EM should create a capital market environment favourable to institutional investors, Iosco says

The Emerging markets committe of the International Organization of Securities Commissions (Iosco) published today a report with recommendations to help regulators in emerging countries to develop the activity of institutional investors in their markets.

According to Iosco, institutional investors are playing an increasingly important role in the development of emerging markets. This is a positive factor, considering that markets with large numbers of institutional investors tend to be less volatile and allocate resources and capital more efficiently to companies requiring funding.

Moreover, institutional investors are better positioned to put pressure on corporations and their management to improve corporate governance and transparency and by pooling assets they can achieve economies of scale, employ high quality investment professionals, develop better investment strategies and build solid risk management systems, creating higher and more stable returns for investors.

In order to push towards this result, emerging markets should create a Capital Market Environment, with a sound legal system, corporate governance standards and other investor protection measures.

“A capital market that is favorable to institutional investors should have reasonable transaction costs (both explicit and implicit), a broad range of potentially high-quality investment products and flexible trading and hedging mechanisms,” Iosco said.

The authorization process for new product issuance should also be simple, fast and free of administrative obstacles. A multi-tier issuance regime could be used to lower issuance costs and broaden the product offering.

Regulators should broaden the product distribution channels by increasing the type and number of distributors institutional investors can use.
Moreover, a level playing field for foreign and domestic investors should be assured in emerging markets.

“Policy makers should gradually loosen or remove restrictions on fund repatriation and capital controls. Regulators should also break down barriers that prevent domestic investors from investing abroad,” Iosco said.

Finally, and in accordance with the Iosco principles, regulators should prevent market abuse by building sound surveillance capacity and periodically reviewing their regulatory framework and coverage. Regulators should work together domestically and across jurisdictions, to monitor, mitigate and manage systemic risk.

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