REGULATION OF THE CAPITAL MARKET
FINANCIAL ACCOUNTING
SS 3
FIRST TERM
WEEK 2
DATE______________
TOPIC:
REGULATION OF THE CAPITAL MARKET
CONTENTS:
- Meaning of capital market
- Reasons for capital market regulation
- Types of regulation
- Stock Exchange Market
SUB-TOPIC 1:
Capital Market
A capital market is a market for securities (debt or equity), where business enterprises and governments can raise long –term funds.
It is defined as a market in which money is provided for periods longer than a year. The capital market includes the stock market (equity securities) and the bond market (debt).
Capital Market Regulator:
Securities and Exchange Commission (SEC): This is the body that oversees the capital markets to ensure that investors are protected against fraud, among other duties.
Regulation is the activities of government –established regulatory agencies to control monitor and supervise the operations of the capital market. In Nigeria, SEC is directly vested with this power of regulation.
Classification of Capital Market
Primary market
Secondary market
Primary market: This is where new stock or bond issues are sold to investors through a mechanism known as underwriting.
Secondary Market: This is where existing securities are sold and bought among investors or traders, usually on a security exchange, over the counter or elsewhere.
Securities and Exchange
Commission Regulatory Authority SEC
Capital Market
Stock market
Evaluation:
Define capital market
Mention two classes of capital market
SUB-TOPIC 2:
Reason For Capital Market Regulation
Bond Market
The purpose of capital market regulation in Nigeria is to engender market integrity and posturing for a truly robust and well-regulated market.
The following are other reasons for capital market regulation.
- To develop market economies
- To develop country’s economy
- To permit a much wider participation in the economy
- To increase the number of people who participates in investment opportunities
- To reduce as much as possible business and market risks
- To improves investors ‘confidence in the market
- To make sure that perfect information is available to all investors at all times
- To prevent cases of capital manipulation ,such as insider trading
- To ensure competence of providers of financial services
- To protect clients and investigate complaint
Evaluation:
Outline six reasons for capital market regulation
SUB-TOPIC 3:
TYPES OF CAPITAL MARKET REGULATION
Statutory Regulation
Self-regulation stock exchanges
STATUTORY REGULATION
These are sets of rules issued by some agency of government that an authority has been vested in. Statutory refers to laws passed by the state or federal government .The following are statutory regulations of the capital market:
The Law ISA N 45, 1999: Investment and Securities Act (ISA) is the principal legislation regulating mergers and acquisitions in Nigeria. It repealed the specific provisions for the regulation of M &A’s in CAMA and transferred the relevant sections to the ISA.
Securities and Exchange Commission: The Securities and Exchange Commission (SEC) is the main or apex regulatory institution of the Nigerian Capital Market. It is supervised by the Federal Ministry of Finance.
Objectives of statutory regulation
- To protect investors
- To maintain confidence in the Nigerian financial system
- To protect and enhance financial services
- To reduce financial crime
Principles of good regulation
Efficiency and economy: The need to use our resources in the most efficient and economic way.
Role of management: Responsibilities of those who manage the affair of authorized persons. This principle is designed to secure an adequate but proportionate level of regulatory intervention by holding senior management responsible for risk management and control within the firm.
Proportionality: Burdens or restrictions that are imposed on the industry should be proportionate to the benefits that are expected to result from those burdens or restrictions. It includes cost-benefit analysis of proposed regulations.
Innovations: This is associated with the desirability of facilitating innovation in connection with regulated activities. It involves using different means of compliance so as not to unduly restrict market participants from launching new financial products and services.
International character: This is the character of financial services and desirability of maintaining the competition .It involves cooperation with overseas regulators both to agree international standards and to monitor global firms and markets effectively.
Competition: Competition is the ability to minimize keen contest among firms that are regulated. It is to avoid unnecessary regulatory barriers to entry or business expansion.
Public awareness: The public must be aware of the regulations. This is to enhance understanding and knowledge of members of public on financial matters.
Nigerian stock exchange
A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds and other securities. It also provides facilities for issue and redemption of securities and other financial instruments and capital events including the payment of income and dividends.
Nigerian stock exchange is an organized market that uses electronic networks to buy and sell stocks. Trading on Nigerian stock exchange increases speed of operation, reduces cost of transactions and less emphasis is now on the physical place.
Classification of stock exchange
- Primary market
- Secondary market
Primary market: This is where initial offering of stocks and bonds exchange hand.
Secondary market: This is where second hand stocks are traded.
