recommends that in the case of a stockbroker, investment bank or fund manager, such persons will not own either directly or indirectly, more than 25 per cent of the issued share capital.
To ensure separation of ownership from management and limit substantial control of licencees that handle clients’ funds, it is recommended that (in the case of a stockbroker, investment bank or fund manager) any person who controls or is beneficially entitled directly or indirectly to more than 25 per cent of the issued share capital of the licencee shall not be appointed to a position of executive director or other senior capacity.
--------------------------------------------------------------------------------
Last Updated on May 6, 2008, 12:00 am
By James Anyanzwa
source: www.eastandard.net/mag/index.php?id=1143986041&catid=53%20
The Capital Markets Authority (CMA) has outlined a raft of tough measures to rein in rogue dealers in what is seen as a crucial transition from an archaic tradition, open to abuses, to a more modern system that is in tandem with the latest market dynamics.
The changeover, which has not been smooth sailing, is meant to restore sanity in the local capital markets and designed to ensure dealers are adequately equipped to handle the ever-increasing securities’ trading volumes.
At the centre of transition to a modern financial hub is Ms Stella Kilonzo, who, although in an acting
capacity as the CMA chief, has boldly pushed through a series of reforms that is expected to modernise the market.
However, this has been an uphill task, as she had to contend with heaps of accusations and criticisms sparked off by the emerging market challenges.
She reluctantly admitted to FS her struggle to dismantle some systems and processes that were not working properly for the market but could have rubbed some people the wrong way.
The latest initiative also comes in the wake of the collapse of two brokerage firms and reports of irregular dealings in clients’ shares by stockbrokers.
Kilonzo is presiding over the process at a time when there is dramatic increase in the number of investors — 1.5 million (expected after the close of the Safaricom IPO).
But even so, there is optimism that a well-structured system could position the local market to levels that it could rival the Far East Asian tigers.
The amendments to the CMA Act, which the regulator tabled before the stakeholders meeting last week, recommends raising capitalisation for stockbrokers from Sh5 million to Sh50 million, demutualisation of Nairobi Stock Exchange (NSE) and a requirement for brokers to make public quarterly financial statements. Also top on the list is regulating activities of agents that are expected to raise heated debate among the active 1,000 agents.
The changes come even as the market struggles to come to terms with the collapse of Francis Thuo & Partners brokerage firm and the placement of Nyaga Stockbrokers under a six-month statutory management.
Kilonzo reckons that the proposals would be open to public discussions for a period of one month before it is pushed to Parliament for enactment.
The new laws is expected to ruthlessly deal with the conduct of stockbrokers, investment banks, fund managers and dealers as it seeks to re-instate the rule of law and integrity in the market that holds about Sh874.3 billion investors’ wealth.
"The proposals are consistent with the authority’s objectives of promoting an effective and efficient securities market," Kilonzo told FS last week.
Under the proposed regulations, brokerage firms and investment banks will be required to re-capitalise their businesses to the tune of Sh50 million and Sh250 million, up from the current Sh5 million and Sh30 million, a move, market analysts say, would open up the market for increased mergers and acquisitions.
And any changes to the capital structure would have to be notified to the authority within five working days from the date of change.
The new measures also propose scrapping the investor compensation fund at the NSE. The fees, formerly payable to the NSE Compensation Fund, will now be channelled to the CDS Guarantee Fund.
The stockbrokers would also be required to maintain a register of their agents in order to ensure adequate oversight of their activities.
Every stockbroker shall be required to forward to CMA on an annual basis a register of agents contracted and shall notify the authority of any amendment to register within five days of such change.
"No person shall act as agent of more than one stockbroker. Prior to contracting any agent, stockbrokers shall have to satisfy themselves that such person is not an agent of any other stockbroker," read the recommendations in part.
It has been argued that the growth of stock broking agents has been necessitated by the existence of unfulfilled investor needs. The growth in numbers, however, lacked regulations to check their activities under the free market system adopted by the regulators.
The new requirement is expected to lead to a massive shakeout that is likely to see major realignments and mergers in the industry.
However, preliminary market reaction has been that the proposed rules are a tall order, especially for medium-sized stockbrokerage firms. Given the prevailing unhealthy finances of a number of the brokerage firms, industry sources say many of these brokers may close shop for failing to meet the Sh50 million capitalisation rule being advocated by the regulator.
This may see a number of the players settle for a merger to remain in business and probably open a window for the highly capitalised commercial banks to enter the lucrative capital markets.
"It will be difficult especially for brokers. Banks might buy them out," commented a broker who sought anonymity because of the sensitivity of the matter.
The minimum capital requirement for commercial banks stands at Sh250 million, but even so most banks have surpassed CBK’s minimum threshold.
