The merits of increased cooperation between members of the East African Securities Exchanges Association (EASEA) have long been a topic of discussion within the region’s investment community, with authorities from Tanzania, Rwanda, Kenya and Uganda regularly talking through long-term strategies to develop capacity in their respective markets. However, these discussions have yielded little in the way of specific measures, until recently, when efforts began to intensify. After a meeting held in Dar es Salaam in August 2016, the EASEA outlined four guiding principles that will inform its development of a five-year strategic plan: increase the product offerings in each market; build capacity of market intermediaries; provide continuous public education and awareness campaigns; and integrate market infrastructure such as trading platforms and depository operations. By the start of 2017 the organisation was preparing to introduce its first concrete initiative and a new legal framework for the association, which could have significant ramifications.
CMIP
The Capital Markets Infrastructure Project (CMIP), due to roll out in 2017 but not yet active at the time of print, is a $3.8m software initiative that will enable investors to trade shares across all participating exchanges without having to move from market to market. With the legal framework in place, a period of technical fine-tuning began in the early months of 2017. This follows an earlier initiative, implemented in 2015, that saw share transfer time between EASEA exchanges decrease from one week to 24-48 hours.
From the perspective of the Dar es Salaam Stock Exchange (DSE) the principal advantage offered by this move towards increased integration is the prospect of a liquidity boost, due to more easily accessible markets. However, the long-term significance of this remains to be seen. The CMIP is concerned with ease of access rather than opening up the bourse to new investors; citizens of the region are already empowered to purchase stocks on neighbouring countries’ exchanges.
Market Protocol
An even bigger reform currently in the works is the common market protocol that is being worked on by the EASEA. According to Tanzania’s Capital Markets and Securities Authority (CMSA), the new Securities Law, now in draft form, will incorporate the EASEA’s new region-wide standards, meaning that domestic brokers will be the first to benefit from the effects of this regional approach. The minimum capital requirement for brokers operating in any of the EASEA jurisdictions has been set at the equivalent of $250,000 in Tanzanian shillings. According to the CMSA, the limit will be included in the new legislation, and Tanzanian brokers are already being asked to provide the regulator with a plan as to how they will raise this capital.
For many domestic brokerages, some of which are effectively run as small businesses, this will prove challenging. A three-year grace period has been proposed, during which time there will likely be a number of market exits. More usefully, it is also possible that larger brokers from elsewhere in the region will decide to partner with local firms, a development that would result in useful skills transfer. Moreover, the heightened competition that the reformed environment will introduce may encourage Tanzania’s brokers to adopt a more proactive approach to business expansion, seeking out a broader customer base.
In the long term this latest phase of regional cooperation raises another interesting issue. While technical integration and legal harmony are useful in terms of liberalising capital flows throughout the region, the individual exchanges of the EASEA are still competitors. The current proposals for regional integration foresee exchange linkages, while the individual exchanges will continue to develop their own infrastructure. Therefore, the DSE will still implement its own strategic plan with the main priority of expanding the domestic market. How this effort will be mitigated with the need for the DSE to align itself with a regional framework will be one of the key issues to consider in this process.
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