The CPMI-IOSCO principles are having a positive effect on African markets, says Bruce Lawrence

The time, money and effort diverted to re-regulation of the financial services industry since 2008 has dismayed bankers everywhere. But it has caused a special brand of irritation on a continent which made no contribution to the financial crisis, and whose main priority is not to tame excesses but to build capital markets attractive to foreign portfolio investors.

At last year’s NeMA Africa conference in London, there was clear frustration at the local consequences of regulations imposed by the United States and the European Union. The Foreign Account Tax Compliance Act (FATCA) was seen as a prime example of a measure designed to benefit nobody but the US Treasury, but which imposed compliance costs on everyone. Some delegates joked that they should impose their own rules on the United States as a form of retaliation.

Bruce Lawrence, a capital markets consultant and director of H.B.L Consultancy Services with extensive experience of emerging markets, counters that adopting international regulation can actually help Africa attract investors. “I do not see global regulation holding back emerging markets,” he says. “It is all part of the education process. Part of the Tanzania project that was run in early 2014 included the running of classes across the country to educate people. Every month in Mongolia we invite around 40 people to the stock exchange to educate them, to let them know what the securities market is. Look at Russia – 20 years on from its creation, 70-80 per cent of it is foreign investment. There is no domestic investment base, and it is supposed to be more advanced than the African markets. It just takes time.”

As it happens, Africa is not hostile to every idea: the continent is, for example, embracing the 24 principles for financial market infrastructures (PFMIs) enunciated by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). “There are four or five basic principles in global regulation around transparency and asset safety, and these should not be detrimental to the local market – it is all part of good corporate governance and the market should adopt these,” continues Lawrence. “For the first time in years I am seeing markets in Africa interacting. IOSCO has been a game-changer in this regard. A lot of the emerging markets are adopting the PFMIs. Most of them were compliant with the principles beforehand, but they were not members of IOSCO. They are now moving into this international community.”

The CPMI-IOSCO PFMIs have become the de facto benchmark of international best practice in the operation of a central securities depository (CSD), a central counterparty clearing house (CCP), a payments system and a trade repository. Their enthusiastic adoption by African markets is, therefore, a measure of their ambition to attract foreign portfolio investors and marks a recognition that if any country complies with international standards it helps all markets attract capital from abroad. This is driving a wave of harmonisation through the continent, assisted by regional alliances which depend on common standards to work effectively.

“It has been tried before, but the environment has never been right – every country has to have its own structure and rules in place,” explains Lawrence. “A lot of people think it will never happen, but from the conversations that I have had with people, there is a clear interest in making harmonisation happen in Africa. It will not happen soon, it will take time, but if you look at the EAC (East African Community), it used to just be Kenya, Uganda and Tanzania. Now you have Rwanda and Burundi coming in. How far does this go? If you go over to West Africa and the Francophile countries, they have a centralised market, but when you go into each country, they still operate individually.”

Rajesh Ramsundhar, head of product management, investor services at Standard Bank, agrees that regionalisation is helpful to harmonisation. “Regionalisation from a capital markets view is absolutely imperative,” he says. “A lot of discussion and national pride is at stake, but we need to move beyond that – regionalisation is the way to go.”

It is certainly well under way, with bodies such as the Southern African Development Community, the West African CMI Council and the East African Community helping to integrate financial as well as product markets. This is testing the capabilities of the African custodian banks, whose networks do not always match the scope of the regional economic and financial groupings. If this is largely because the volumes of business in minor markets are too low to warrant the investment, an obvious chicken-or-egg question arises.

“International investors want internationally recognised custodians,” says Lawrence. “Even within Africa there are issues with the custodian banks that are well established on the continent being too focused on their domestic market, though. For example, Stanbic has always been accused of being too focused upon Johannesburg. The knock-on effect was, for example, in Lagos, that their processing day was almost dictated by when Johannesburg ran the overnight run because it was all focused in that one marketplace.”

A pan-African view helps because the network managers at the global custodian banks servicing the North American and European fund managers active in Africa are prepared to sacrifice local knowledge for the convenience of going through a hub servicing multiple markets. Société Générale, for example, has recently established an Africa hub in Mauritius. “From a network perspective, it makes sense,” says Lawrence. “You want access to as many markets as possible – if you can use only one custodian for this, it makes sense.”

The combination of convenient custodial arrangements and the adoption of those international standards that impress foreign portfolio investors will help African financial markets to attract international capital. Bruce Lawrence draws a parallel with international investment indices such as FTSE and MSCI. “Look at what a market has to do to go from frontier to developing status,” he says. “It is based largely on adoption of principles. The index does not tell you what must do, but it does map out how to take that next step.”

Tags: AfricaRegulationDirectiveCPMI-IOSCOPrinciples for Financial Market InfrastructuresPFMIsClearingSettlement