Securities market integration in Asia: what would be the theoretical approach?

• Author: Zahid, Md Anowar

1. INTRODUCTION

   Today, securities offerings and trading have become, to a remarkable extent, global in the same vein as other economic and business activities. The globalization is taking place mainly through integration of national securities markets. The principal examples of such integrated markets are the European union (EU) and the Multijurisdictional Disclosure System (MJDS) between Canada and the united States. Recently, the Association of Southeast Asian Nations (ASEAN) initiated an attempt to integrate securities markets in Asia. This paper will go over the integration efforts of these three regions to see what theoretical approaches they have taken towards their goal.

   Integration between different nations is not an easy task because they are politically, economically, and legally divided and diverse. A look into the theoretical perspective will describe how integration has been achieved despite these diversities. As integration has already successfully taken place in Europe and North America, their approaches will be examined first. After that, this paper will evaluate the ASEAN approach to determine if it is following the same line of theoretical construction to achieve its goal. (2)

2. INTEGRATION IN EUROPE

   1. Background

   The EU of today is a supranational organization that has integrated the economic, political, security, domestic, and justice regimes of twenty-five European states. (3) Its origin lies in three organizations: the European Coal and Steel community (EcSc), the European Atomic Energy community (Euratom), and the European Economic Community (EEC). The ECSC was formed by treaty in 1951 to integrate the coal and steel market in Europe and brought together six states including France and Germany, the two bitter enemies of the Second World War. With this act, Europe started its journey as a community, "basically as an economic organisation, although the final objectives were clearly political." (4) The other two organizations, Euratom and the EEC, followed in 1957 under two different treaties. (5)

   Of the above institutions, the EEC (hereinafter EC) was the leading one. (6) Its goal was economic integration and political cohesion. (7) The economic development "was always planned with grander aspirations," (8) because, for some theorists, economic integration "inevitably begets political integration too, even without any explicit initiatives directed at the political sector." (9)

   The promoters of the EC envisioned a twofold means of achieving these goals: establishment of a common market and progressive harmonization of economic policies among the member states. Indeed, economic success as a goal and a common market as a means to reach that goal received prominence in EC propaganda and activities. (10) The common market, in this context, promoted four unfettered freedoms (11): namely the free movement of goods, (12) persons, (13) services, (14) and capital (15) under equal conditions of competition. (16) To facilitate their movement, the EC adopted a combined approach--harmonization of some rules and standards and mutual recognition of member states' domestic regimes. The reason behind this approach was that harmonization alone would not be an effective method of integration because detailing technical specifications would be time-consuming, "overregulatory," (17) and probably impossible given the diversity of the legal, administrative, and regulatory systems of the member states. (18) Conversely, resorting to mutual recognition alone would not be sufficient, either, because of the increasing size of the competitive market of Europe.

   However, it is not easy to achieve the combined approach in practice. Member states, with a variety of diversities, have different legal and administrative requirements. (19) For example, they have varying standards for products, qualifications for professionals, and regulations for services. These differing requirements stand in the way of the four freedoms. Therefore, to forge harmonization, essential requirements--instead of detailed ones--are established so that member states can incorporate them in domestic laws or amend necessary legal provisions.

   Article 100 (20) of the EEC Treaty provides for harmonization mainly through EC directives issued by the European Council. Member states are supposed to adopt means to comply with the directives. States may adopt different means, but the ends must be the same. (21) In this system, so far as the securities market is concerned, "issuers can be certain of the results in each participating country, but may still have to comply with various sets of rules." (22) Derogation from the harmonization provision may be available to a member state on certain grounds, such as health, safety, or environmental protection. Member states are allowed to legislate in such cases with varying standards or regulations. (24)

   In the areas where harmonization of technical standards or regulations is not essential or possible on these grounds, the law requires each member to recognize other members' regulations as valid and as effective as its own for the purpose of market integration. (25) This is known as the principle of mutual recognition, which the European Court of Justice (ECJ) first established in the famous case of Cassis de Dijon (26) The basic purpose of mutual recognition in securities law is "to keep the amount of supplemental information as small as possible." (27) If issuers' home country administration reviews the necessary documents, that should be sufficient so that issuers need not experience regulatory hassles in other jurisdictions. (28)

   The method of mutual recognition operates in a dual fashion: removing barriers to the intra-Community market and setting common standards. (29) For example, in the financial services area, (30) each member state has to allow the financial services providers based in other member states free entry to its market, subject to the condition that a minimum degree of protection for investors or creditors is offered under the regulatory regime of the host country. (31) Additionally, the EC issues directives and regulations setting common minimum standards, (32) which will be mutually recognized by all states. (33) In the absence of such EC legislation, the national laws of each member state apply. This means that the application of the mutual-recognition principle is not automatic; rather, it requires EC legislative measures. (34)

   The above approach to integration is based on economist Tibor Scitovsky's theory of European economic integration. (35) According to Scitovsky, European economic integration can take place through "the abolition of restrictions on the movement of products and ... on the movement of labour and capital." (36) This will generate competition among the national economies of the member states under equal conditions. Such competition may produce "unfavourable effects" on any particular sector of any national economy. For example, small business firms that a particular member state has been fostering with subsidies, even to the disadvantage of larger firms, may not survive the competition. (37) In such a situation, Scitovsky suggests adopting measures to remove the "unfavourable effects" or to convert them into "favourable ones" and thereby bolster the integrated market. (38) Along the same line of thought, the EC Commission has maintained that:

   The benefits to an integrated Community economy of the large, expanding and flexible market are so great that they should not be denied to its citizens because of difficulties faced by individual Member States. These difficulties must be recognised, to some degree they must be accommodated, but they should not be allowed permanently to frustrate the achievement of the greater progress, the greater prosperity and the higher level of employment that economic integration can bring to the Community. (39) B. Integration of Securities Markets

   1. Prelude

      The EC initially adopted directives liberalizing capital movement as a means of establishing a common market in financial services. (40) Those directives enabled individuals and firms to invest capital across national frontiers. (41) Although investors, taking advantage of this freedom, could invest in foreign securities, securities issuers could not establish business and solicit capitalization in foreign jurisdictions within the EC.42 Therefore, the EC underscored the need for "a level playing field" for both securities issuers and investors. (43) This led to the adoption of a number of directives facilitating harmonization and mutual recognition of rules and requirements relating to the offering and trading of securities within the EC. Those directives include, in the first category, (44) the Listing Particulars Directive (LPD), (45) the Interim Reports Directive, (46) and the Major Shareholding Directive. (47) Later, the Admission and Information Directive (AID) replaced the four earlier directives, keeping their contents unchanged. (48) In the second category, the Public Offer Prospectus Directive (POPD) defines information to be published when securities, not previously listed, are offered to the public for the first time. Subsequently, the Annual Accounting Directive (49) and Consolidated Accounting Directive (50) were adopted, setting forth how financial statements--an important component of listing particulars and public offer prospectuses--were to be prepared. In addition to the Interim Reports Directive mentioned above, the EC adopted post-listing directives including, among others, the Insider Dealing Directive, (51) which the Market Abuse Directive (MAD) later repealed. (52)

      In 1993, the EC also adopted the Investment Services Directive (ISD). [53] It is the first "passport" directive in securities, enabling firms providing investment services to freely carry out business within the EC. Then, in 2003, the EC adopted the "passport" Prospectus Directive (PPD), (54)...