## 1. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation ## Source details **Canonical URL:** [1. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04352.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04352.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04352.pdf.json) --- ### Summary assessment and purpose - Assessment performed as part of the Financial Sector Assessment Program for Kuwait in July and September 2003. - Purpose: assess observance of the International Organization of Securities Commission (IOSCO) objectives and principles of securities regulation, effectiveness of market supervision, and suggest areas for improvement and development. - Assessment conducted by Ashraf Shamseldin, Securities Advisor, IMF, July 1–10 and September 6–18, 2003. - Methodology based on IOSCO methodology revised in April 2003. ### Information and methodology used - Based on review of laws, rules, regulations, documentation and reports, and interviews with government officials, KSE management and staff, legal experts, market participants, intermediaries, and some investors. - Supplemented by self-assessment reports prepared by the KSE, additional reference materials and other publicly available information. - Assessment perspectives: - Legal perspective: identify powers and authorities conferred on the regulator, relevant provisions of laws, rules and regulations, and programs/procedures intended to implement them. - Practical perspective: exercise of those powers and authorities in practice and efficiency of enforcement. ### Structure, role of regulators, and institutional fragmentation - Regulators: Market Committee (MC)/Kuwait Stock Exchange (KSE), Central Bank of Kuwait (CBK), Ministry of Commerce and Industry (MOCI). - Historical and market context: - KSE and MC established by Decree-Law in 1983. - Exchange closed in August 1990 and reopened in September 1992. - Kuwait Automated Trading System (KATS) introduced in 1995. - Investment barriers removed for GCC citizens in 1988; market opened to all foreign investors in August 2000. - Regulator responsibilities: - MOCI: licensing securities market intermediaries and regulation/supervision of the primary market. - CBK: supervision of collective investment schemes (CISs). - Regulatory powers described as fragmented without sufficient formal coordination procedures. ### Market size, structure, and statistics - Market size and liquidity: - Securities market in Kuwait is the second largest in the Arab world in terms of value of trading (US$22 billion) and market capitalization (US$35 billion). (2002 figures.) - Market capitalization in 2002 represents about 100 percent of GDP. - Turnover ratio was 11.6 in 2002. - Listed securities and trading: - In 2002, 95 companies were listed on the KSE. - Total volume of traded shares is about 27,834 million. - No derivatives are traded in the Kuwaiti market. - Bond trading can take place through KATS but there is no bond dealing/market making service available yet. - Over-the-counter market in equities exists; KSE has rules governing trading in this market. - Investment funds and intermediaries: - By end of 2002, there were 33 licensed funds with total assets of slightly more than US$3 billion. - Total number of entities under CBK supervision licensed as investment companies (fund management and portfolio management) is 71. - There are 13 licensed brokerage firms; brokers are not allowed to perform proprietary trades. - Banks are not allowed to conduct securities business except through affiliated firms. - Institutional investors are few; institutional investment is mainly passive. - Market role and investor behavior: - Market is emerging with a marginal role as a source of medium and long-term finance. - Primary market is not active and lacks basic services. - Equity is the major financial tool; bond issues are very few (mainly government bonds of medium-term maturity; corporate bonds limited). - Investment in securities less popular than bank deposits due to speculative investor behavior and high market volatility. ### Trading, clearing, settlement, and depository arrangements - Clearing and settlement: - Equity and debt trades on the KSE are cleared and settled through the Kuwait Clearing Company (KCC), the sole company established for this purpose. - KCC functions as central clearing and settlement agent and also acts as the securities depository and registry; it was founded by major banks (payment banks), the KSE, and a few market intermediaries. - In the KCC system, securities are immobilized and not dematerialized. - Safekeeping with the KCC is optional, but settlement through the KCC is mandatory and all settlements are done electronically by transferring assets between investors’ accounts held within the KCC system. - Penalties imposed on members if they fail to meet obligations on settlement date. - Account and payment arrangements: - Traders allowed to open accounts in the CSD system; one beneficial owner allowed to open one account only. - Brokers act as agents and take full responsibility for client performance. - To