Markets reform on the card

Business

The Securities Exchange Commission of Papua New Guinea is a division within Investment Promotion Authority.
It regulates the capital markets. Business Editor SHIRLEY MAULUDU spoke to executive chairman
CHRISTOPHER HNANGUIE about the capital markets and the commission’s responsibilities.

Q: What is your background?
HNANGUIE: In a nutshell, I assumed the role of the executive chairman of SEC- PNG in August 2017. I have more than 22 years of experience in capital markets development, reform and restructuring in 30 countries throughout the Asia-Pacific region when I worked as a macroeconomist for the Asian Development Bank over the past 22 years, from 1995-2017].
With these experiences, I am determined to reform, develop and expand our capital market. We will draw on the best practices and experiences of other countries, including Asia whose experiences are more relevant to PNG’s own development and the financial market context.

Q: What are its main roles and functions of the Securities Exchange Commission?
HNANGUIE: The SEC-PNG is an autonomous governmental entity established by the Securities Commission Act 2015. It has three main objectives of capital market regulation and supervision: (i) Protect investors; (ii) ensure the market is fair, efficient and transparent; and (iii) reduce systemic risk.
To achieve these three objectives, SEC-PNG is moving towards adopting most of International Organisation of Securities Commissions (IOSCO) principles of capital markets regulation and supervision. As a member of IOSCO, SEC-PNG does not need to reinvent the wheel.

Q: What are securities and what are the main types of securities?
HNANGUIE: Before we can discuss anything about securities, it is important to clarify this term because of its misconception with the general public.
The term securities in PNG is commonly mixed-up, confused or misunderstood with security personnel or security firms – those who are responsible for securing and protecting properties. It is hereby clarified that the term securities is a commerce, economics, finance, and investment term which has little relevance to the security and protection of properties.
Securities in our context means any form of financial asset that holds some type of monetary value which can be easily traded. These are financial assets that are liquid (than other tangible assets, such as commodities or real estate), that can be traded on financial markets; are usually non-physical financial asset whose value is derived from a contractual claim.
There are many types of financial securities. The most common ones are usually in the equities, debentures, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, and rights to or interests in investments.
Q: What is the difference between a financial market, a capital market, a stock market, and a money market?
HNANGUIE: First thing to understand is that all other markets are part of an overall financial market. A financial market brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies and other fungible items of value at low transaction costs and at prices that reflect supply and demand.
Within a financial market you can have the capital market, stock market, bond market, commodities market, currency market,
futures market, money markets, etc.
So the financial market is the overall market where all other markets operate, regardless of the maturity of the period in which securities are traded.
A capital market is a market within the financial market that includes the equity/share/stock market and debt/bond market and other venues for trading financial products. These markets all trade financial products or securities, so they form the capital market.
Capital markets are used for trading long-term assets, which normally have a maturity period of more than one year.
A stock market means a place where stocks are traded. The stock market allows investors and banking institutions to trade stocks, either publicly or privately. A stock exchange means a specific place where the trading is executed, such as POMSOX, NYSE, and so on. In PNG our stock market comprise of one stock exchange (POMSOX).
A money market is where financial instruments with high liquidity and very short maturity period are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.

Q: What is the country’s capital market like?
HNANGUIE: There have been discussions about the performance of our capital market: its rapid growth on the back of government reform of our financial sectors, the importance of capital market investing, the above average returns, the availability of easy margin credit, its state of illiquidity, its static performance, the absence of confidence on the part of the investors, why and how and who got us to where the market currently is today.
Other challenges faced by the capital market include: Lack of a champion to lead the reforms in PNG; limited co-ordination among the various financial market authorities (BPNG, SEC-PNG, Treasury/Finance) to assure coherent strategy, policies and efforts; disregard of the relevant laws in place and uncoordinated policy initiatives and pronouncement from these agencies have created uncertainty and market confusion; widespread market perception that the POMSOX, an SRO, is an entity independent
of SEC-PNG authority and oversight and not subject to SEC-PNG rules and regulation; and lack of clarity in the ownership and
governance structure of the POMSOX.
The answers to some of these issues have been traced to the inadequacy of the capacity and capability of our SEC-PNG (in terms of people, systems and technology) to effectively exercise its authority over market operators like POMSOX and other market participants, especially after the market was taking off in the 2000s.
PNG has the opportunity now to learn from the lessons of
others and from our own and emulate the best capital market practices.
To get there, we must ensure that our capital market is open and fair, operating under a transparent, efficient, legal and regulatory framework.
But even a regime comprising good substantive laws and rules, if non-transparent and applied unfairly, unevenly, inefficiently or incompetently will drive investors and financial services providers away.
PNG should create a world-class capital market that is fair, efficient, transparent, innovative and attractive to investors both local and foreign while contributing to and facilitating the growth and development of the national economy and have an impact beyond our borders.

Q: Is there a need to regulate PNG’s capital market?
HNANGUIE: If the market is where the basic and fundamental tenets of the capitalist system is, that of supply and demand and willing buyer, willing seller play out, then why not just leave the market participants to their own devices?
The simple answer is, yes, there is a big need to regulate the capital market.
First, because in the capital market the balance of power between the seller and the buyer of securities is not always even.
The power mainly rests with the issuer of the securities who is able to dictate the terms of trade. Hence, there is a need to protect the investor.
And that protection must come from a neutral body to ensure and assure the market is fair and transparent.
Second, as PNG is a part of the modern free-market economy and dependent on a sound capital market for capital mobilisation, there is a need to ensure the market is always there and market failure is as far as practicable prevented or where it occurs at all, the impact is minimised.
Conversely, the absence of regulation, inappropriate regulation or unfair, untransparent, incompetent or ineffective enforcement of regulation can and often do impose an unjustified burden on the capital market and inhibit market growth and development.

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