Authority eyes effective monitoring system in accordance with global standards

KUWAIT: The Capital Markets Authority (CMA) has launched a project to prepare regulations of capital adequacy standard for licensed persons with a view to establishing an effective monitoring system in accordance with international standards.

This is in tune with the CMA's comprehensive vision to enhance its legislative infrastructure and within its role as a monitoring auditor of the Kuwait capital market.

A capital requirement, also known as regulatory capital or capital adequacy, is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets.

The CMA's move is as per law no 7 of 2010 regarding the establishment of the Capital Markets Authority and regulating securities activities and its amendments, namely clause number 2 of article 66 of the law, which states "A person licensed to engage in the management of securities activities shall comply with the regulations specified in the bylaws and in particular maintaining adequate capital", as well as article 64 which states "The authority may request from persons licensed to engage in securities activities to submit periodic reports on all their activities to make sure they are capable of carrying on with their business and particularly have adequate capital that suits the volume and type of their securities activities".

These regulations are a major step in this regard as they are part of the effective auditing tools that would enhance the efficiency of companies licensed to deal in securities and ensure safety of their financial statuses in a way that matches the nature of the risks they undergo. The regulations will also protect investors' rights and create a safe investment environment.

Notably, in collaboration with international consultants Ernst & Young, CMA prepared a draft on licensed persons' capital adequacy, in addition to all the forms needed in both English and Arabic to assess their suitability for the business environment through conducting a study on different quantitative impacts, which involved applying the draft regulations on a selected specimen of licensed persons.

The results showed that these regulations fit the business environment, namely in terms of covering all the risks accompanying securities activities. The results also showed that most licensed persons have high capital adequacies.

The basis of the draft regulations can be summed up in the following:

• Capital was calculated according to a risk-based approach.
• Four licensed activities will be initially exempted from the regulations and will be allowed to maintain minimum limits of their capitals, including: Asset assessors, investment consultants, credit rating agencies and investment auditors.
• Extra requirements have been set for financial market infrastructure (FMI).

The above regulations are expected to lower the minimum capital requirements in general, which will enhance higher efficiency of utilizing capitals for both companies and CMA and balance the risks these companies may undergo as well as the auditory capital they should maintain.