avoid broker default risk, market rules dictate investor pays for a buy trade directly to the CSD; the CSD initiates payment on a sale trade in the name of the investor—cash transacted between the CSD account and investors’ accounts. - Market controls: - KSE has a surveillance mechanism to monitor trading and detect unusual activities. - Each security has its own market up/down daily limit; once limit is reached, security cannot be traded further that day. ### Clearing and settlement risk, dematerialization, and investor protection (principle 27 summary) - Clearing and settlement system prevents to a great extent payment default in case of the failure of a participant to meet his obligations. - Dematerialization of securities cannot be efficiently and promptly implemented in the absence of a compelling law. - It is expected that the risk of delay in securities delivery would remain high and more so in the event of a bankruptcy of a clearing member. - The plan to establish an investor protection fund (IPF) has so far not been implemented. ### Self-regulation and institutional issues - KSE and KCC operate under special rules with their own management, but they are not officially recognized as self-regulating organizations (SROs). - From a statutory viewpoint, MC is an independent agency but in practice it is not: - MOCI serves as chair of its board of directors; the director-general is appointed and can be removed; majority of board members are appointed by the government. - MC has limited powers for fulfilling its mandate; most powers of licensing, supervision, and sanctions lie elsewhere. - Supervisory powers of MC over KSE and KCC are not sufficient; MC/KSE inspection, investigation, and surveillance powers are not adequate and lack power to supervise and inspect key market institutions. - Two key market participants, the KSE and the KCC, are not subject to the regulator’s inspection. - Human resources and organization: - MC/KSE human resources need strengthening to increase efficiency. - Recent efforts underway to reorganize supervision, surveillance, inspection, and investigation mandates. ### General preconditions, legal framework, and transparency - Legal and institutional preconditions: - Regulatory environment generally does not conform to preconditions of IOSCO objectives and principles. - Securities law and regulations were prepared in reaction to 1982 crash; perceived deficiencies remain in major areas. - No explicit power given to regulator to develop the market as it evolves without legislative changes. - Protection of minority shareholders and prohibition of market manipulation and insider trading are not covered by present regulations. - IOSCO principles require appropriate legal setting, tax system, bankruptcy law, efficient court system, and accounting framework; these exist but need improvement. - Information, education, and transparency: - Need for market awareness and education for company directors, managers, investment intermediaries, and others; KSE seeks to implement an information and education program for market participants. - Rules and regulations are published in the Official Gazette and licensed intermediaries are informed by KSE correspondence; however, regulations, circulars, and administrative decisions are numerous, not compiled in a consolidated master reference, and difficult to track—this impedes accurate compliance assessment and market participants’ ability to keep abreast of rules. - KSE has developed a web site and plans to post all rules, regulations, administrative decisions, and guidelines and to develop a compendium or consolidated master reference. ### Main findings and coordination issues - Overall finding: some regulatory and institutional progress has been made recently, but the underlying legal framework remains inadequate and in need of improvement. - Fragmentation and harmonization: - Lack of regulatory harmonization has led to significant fragmentation of responsibilities among MC/KSE, CBK, and MOCI. - Power to set technical standards for the market is fragmented and not coordinated. - Information sharing and cooperation: - Law permits sharing information and coordinating actions with foreign authorities, but executive regulations limit sharing to public-domain and non-confidential information only because law did not explicitly permit sharing of all types of information. - Lack of formal protocols to streamline and institutionalize cooperation among national regulatory agencies and other domestic supervisory and inspection authorities. - Recommendation: law needs amendment to explicitly and clearly provide for cooperation and broader information sharing to support law enforcement and investor protection, especially given market opening to foreign investment. --- ### 27. The clearing and settlement system prevents to a great extent payment default in case ### Clearing and settlement; dematerialization; investor protection - The clearing and settlement system prevents to a great extent payment default in case of the failure of a participant to meet his obligations. - Dematerialization