Roles of stock exchange
- Raising capital for business
- Mobilizing savings for investments
- Facilitating company growth
- Profit sharing
- Corporate governance
- Creating investment opportunities for small investors
- An avenue for government to borrow funds to finance projects
- Barometer of the economy
Evaluations:
- Define stock exchange
- Mention and explain two classes of stock exchange
- Outline five roles of stock exchange
SUB-TOPIC 4
Operation of Nigeria stock exchange
Nigerian Stock Exchange is regulated by the SEC, which has the mandate of surveillance over the exchange to forestall breaches of market rules and to deter and detect unfair manipulations and trading practices.
The NSE has an automated trading system data on listed companies ‘performances that are published daily,weekly,monthly,quarterly and annually. However,trading takes place every day, that is Monday to Friday.NSE extended its trading hours by additional two hours, from five hours to seven hours by June 2011.
Nigerian stock exchange uses market indices, such as all shares index, and market capitalization to measure the performance or growth of the market.
Operation of the Securities and Exchange Commission
In the process of regulating the market, the commission undertakes the following activities meant to protect investors, market operations and also to maintain the integrity of the market.
Registration of securities and market intermediaries to ensure that only fit and proper persons/institutions are allowed to operate in the market such as:
Market places
Securities/commodities exchange /capital trade profits
Issuing houses
Securities dealers/stock brokers/sub-brokers
Registrars /transfer agents
Trustees
Capital market consultants
Government bonds
2.Surveillance over the exchange and trading systems in order to forestall breaches of market rules as well as to deter and detect unfair manipulations and trading practices to prevent market disruption.
3.Investigation of alleged breaches of the laws and regulations governing the capital market and enforcement of sanctions where appropriate.
Evaluation:
Briefly explain the operation of the stock exchange
Enumerate three roles of Securities and Exchange Commission in regulating the stock exchange
SUB-TOPIC 3:
Tools of regulation
The tools of regulation focus on execution, i.e the processes and tools that are available to government regulations to achieve their regulatory outcomes.
The following six approaches are always adopted to analyze and classify regulatory tools:
- Economic tools
- Transactional tools
- Authorization tools
- Structural tools
- Informational tools
- Legal tools
- Reasons for regulation
Regulations, such as any other form of coercive action, have costs for some and benefits for others. Regulations are justified using a variety of reasons and therefore can be classified in several broad categories as follows:
Market failures: These are regulations due to inefficiency
Collective desires: Regulations about collective desires or judgments on the part of a significant segment of society
Diverse experiences: Regulation with a view of eliminating or enhancing opportunities for the formation of diverse preferences and beliefs
Social subordination:
Endogenous preferences: Regulation’s purpose is to affect the development of certain preferences on aggregate level.
Irreversibility: Regulation that deals with the problem of irreversibility-the problem in which a certain type of conduct from current generations results in outcome from which future generations may not recover from at all.
Professional conduct: Regulation of members of professional bodies, either acting under statutory or contractual powers
Interest group transfers: Regulation that results from effort by self-interest groups to redistribute wealth in their favour, which may be disguised as one or more of the justification above.
Evaluation:
Mention and explain two types capital market regulation
List five principles of good regulation
GENERAL EVALUATION
Objective Test:
1. Capital market is made up of the following A. money market and bond market
B.security market and stock market C.stock market and bond market D.stock market and security market
2. Capital market may be classified into one of the following categories: a. financial market and instrument market
b.primary market and secondary market c.primary market and tertiary market d.secondary market and tertiary market
3. One of the following is not an example of regulation types a.statutory regulation
b.SEC regulation c.self-regulation
d. registration regulation
4. The following are examples of capital market operators except
a.issuing house
b.stock brokers
c.capital brokers
d.reporting accountants
5. A market where securities are bought and sold is called
A. Securities and Exchange Commission
B.stock exchange
C.foreign exchange market
D.Onitsha market
2.
The market where second hand securities are bought and sold is called
A. capital market
B.money market
C.primary market
D.secondary market
3.
The trading hour of Nigerian Stock Exchange is
A. three hours
B.five hours
C.seven hours
9 | P a g e
D.ten hours
4. One of the following is not a tool for regulation A. legal tools B.economic tools C.vertical tools
D.structural tools
5. The apex regulatory institution of government at the capital market is A.SEC B.EFCC C.CPC D.NDLEA
Essay Test:
Define capital market
Mention and explain two classes of capital market
Briefly discuss the two types of capital market regulation
Highlight six reasons for capital market regulation
WEEKEND ASSIGNMENT
1. What do you understand by Nigerian Stock Exchange?
REFERENCES
1. Financial Accounting for Senior Secondary School 3 by M.A.Adesola: Melrose Publishing Ltd