Total assets for commercial banks surged 26.8 per cent to Sh971.1 billion in February from Sh766 billion in January 2008, according to official data from CBK Monthly Economic Review, while deposit liabilities climbed 23.1 per cent to Sh773.5 billion over the same period.
The capital markets offer these banks a new frontier to enhance their financial package so as to remain competitive in a crowded sector where close to 45 banks are active players.
Lately, the banks have shown keen interest in the sub-sector, with a number of them already buying out financially distressed brokers.
CMA, however, believes that the proposed laws are meant to instil professionalism in the stockbrokerage business.
But despite spelling doom to stockbrokers in terms of propping up their investments and agents who will now be restricted to dealing with a single broker, close market observers hailed the tough rule, which they said would bring in professionalism in the management of the country’s emerging market.
They blamed the current woes facing the industry on laxity among the players.
According to market analysts, the new directive will see consolidations and mergers of stockbrokerage firms.
"This will leave a viable number of stockbrokers to survive on the available volume of business," said an observer, who declined to be named.
The brokers are likely to be troubled by the new "capitalisation" rule with respect to minimum capital requirement.
Besides capitalisation, the NSE will be conditioned to dimutualise, a process that has been long overdue.
Eighteen stockbrokers and investment banks currently own the stock exchange. This ownership structure will have to change over to a public listed company — a company owned by shareholders — to de-link NSE from its owners.
A consultant was hired to advise on the best way to do this, but no action has since been taken towards this initiative.
For sometime now, there has been friction between the brokers and agents with each side blaming the other for the market woes.
The brokers claim that agents misrepresent themselves to investors through advertising (pretending to be actual stockbrokers).
This latest rift between the agents and the brokers has led to the view amongst industry observers that the CMA takes charge and formulate regulations for the agents, as opposed to the NSE, which could be partisan owing to its close association with the brokers.
Whereas brokers are expected to be market professionals with the technical ability to analyse trends and advise their clients accordingly, cases of unprofessional conduct have been rampant. Many thrive on irregular dealing in clients’ shares and failing to credit their accounts, thus tarnishing the image of the industry.
This is what Kilonzo sought to address by introducing the tough rule.
She contends that once the rules are in place, the CMA would police the sector to ensure compliance to professionalism and ethical practices. The measures are meant to make it harder for weak institutions and ensure a strong industry.
Brokers and investment banks whose paid-up share capital falls below the requirement at the time of the commencement of the sub-regulation would be expected to come into compliance within six months from the date of commencement.
The proposed regulations have already been approved by the CMA board, but are awaiting the input from the stakeholders before getting the final nod from the Finance minister, Mr Amos Kimunya.
It is expected that if everything goes as planned, part of the proposed regulations could be implemented beginning July next year.
"These laws are still provisional and are all subject to amendments once the stakeholders and Minister for Finance looks at them," explained Kilonzo, adding, "The CMA board will decide which ones to adopt."
Under the proposed rules, the level of paid–up share capital for stockbrokers and investment banks will not be allowed to fall below their lower limits, but could be raised in accordance with the authority’s prescription.
The Capital Markets Authority been under intense pressure from certain quarters of the market to pay increased attention to the market, particularly on issues of risk management to protect investors’ hard earned cash.
The regulations also require every licensee to designate a compliance officer that will be responsible for liaising with the authority on all compliance matters.
Stockbrokers would be required to report any overdrawing of clients’ accounts within 24 hours.
All intermediaries dealing directly with public funds would be required to publish their audited financial statements in the Press for scrutiny to increase transparency in the market. This measure will also give investors an opportunity to make an informed decision as to which intermediaries to deal with.
And to ensure the authority has greater oversight over changes in key personnel of licensees, any person licensed by the authority shall not change its shareholders, directors, chief executive or key personnel before receiving confirmation in writing that the authority has no objection.
According to the proposed regulations, no licensed person shall open a branch or a new office or change the location of a branch or existing place of business without the explicit approval of the authority.
Such approvals also cover closure of any of the operators’ places of business. The authority must be informed of such development within three months’ in a written notice.
In order to exclude persons with substantial ownership in entities that handle clients’ funds from its management, CMA recommends that in the case of a stockbroker, investment bank or fund manager, such persons will not own either directly or indirectly, more than 25 per cent of the issued share capital.
To ensure separation of ownership from management and limit substantial control of licencees that handle clients’ funds, it is recommended that (in the case of a stockbroker, investment bank or fund manager) any person who controls or is beneficially entitled directly or indirectly to more than 25 per cent of the issued share capital of the licencee shall not be appointed to a position of executive director or other senior capacity.