of securities cannot be efficiently and promptly implemented in the absence of a compelling law. - It is expected that the risk of delay in securities delivery would remain high and more so in the event of a bankruptcy of a clearing member. - The plan to establish an investor protection fund (IPF) has so far not been implemented. ### Market regulation, self-regulation, and regulatory structure - There are no SROs at present in a proper sense. - Although the legal framework does not prohibit self regulation, it does not provide a set of clear rules for this purpose. - The MC, which is the market regulator, acts as the exchange’s board of directors, defeating the principle of self-regulation. - The Kuwait Clearing Company (KCC) is a self-regulated entity under the supervision and oversight of KSE and thus it is implicitly and indirectly subject to the oversight of the market regulating agency. - The securities market is regulated by more than one agency; division of responsibility does not avoid inequities and leaves gaps. - The various laws that govern the market do not form a comprehensive legal framework. - Cooperation between the regulating agencies is not formalized and there are no legal procedures in this respect. - The MC is the principal regulator, but has no staff and relies on KSE staff. - The power and jurisdiction of the MC is limited, as it is confined only to the KSE and member brokers. - While the law grants the independence of the MC/KSE, it is not, in practice, operationally independent from external political or commercial interference. - The minister is the chairman of the board; six members of the board represent the market players and business community, creating potential conflicts of interest. - The sanctioning system is too weak; MC/KSE needs to be empowered with pecuniary sanctions and a larger spectrum of sanctions. - Rules, procedures, and decisions are not available to the public; no consolidated master reference exists. - The regulator does not consult with industry or public; there is no established procedure for rule making. - No comprehensive inspection procedure is in place and no regular inspection is performed. - The regulator has no subpoena powers, and it cannot call witnesses or other parties to complete its investigations. - Insider trading is not prohibited and consequently not penalized. - There is no provision in the law that specifically authorizes the MC/KSE to share nonpublic information with domestic and foreign counterparts. - Information sharing procedures and mechanisms need to be formalized by way of a Memorandum of Understanding (MOU). - MOUs already signed need to be in line with IOSCO standards for information sharing. ### Listing, issuer regulation, and primary market shortcomings - Listing requirements are set by the KSE, subject to the approval of the MC and the MOCI. - For a company to be listed on the exchange, it must have published audited financial statements for the three fiscal years preceding the listing application. - Public offerings of securities require preparation of a prospectus and disclosure of complete and reliable information; supervision of this process is by the MOCI. - Such offerings cannot be listed on the exchange until one year following the publication of its audited financial statement for the first subsequent fiscal year. - The relevance of the prospectus becomes marginal due to insufficiency of information therein at the date of offering or the date of listing. - Investors invited for subscription, whether in an initial public offering or private placement, are not properly informed of the inviting company or potential risk, and are not provided with adequate protection. - Regulation of the primary market is not sufficient and needs improvement. - There are no regulations or detailed disclosure rules on: - mergers and takeovers, - reporting transactions by insiders and any changes in significant shareholdings, - equal treatment of shareholders to protect minority shareholders and outside investors. ### Market intermediaries: licensing, supervision, and enforcement - Licensing requirements for market intermediaries are few and broad. - With the exception of brokers who are supervised by the KSE, requirements for other intermediaries are regulated by different agencies. - The term “Investment Company” is not defined and therefore not clear; there are no rules to govern such a definition. - Regulations related to intermediaries and intermediation are generally inadequate. - Individuals are not licensed and no proficiency requirements exist for traders, advisors, portfolio managers, compliance officers, or officers and directors of investment firms and mutual fund managers. - No relevant general guidelines have been issued in the absence of these legal requirements. - The KSE can enforce laws and regulations with respect to brokers only and can enforce sanctions limited to warnings and revocation of licenses but not fines. - The KSE uses an electronic surveillance system to detect irregularities in market prices that might reflect