adminIn every country CSD formation and operations are executed within a legal framework that gives legality to the establishment and running of CSDs in the first place and empowers them to formulate the operational rules that are binding on the participants in that particular market.
In Zimbabwe we have a three-tier implementation framework for all the laws that govern the CSD. At the apex is the Ministry of Finance whose function is to formulate Bills for Cabinet’s approval and ratification by parliament.
Once these Bills are signed into law, the ministry becomes the responsible authority in implementing the provisions of the Act and ensuring compliance. The next level is the regulatory level where such bodies as the Securities Commission sit.
The Securities Act 17/2004 is the Act that set up the Securities Commission of Zimbabwe (SEC) which has the overall responsibility of regulating capital markets. The Act also gives legality to the existence of the CSD in Part IX which describes the essentials of its operation.
As one of the regulators in the capital market, SEC has formulated specific rules and regulations pertaining to the CSD and these have been gazetted as Statutory Instrument 63 of 2013. It follows that the rules had to be approved by Cabinet and voted on in Parliament before they could be gazetted.
The third level is the operational level where the CSD exists to plan and execute the necessary activities to achieve the goals of the Act. One of the key functions of SEC is to license market participants (brokers, transfer secretaries, settlement banks and custodians), including the CSD.
The history of stock markets is replete with stories of fraud, cheating and manipulations. In that regard governments have set up laws which prescribe the licensing requirements for capital market players in order to attract and protect investors by allowing participants with the right level of financial and technical capacity.
The CSD itself is a self-regulating entity in that it is authorised to formulate its own operational procedures to satisfy the objectives set out in the Securities Act and the Statutory Instrument. The CSD operational procedures define the “how” whereas the Act and Statutory Instrument define the “what”. In its role as the regulator, SEC approves the operational procedures before they are binding on the participants.
Extensive consultations are critical at all levels of legal framework formulations and indeed workshops and seminars have been the norm since 2009 when SEC started implementing the Securities Act.
Currently, the CSD operational procedures are being finalised having been reviewed by the participants, the board and of course the lawyers. Once SEC gives its approval they become binding on all participants. The rules and operational procedures are not cast in stone and will be reviewed and updated to satisfy the demands of the prevailing market conditions.
Regulators
The CSD role is essentially to provide a vehicle to facilitate the execution of trades in financial instruments. The actual trading is carried out at the stock exchange and the CSD provides the platform to facilitate the exchange of shares (clearing) and money (settlement).
This gives rise to two regulators having a direct interest in the CSD – SEC and the Reserve Bank of Zimbabwe. SEC is responsible for the securities aspect, i.e. the trading, authentication and transfer of shares whereas the RBZ is focused on settlement since it entails the flow of funds in the financial sector.
Overall, the two regulators have a common interest and that is to guarantee market integrity by making sure that the capital markets in Zimbabwe are a safe place to trade, and thereby attract investors. This also means that the CSD must remain in constant liaison with the two regulators in order to stay compliant.
Standards
Over time the world has compiled experiences and best practice activities as financial market have evolved. These have been crystallised into standards which most countries have adopted. These standards are not prescribed as obligatory in the Act but the regulators are empowered to apply tools they deem to be effective in ensuring efficient markets.
The International Organisation of Securities Commissions established in 1983, is the acknowledged international body that brings together the world’s securities regulators and is recognised as the global pace setter for the securities sector standards.
IOSCO develops, implements, and promotes adherence to internationally recognised standards for securities regulation, and is working intensively with the G20 and the Financial Stability Board on the global regulatory reform agenda. Through its Technical Committee, IOSCO has published principles for financial markets infrastructures (FMI) and disclosure frameworks for FMI.
Another important standard is the ISO 15022 messaging standard for Banking, Securities and Related Financial Services. This standard defines a common message structure (syntax) for electronic messages exchanged between securities industry players, including banks.
This standard has been adopted by SWIFT and has been implemented in the Zimbabwean market. Since standards are not necessarily compulsory under law, other countries have their own standards, for example, India has developed its own standards.
Associations
These are worldwide, voluntary organisation with regional structures to which the CSD can belong. Securities Commissions are linked together under IOSCO and the World Forum of Central Securities Depositories groups together regional CSD sub-groups.
These include Asia Pacific CSD Group (ACG), Americas’ Central Securities Depositories Association (ACSDA), Association of Eurasian Central Securities Depositories (AECSD), Africa & Middle East Depositories Association (AMEDA) and European Central Securities Depositories Association (ECSDA).
Membership to these associations is very useful in that it provides access to best practice, technical advice and worldwide trends information which is invaluable to setting up efficient and effective capital markets.
Harmonisation of exchanges is also becoming a worldwide phenomenon. It is important to note that the Zimbabwe Stock Exchange, at Sadc level, has also joined the Committee of the Sadc Stock Exchanges (COSSE) a body that is working towards the harmonisation of regional exchanges and facilitating the exchange of ideas and experiences.
Our late entry into the world of automated CSDs has had some beneficial value in that we did not have to re-invent the wheel and clearly our legal framework and operational rules have many borrowed principles and elements that have been adapted to our unique Zimbabwean situation.
Since change is a constant in our world, there is need to continuously challenge, re-visit and amend our governance structures in order to adapt to changing business environments and thus remain competitive.
Nyasha Mukura and Campbell Musiwa can be contacted on [email protected] and [email protected]
Online Reporter