Chapter 6: Islamic Securities Regulation PDF

6.0 Securities Regulation for Islamic Securities Products 6.1 INTRODUCTION AND OVERVIEW OF THE ISLAMIC CAPITAL MARKET 6.2 APPLICATION OF INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO) DEFINATION OF ICM ICM is a market where the capital market transactions, operations, activities are...

6.0 Securities Regulation for Islamic Securities Products 6.1 INTRODUCTION AND OVERVIEW OF THE ISLAMIC CAPITAL MARKET 6.2 APPLICATION OF INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO) DEFINATION OF ICM ICM is a market where the capital market transactions, operations, activities are carried out according to shariah principles and requirement. PROHIBITED ELEMENTS IN ICM RIBA GHARAR MAYSIR (INTEREST) (UNCERTAINTY) (GAMBLING) SPECULATION  EQUITY MARKET CONVENTIONAL ICM Business Activity The company is not limited in The company must engaged in its business activies shariah compliant business activies Use of proceeds No restriction Shariah compliance Market Exposure Not acceptable to muslims Enjoy a larger market base to investors both sets of investor KEY DIFFERENTS BETWEEN CONVENTIONAL AND ISLAMIC CAPITAL MARKET  DEBT MARKET CONVENTIONAL ICM Business Activity An issuer conventional bonds is not limited in its business A sukuk issuer must be engaged in shariah activities compliant business activities which are permissible under shariah Use of proceeds No restriction Shariah compliance Market Exposure Not acceptable to Islamic investor Enjoy a larger market base to both sets of investor Structure type Debt based only Asset, investment and debt based Asset requirement Not required, unless for asset backed securities Yes, required KEY DIFFERENTS BETWEEN CONVENTIONAL AND ISLAMIC CAPITAL MARKET FUNCTIONS AND OBJECTIVES OF ICM Intermediaries Plays a Provide opportunity between demanders complementary role for diversification of and supplier of to Islamic Banking risks funds and Takaful sectors Facilities the Makes available availability by Contributes to various financial enabling secondary economic growth services trading of securities Growth drivers of Islamic capital market The roles played by IIFS, Islamic Banks and Takaful operator The growing needs for high quality managing instruments also creates a demand for both short term and long term funding facilities The increasing preference for shariah compliant investment The rising demand for infrastructure financing  The Securities Commission Malaysia (SC), as the supervisor of the capital markets, has developed a Application of robust supervisory framework that exhibits high levels International of implementation of the International Organization of Securities Commissions Objectives and Principles of Organization Securities Regulation (IOSCO Principles) in most areas. of Securities Commissions The regimes governing the regulation of issuers, auditors, (IOSCO) collective investment schemes, market intermediaries and secondary markets, and with respect to enforcement, co- operation and information sharing, are extensive. Scope of IOSCO A. Introduction B. Institutional and Market Structure—Overview C. Preconditions for Effective Securities Regulation D. Recommended Action Plan and Authorities’ Response  The assessment was conducted during the IMF/World Bank Financial Sector Assessment Program (FSAP) mission to Malaysia during the period April 4 to 20, 2012, by Tanis MacLaren, an external technical expert employed for this purpose by the IMF. The assessment was carried out using the 2011 IOSCO Methodology for Assessing Implementation A. Introduction of the IOSCO Principles (the Assessment Methodology). The Assessment Methodology was published in final form by IOSCO in 2011 and superseded an earlier version published in 2003. The final version of this revised Assessment Methodology is expected to be endorsed at the IOSCO annual meeting in 2012. In using the Assessment Methodology, the assessor sought to focus on the substance of the regulatory outcomes of the key requirements under each Principle.  The Malaysian financial system is regulated by two main authorities: the SC and BNM. The SC is a regulatory authority with broad powers to regulate the capital markets in operation in Malaysia. B. Institutional The regulator's responsibilities, powers and and Market authority with respect to the capital market are established by statute. SC draws its powers from Structure— several laws, including the Securities Commission Act Overview 1993 (SCA), Capital Markets and Services Act 2007 (CMSA) and Securities Industry (Central Depositories) Act 1991 (SICDA). BNM is the central bank and the supervisory authority for a broad array of financial institutions operating in Malaysia. C. Preconditions for Effective Securities Regulation The preconditions for effective supervision (a stable macroeconomic environment, sound legal and accounting framework, and effectiveness of procedures for the efficient resolution of problems in the securities market) appear to be in place in the jurisdiction. The bankruptcy legislation is dated, but is under review and is expected to be substantially amended in the near future.  Principles 10–12, Principles 1–8, Principle 9, Principles Principles relating to Principles relating to relating to self- enforcement of the regulator regulation securities regulation Principles 13–15, Principles 19–23, Principles for Principles 16–18, Principles for auditors, cooperation in Principles for issuers credit rating agencies regulation and other Principles of information service Principles 24–28, Principles for collective Principles 29–32, Principles for market IOSCO providers investment schemes intermediaries and hedge funds Principles 33–37, Principles for the secondary markets Principles 1–8, Principles relating to the regulator: The SC has clear statutory authority over and responsibility for the Malaysian capital markets. In practice, the SC has operational independence from the industry and the government. Principle 9, Principles relating to self-regulation: There are two organizations in the Malaysian capital markets that exercise some direct oversight responsibility for certain markets and market participants and whose rules are subject to meaningful sanctions. Both Bursa Malaysia and FIMM are subject to the oversight of the SC and are required to observe high standards of conduct in carrying out their tasks. Principles 10–12, Principles relating to enforcement of securities regulation: The SC has broad inspection, investigation and surveillance powers. It has powers to investigate and take action against anyone who breaches the laws it administers. Principles 13–15, Principles for cooperation in regulation: The SC has the ability and capacity to share information and cooperate with regulators, both domestically and internationally. Principles 16–18, Principles for issuers: Extensive requirements are in place for initial offering and continuous disclosure documents for securities. The disclosure to be provided to purchasers of futures contracts is specified in the CMSA and the rules of the Bursa Malaysia Derivatives. Principles 19–23, Principles for auditors, credit rating agencies and other information service providers: There is a regulatory system in place in Malaysia that subjects auditors of PIEs to appropriate levels of oversight. Principles 24–28, Principles for collective investment schemes and hedge funds: All publicly offered CIS and their operators and distributors are subject to authorization and reporting requirements. Principles 29–32, Principles for market intermediaries: A framework is in place for licensing and to apply on-going requirements for market intermediaries. Applicants are subject to detailed reviews before being licensed. Principles 33–37, Principles for the secondary markets: Exchanges are subject to authorization by the Minister with the advice of the SC. D. Recommended Action Plan and Authorities’ Response Search about the Recommended Action Plan and Authorities’ Response of IOSCO