market manipulation. - The KSE has authority to conduct regular inspections but carries out inspections only in cases of investor complaints or reported fraud, largely due to lack of staff and technical capacity. ### Investment fund regulation and collective investment schemes (CISs) - Regulation and supervision of CISs are segmented among three agencies. - Maintaining industry integrity requires detailed and comprehensive rules and supervision at all stages. - Owners, founders, operators, and managers need to be subject to strict fit and proper assessments. - Auditors of these funds should be selected from a list of auditors who meet eligibility criteria developed and maintained by the regulating agency. - It is recommended that the regulating agency develop and issue investment performance standards similar to those of the Association for Investment Management and Research (AIMR) of the United States. - Prudential rules are required to ensure fund solvency and asset diversification. - The law should develop guidelines and prudential rules regarding investment policy to ensure sufficient diversification of assets. - Classification of mutual funds by categories reflecting different investment strategies needs to be clearly defined. - There are no clear rules governing a fund’s net asset value (NAV) calculation: - The rules do not require funds to include in their prospectuses the methodology they intend to use. - It is not clear how NAV is calculated, what methodology is used, the frequency of calculation, or whether prior approval by the regulating agency is required. - No rules mandate publication of NAV on a daily or at least a weekly basis. - It is not clear how market prices of stocks are used in NAV calculation (average market prices during a trading week, the closing price of the day of calculation, or price of the last day of the trading week). - NAV methodology is only specified in general terms by the Articles of Association of the fund on the day it is licensed. - Neither the MC nor the CBK are authorized to set parameters of NAV calculation or its frequency, nor to issue detailed CIS guidelines. - The CBK is designated to monitor, supervise, and inspect CISs; supervision is usually done by external auditors appointed by the CBK. - Inspection is sometimes done by auditors due to shortage of staff; training should be organized for inspection teams. - CISs should be licensed, regulated, and monitored within the wider context of securities market functions. ### Market intermediary regulation recommendations - Entry standards for market intermediaries need redefinition for each type of service. - Prudential rules and regulations need to be in place for all intermediaries from incorporation to liquidation. - Licensed intermediaries are overseen and inspected by different agencies that may not use a consistent approach. - Rules should be supplemented by a code of ethics for each type of intermediary. - Intermediary companies should establish clear internal procedures in full compliance with rules and regulations, indicating market practice and monitoring. - Intermediaries must avoid conflicts of interest and should inform clients of any conflicts. - A compliance officer must be appointed for each intermediary. - The MC should be empowered to inspect books, records and business operations of all intermediaries; inspections should be regular, at least once a year. - The MC should be empowered to impose necessary and relevant sanctions to provide full protection to clients. - It is desirable that the KSE plan to establish an IPF be implemented to provide investor protection in case of bankruptcy of a financial firm. - All financial intermediaries should contribute to the fund based on their revenues from securities activities. - Criteria for capital adequacy and solvency should be established and closely supervised and monitored by the regulating agency. ### Secondary market regulation and system robustness - The MC and the KSE should be separate institutions, each with its own resources, staff, and separate management. - The MC should be empowered to perform regular on-site inspections to ensure reliability of KSE monitoring and supervising the trading system. - The MC should be explicitly empowered by law to license the KSE(s). - The nonprohibition of insider trading is a serious defect that undermines market fairness and integrity. - Although the surveillance system seems adequate for the present level of trading, the KSE should be able to implement a wider and more severe set of sanctions, including levying fines. - To exercise proper risk management, the system developed by the KCC should require ultimate dematerialization of outstanding securities and become fully automated on the basis of book entries; this requires an amendment to the current law. - The KSE is authorized to supervise the KCC, but there is no formalized system in place. - In order to improve clearing and settlement, dematerialization of securities needs a strong legal basis to ensure effectiveness of the risk management system. - Weaknesses in