Modernising financial laws: Tracking efforts to raise standards in the derivatives market

The modernisation of financial trading has necessitated the enactment of new legislation. While only in draft format, these laws indicate a drive to upgrade the legal environment for domestic and global trading.

The Draft Law 42-12 (April 19, 2012) on derivatives exchange, stipulates the rules to organise the derivatives market and to ensure regulation by Bank Al Maghrib and the Financial Markets Authority (Conseil Dé ontologique des Valeurs Mobiliéres, CDVM) over derivatives transactions and actors within the market.

STRUCTURE: The Draft Law divides derivatives in three categories: futures, options and swaps. Among its more significant provisions, the law states that (i) in order to carry out derivatives transactions, banks and financial companies must obtain a prior approval from the Ministry of Finance; (ii) the authorisation of the issuer of the underlying assets is required before launching the derivatives product; (iii) a prospectus must be issued ahead of the launch of a contemplated derivative; (iv) standard agreements drafted by the newly-created derivatives clearing house must be used by the counterparties; (v) guarantee deposits must be paid by the counterparties to the clearing house, which maintains a guarantee fund to cover the risks associated with the derivatives market; and (vi) the derivatives products will be structured and approved by the newly created Derivatives Management Company.

Given the primary role of over-the-counter (OTC) derivatives and derivatives traded on organised exchanges (notional amounts outstanding worldwide of derivatives on organised exchanges totalled €19.41trn at the end of September 2012), as well as securities lending transactions (average of €18bn of securities lent everyday through Euroclear Bank), Morocco is showing intent to harmonise its legal system with global standards to attract foreign investments in the region and become a leading marketplace in Africa.

AVOIDING SPECULATION: The modernisation of the Casablanca exchange, however, may not result in allowing highly speculative products. In Morocco, there is a general inclination against purely speculative products. The legislature tends to prevent the introduction of highly speculative products, either by (i) entailing them in specific set of rules such as Law 10-98 relating to mortgage collateralisation, or (ii) simply by prohibiting them, such as article 161 of the November 16, 2012 Circular of the Moroccan Office of Exchange, which forbids purely speculative derivatives on commodities.

The Draft Law mandates that the issuer of the underlying asset authorise the derivatives transaction, thus showing greater willingness from the legislature to prevent the potential negative impact of highly speculative products. By creating the Casablanca derivative exchange, the Moroccan legislature is also favouring regulated derivatives products over unregulated OTC transactions, which suffer from a lack of transparency given the high volume of unregulated OTC transactions worldwide. In fact, total notional amounts outstanding of OTC transactions were €497trn as of late June 2012.

SECURITIES LENDING: The modernisation trend of the Casablanca exchange will continue to develop though the introduction of securities lending transactions in the legal system. Currently, market participants in Morocco may not execute securities lending due to the absence of any environment regulating this type of transaction. Given the importance of securities lending in major financial markets, the Moroccan legislature implemented the Draft Law 45-12 (April 12, 2012) on securities lending, which provides a list of entities authorised to carry out securities-lending transactions. The parties will have to formalise their agreement though the execution of a mandatory standard-form securities agreement established by the CDVM. The Draft Law should be passed during the course of 2013.

The last step of the reforms is through the enactment of Draft Law 54-08, which creates a new market regulator called the Moroccan Authority of Capital Markets, whose role will differ from the CDVM since it will extend to capital markets to cover both monitoring derivatives as well as securities-lending transactions.