Financial Sector Development:Building Market Foundations Through

International Codes And Standards

Sherman G. Boone, Assistant Director Office of International Affairs

U.S. Securities and Exchange Commission

Prepared for Inter-American Development Bank

Business Seminar on Capital Markets for DevelopmentWashington, DC

June 4, 2004

Disclaimer:

The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any publication or presentation by its employees. The views expressed in this presentation are those of Mr. Boone and do not necessarily reflect the views of the Commission, individual Commissioners, or colleagues on the staff of the Commission.

Overview:

1. Financial Sector Development2. International Financial and Economic

Policy Codes and Standards3. Strengthening Market Foundations:

Corporate Governance4. Implementation and Assessment5. Role of the Private Sector6. Further information

A well-developed financial system includes …

• Banks

• Non-bank financial institutions

• Securities markets

• Collective savings devices

Financial Sector Development

• An efficient financial sector is central to economic growth.

• Need for effective intermediation and

• a sound legal and regulatory infrastructure to provide

• a framework for financial sector development.

Financial Sector Framework

• Set and enforced by government

• Key is building a framework that manages to facilitate the market but does not try to manage the market

• Transparency is a crucial element

Why international standards?

• Help financial markets function better and withstand crises

• Provide benchmarks

• Help to ensure that economies function well at the national level – a prerequisite to a well functioning international system

• Transparency is key

12 Key Standards (FSF)

Macroeconomic Policy and

Data Transparency (IMF):

• Monetary & Financial Policy Transparency

• Fiscal Policy Transparency Code

• Special Data Dissemination Standard (SDDS) / General Data Dissemination Standard (GDDS)

12 Key Standards, cont.

Financial Supervision and Regulation:

• Core Principles for Effective Banking Supervision (Basel Committee)

• Objectives and Principles of Security Regulation (IOSCO)

• Insurance Core Principles (IAIS)

12 Key Standards, cont.Institutional and Market Infrastructure:

• International Accounting Standards • International Standards on Auditing (IFAC)• Corporate Governance Principles (OECD)• Core Principles for Systemically Important

Payment Systems (CPSS)• FATF 40 Recommendations • Insolvency (IBRD)

Principles of Corporate Governance

• OECD Principles of Corporate Governance are the most significant multilateral statement on corporate governance issues

• Recognized as one of 12 key standards for sound financial systems

• Are non-binding and do not aim at detailed prescriptions for national legislation: represent the core elements considered essential for good corporate governance and are expected to be applied in accordance with national and corporate-specific circumstances

Elements of the OECD Principles

• Governance codes should be consistent with the rule of law and articulate division of responsibilities among different regulatory and enforcement authorities;

• Protect and facilitate the exercise of shareholders’ rights;

• Ensure the equitable treatment of all shareholders, including minority and foreign shareholders;

OECD Principles, cont.

• Recognize the rights of stakeholders as established by law or through mutual agreements;

• Ensure that timely and accurate disclosure is made on all material matters regarding the corporation; and

• Ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and its shareholders.

OECD Principles – Key Revisions• New chapter emphasizes the need for effective

enforcement of corporate governance laws and regulation;

• Institutional investors acting in a fiduciary capacity should disclose their corporate governance and voting policies with respect to investments, how they manage material conflicts of interest, and how they exercise key ownership rights regarding their investments;

• Shareholders should be able to make their views known about executive and board remuneration policy, and approve equity compensation plans;

OECD Principles: 2004 revisions, cont.

• The effective participation of shareholders in the nomination and election processes for board members should be facilitated;

• External auditors have a duty to exercise due professional care in the conduct of an audit and greater attention should be paid to ensuring auditor independence; and

• Employees and other stakeholders who act as whistleblowers should be able to communicate their concerns to the board without fear of reprisal.

Observations

• Recognize the primacy of the board of directors as essential to sound corporate governance.

• Directors’ duties of care and loyalty are now recognized with equal prominence.

• Voluntary codes and a top-down approach to governance standards are the best approach in emerging markets.

• While codes should be voluntary, a minimum amount of required financial and non-financial disclosure is essential.

• The importance of internal accounting control safeguards is often overlooked as an essential complement to disclosure requirements.

Implementation through “Enhanced” Surveillance

• IMF Article IV Staff reports

• Joint IMF-World Bank Financial Sector Assessment Program (FSAP)

• Reports on the Observance of Standards and Codes (ROSCs)

Further InformationFinancial Stability Forum• Compendium of Standards @

http://www.fsforum.org/compendium/about.htmlIMF• Codes & Standards @

http://www.imf.org/external/standards/index.htm• ROSC Program @ http://www.imf.org/external/np/rosc/rosc.asp• FSAP @ http://www.imf.org/external/np/fsap/fsap.asp World Bank• International financial architecture @

http://www.worldbank.org/ifa/index.html• ROSCs @ http://www.worldbank.org/ifa/rosc.htmlOECD• Principles @ http://www.oecd.org/dataoecd/32/18/31557724.pdf