supervision of clearing, settlement and depository systems may cause high risk. - KCC inspection by the KSE needs strengthening; serious attention must be given to supervision of clearing and settlement systems and to addressing conflicts of interest arising from the governance structure of the MC, the KSE, and the KCC. ### Principle-by-principle assessment methodology and implementation categories - Assessment categories defined: - Fully implemented: all assessment criteria generally met without material deficiencies. - Broadly implemented: affirmative responses limited to benchmark exceptions that do not substantially affect overall adequacy. - Partly implemented: assessment criteria generally met without significant deficiencies. - Not implemented: major and material shortcomings found. - Whenever assessed as broadly, partly or not implemented, recommendations proposed for achieving full implementation. --- ### 44. A principle will be considered not applicable whenever it does not apply given the ### Overview and institutional structure and key capacity figures - Main legal framework: Amiri Decree (August 1983) and its executive regulations govern the Kuwait securities market. - Market regulator: Market Commission (MC) and Kuwait Stock Exchange (KSE) function almost as a single body under the same management; MC/KSE is managed by a committee chaired by the MOCI. - Committee composition: chair (MOCI), deputy chairman/general manager (KSE GM), one representative each from CBK and MOF, two experts, four members nominated by the chamber of commerce and industry including one broker. - Staff and resources: KSE total staff = 160; majority technical/professional with a university degree. Cost of new trading system was totally covered by the government—approximately US$1 million. - Financial independence: MC/KSE financially independent, relies on own resources; annual report published but does not contain authority’s financial statements. ### Assessment highlights for Principles Relating to the Regulator (Principles 1–5) - Principle 1: Assessment = Not implemented. - Principle 2: Assessment = Not implemented. - Principle 3: Assessment = Not implemented. - Principle 4: Assessment = Not implemented. - Principle 5: Assessment = Not implemented. ### Key deficiencies in regulatory powers, independence, and processes - Responsibilities and powers: - MC objectives (Article 4) and powers (Article 6) are broadly defined and limited in scope (mainly supervision of KSE and member brokers). - No clear authority for MC to license, inspect, investigate all market participants; sanctioning powers limited to administrative sanctions with no pecuniary fines. - Organizational conflicts: - MC and KSE merged in one body; no separation of regulator and exchange undermines supervisory role; no inspection has ever been carried out by MC over KSE. - MC has no technical staff and relies on KSE staff. - Legal protections and transparency: - No legal protection for MC/KSE staff acting in discharge of functions. - No clear legal procedure for contesting MC/KSE decisions. - Rules, procedures, and executive decisions are not consolidated or publicly available; not fully published on KSE web site. - Ethics and confidentiality: - AD Article 69 prohibits violation of confidentiality, but no formal code of ethics; staff prohibited from investing in market except with prior approval under an administrative instruction only. ### Self-regulation (SROs) - Current status: - No full SROs in proper sense; KSE is not a self-regulated entity under law; KCC operates as a private company responsible for clearing, settlement, and depository functions and is supervised by KSE. - Assessments: - Principle 6: Partly implemented. - Principle 7: Partly implemented. - Comments: - Law does not empower MC to license SROs or provide oversight mechanisms; amendments recommended to permit SROs and empower regulator to inspect and sanction SROs. ### Inspection, investigation, surveillance, and enforcement - Present powers and practice: - No comprehensive inspection and investigation rules; inspections are ad hoc and not routine. - Investigating staff have judicial power to prove actions but no subpoena power; cannot compel testimony. - KSE has an online surveillance system to monitor transactions; MC has not developed surveillance to oversee KSE. - Sanctions: - KSE administrative sanctions: admonition; suspension up to 4 months; confiscation of bank guarantee; cancel KSE membership; suspension or delisting for listed companies (up to 4 months). No pecuniary fines permitted by law. - Assessments: - Principle 8: Partly implemented. - Principle 9: Partly implemented. - Principle 10: Partly implemented. - Specific concerns: - Insider trading is neither prohibited nor penalized. - No subpoena powers for regulator; record-keeping rules not sufficiently detailed (type and retention periods unspecified). - Enforcement powers segmented across agencies (MC/KSE, CBK, MOCI) with no formal coordination. ### Cooperation and information sharing - Legal basis: - Law authorizes MC/KSE to establish links and cooperate domestically and internationally but does not explicitly authorize sharing nonpublic information with domestic or foreign counterparts. - Some MoUs exist (Bahrain, Egypt, Jordan, Tunisia) but experience in exchanging nonpublic information with foreign counterparts is lacking. - Assessments: - Principle 11: Partly implemented. - Principle 12: Partly implemented. - Principle 13: Partly implemented. - Recommendation: promulgate explicit legal provision authorizing exchange of nonpublic information and formalize information-sharing mechanisms (MoUs) in line with IOSCO standards. ### Issuers and disclosure - Disclosure regime: - Prospectus requirement: not mandated by securities market law; prospectus required as a listing requirement for companies seeking listing; prospectus typically includes issuer characteristics and a summary of audited financial statements for the last three years. - Listed companies: required to disclose financial information quarterly; prepare financial statements in accordance with International Accounting Standards (IAS) and audited under International Auditing Standards. - Immediate disclosure required when a shareholder reaches 5 percent ownership (and for companies to disclose shareholders reaching 5 percent). - Assessments: - Principle 14: Partly implemented. - Principle 15: Partly implemented. - Principle 16: Partly implemented. - Key gaps: - Primary market regulation deficient: public offerings can be sold and traded for a year before listing without regulator-reviewed prospectus; lack of detailed prospectus content rules; no regulations on tender offers, mergers and acquisitions; minority shareholder protections inadequate. - Capacity constraint: present human capacity insufficient to examine all financial statements. ### Collective Investment Schemes (CISs) - Legal framework: Law No. 31 of 1990 and Ministerial Decree No. 113 of 1992; CD of MOCI enforces, licensing requires CBK approval. - Types and structure: - Two types allowed: open-end (variable capital) and closed-end (fixed capital). Funds must be established by a joint-stock company; capital must be paid in cash. - Management/oversight: independent trustee, external auditors, CBK conducts inspections; manager must hold minimum 5 percent of units. - Disclosure and valuation: - Prospectus required with specified content under Executive Regulations (Article 40); periodic reporting: annual (within 45 days), semi-annual (within 30 days), quarterly. - NAV valuation frequency defined in Articles of Association; trustee responsible for valuation and publication in at least two newspapers; no regulatory empowerment to mandate NAV frequency or methods. - Assessments: - Principle 17: Partly implemented. - Principle 18: Partly implemented. - Principle 19: Partly implemented. - Principle 20: Partly implemented. - Concerns and recommendations: - Regulation and supervision of CISs are segmented among CBK, CD, and MC; recommendation to formalize consultation mechanism and consider consolidating supervision under MC. - Need clear standards for NAV calculation, publication frequency (suggestion: daily), classification of funds by strategy, and prudential investment limits (e.g., concentration limits). ### Market intermediaries and prudential rules - Licensing and entry: - Market intermediaries licensed by CD of MOCI; brokers and CISs have specific requirements; brokerage minimum paid-up capital = KD 100,000; bank guarantee = KD 50,000. - Certification examinations are not required. - Prudential requirements: - Brokers: initial capital KD 100,000; bank guarantee KD 50,000; closed-end funds capital requirement = KD 5 million; minimum capital for open-ended funds = KD 5 million (note: text lists KD 5 million for closed-end and states "This amount is the minimum capital in case of open-ended funds"—preserve as presented). - Ongoing capital maintenance rules limited to bank guarantee remaining valid; no comprehensive ongoing capital adequacy framework. - Internal organization and conduct: - No comprehensive rules for internal organization and operational conduct across all intermediaries; brokers and CISs subject to specific prohibitions and conduct rules. - No universal code of ethics; no mandatory compliance officer requirement across all intermediaries. - Assessments: - Principle 21: Partly implemented. - Principle 22: Partly implemented. - Principle 23: Partly implemented. - Principle 24: Partly implemented. - Failure resolution: - Existing protections: bank guarantees and Settlement Guarantee Fund (SGF) supporting DVP on T+3 settlement. - Investor Protection Fund (IPF) envisaged but not yet in place. ### Secondary market, trading systems, clearing and settlement - Trading and exchange oversight: - KSE trading rules set by KSE and approved by MC; all transactions executed through licensed brokers; trading automated with online real-time information. - KSE publishes daily and monthly trading bulletins and displays information on website. - Clearing, settlement, and depository: - KCC (Kuwait Clearing Company) manages clearing, settlement, and depository functions; KCC supervised by KSE; settlement = T+3, DVP principle; 50 percent of outstanding shares immobilized in KCC. - Brokers deposit KD 50,000 bank guarantee; SGF operated within KCC covers member failures; large penalties for settlement failures. - Settlement and transfer via book-entry system; settlement through KCC mandatory, safekeeping optional. - Assessments: - Principle 25: Partly implemented. - Principle 26: Partly implemented. - Principle 27: Partly implemented. - Principle 28: Partly implemented. - Principle 29: Partly implemented. - Principle 30: Partly implemented. - Key operational points: - Electronic trading system provides transparency; market up/down limits exist per security. - KSE surveillance exists but MC lacks direct surveillance and routine on-site inspections of KCC and KSE. - No legal obligation for full dematerialization; cross-border transaction rules absent. ### Summary observance statistics - Partly implemented: 25 — Principles: 6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22,23,24,25,26,27,28,29,30 - Not implemented: 5 — Principles: 1,2,3,4,5 - Fully implemented: none listed - Broadly implemented: none listed - Not applicable: none listed ### Selected exact figures and thresholds - KSE staff total = 160 - Cost of new trading system = approximately US$1 million - Broker minimum paid-up capital = KD 100,000 - Broker bank guarantee = KD 50,000 - Closed-end funds capital requirement = KD 5 million - Minimum capital for open-ended funds described as = KD 5 million (as presented in source) - Settlement cycle = T+3 - Percentage of outstanding shares immobilized in KCC = 50 percent - Shareholder disclosure threshold = 5 percent - Assessment grades explicitly stated for Principles 1–30 as above ### Principal recommended actions (condensed) - Principles Relating to the Regulator (CP 1–5): - Enact one comprehensive securities market law unifying present laws; clearly define MC objectives, responsibilities, functions, and authorities. - Ensure MC independence and accountability; publish audited financial statements in annual report and web site; provide judicial appeal for MC decisions. - Empower MC to license, inspect, investigate, and sanction all market intermediaries; authorize a broader spectrum of sanctions including cash fines and set ceilings. - Institute formal rulemaking processes with public consultation and require publication of investigation outcomes and guidance. - Establish explicit confidentiality rules and an ethics code for MC personnel. - Self-Regulation (CP 6–7): - Amend law to allow SROs; explicitly vest MC with authority to license, oversee, inspect, and sanction SROs including pecuniary sanctions. - Enforcement (CP 8–10): - Empower MC to develop and enforce comprehensive inspection, investigation, and surveillance powers; prohibit and penalize insider trading; formalize inter-agency coordination. - Implement regular routine on-site inspections; grant regulator subpoena powers. - Develop and implement an effective compliance program across intermediaries. - Cooperation (CP 11–13): - Legislate explicit authority to share public and nonpublic information with domestic and foreign counterparts; formalize MoUs and consider joining IOSCO or signing IOSCO collective MoU. - Issuers and CISs (CP 14–20): - Empower MC to regulate IPOs, public offerings, tender offers, mergers and acquisitions; require prospectus approval and define prospectus content and distribution. - Strengthen minority shareholder protection and corporate governance requirements as listing conditions. - Build MC capacity to oversee application of International Accounting Standards and auditing; consider MC approval of auditors. - Consolidate CIS supervision (formal consultation among CBK, CD, MC or centralized supervision under MC); define NAV calculation parameters and require regular NAV publication (suggested daily). - Define fund categories by investment strategy; require prospectus publication and risk disclaimers. - Market intermediaries and failure procedures (CP 21–24): - Define clear entry standards and ongoing prudential requirements for all intermediaries; require fit and proper assessments for owners and officers. - Require codes of ethics, internal procedures, appointment of compliance officers; empower MC to inspect books and records and to impose sanctions. - Establish IPF and require contributions by intermediaries; set capital adequacy and solvency criteria. - Secondary market, clearing and settlement (CP 25–30): - Separate MC and KSE into distinct organizations with separate management and staff; empower MC to license and perform regular on-site inspections of KSE and KCC. - Prohibit insider trading and provide heavy penalties; develop systems to deter and detect market manipulation. - Enable legal dematerialization of securities; empower KCC to achieve ultimate dematerialization and consider KCC as central corporate registry; develop cross-border transaction rules. --- ### 45. The authorities in Kuwait are in broad agreement with the assessment and ### Authorities' stance - The authorities in Kuwait are in broad agreement with the assessment and recommendations. ### Planned reform action and objectives - The KSE has prepared a four-year development plan to be implemented as soon as possible. - The plan was prepared in recognition of the recommended reforms to the securities market and the need for immediate initiation of the reform actions. - Objectives of the four-year development plan: - Improve the regulation and the regulatory framework. - Strengthen the enforcement and the supervisory role of the market regulator. - Improve the current stock exchange mechanism and systems. - Expected outcomes: - Implementation of the four-year plan is expected to institutionalize a dynamic process for the reform and development of the securities market in conformity with the international standards and best market practices. *Source: _cr04352 - IMF staff detailed assessment of observance of the IOSCO Objectives and Principles of Securities Regulation for Kuwait (excerpts as provided).* ### 1. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities ### 1. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation ### Summary assessment and purpose - Assessment performed as part of the Financial Sector Assessment Program for Kuwait in July and September 2003. - Purpose: assess observance of the International Organization of Securities Commission (IOSCO) objectives and principles of securities regulation, effectiveness of market supervision, and suggest areas for improvement and development. - Assessment conducted by Ashraf Shamseldin, Securities Advisor, IMF, July 1–10 and September 6–18, 2003. - Methodology based on IOSCO methodology revised in April 2003. ### Information and methodology used - Based on review of laws, rules, regulations, documentation and reports, and interviews with government officials, KSE management and staff, legal experts, market participants, intermediaries, and some investors. - Supplemented by self-assessment reports prepared by the KSE, additional reference materials and other publicly available information. - Assessment perspectives: - Legal perspective: identify powers and authorities conferred on the regulator, relevant provisions of laws, rules and regulations, and programs/procedures intended to implement them. - Practical perspective: exercise of those powers and authorities in practice and efficiency of enforcement. ### Structure and role of the securities industry and regulators - Regulators: Market Committee (MC)/Kuwait Stock Exchange (KSE), Central Bank of Kuwait (CBK), Ministry of Commerce and Industry (MOCI). - Historical and market context: - KSE and MC established by Decree-Law in 1983. - Exchange closed in August 1990 and reopened in September 1992. - Kuwait Automated Trading System (KATS) introduced in 1995. - Investment barriers removed for GCC citizens in 1988; market opened to all foreign investors in August 2000. - Regulator responsibilities: - MOCI: licensing securities market intermediaries and regulation/supervision of the primary market. - CBK: supervision of collective investment schemes (CISs). - Regulatory powers described as fragmented without sufficient formal coordination procedures. ### Market size, structure, and statistics (preserve numeric values exactly) - Market size and liquidity: - Securities market in Kuwait is the second largest in the Arab world in terms of value of trading (US$22 billion) and market capitalization (US$35 billion). (2002 figures.) - Market capitalization in 2002 represents about 100 percent of GDP. - Turnover ratio was 11.6 in 2002. - Listed securities and trading: - In 2002, 95 companies were listed on the KSE. - Total volume of traded shares is about 27,834 million. - No derivatives are traded in the Kuwaiti market. - Bond trading can take place through KATS but there is no bond dealing/market making service available yet. - Over-the-counter market in equities exists; KSE has rules governing trading in this market. - Investment funds and intermediaries: - By end of 2002, there were 33 licensed funds with total assets of slightly more than US$3 billion. - Total number of entities under CBK supervision licensed as investment companies (fund management and portfolio management) is 71. - There are 13 licensed brokerage firms; brokers are not allowed to perform proprietary trades. - Banks are not allowed to conduct securities business except through affiliated firms. - Institutional investors are few; institutional investment is mainly passive. - Market role: - Market is emerging with a marginal role as a source of medium and long-term finance. - Primary market is not active and lacks basic services. - Equity is the major financial tool; bond issues are very few (mainly government bonds of medium-term maturity; corporate bonds limited). - Investment in securities less popular than bank deposits due to speculative investor behavior and high market volatility. ### Trading, clearing, settlement, and depository arrangements - Clearing and settlement: - Equity and debt trades on the KSE are cleared and settled through the Kuwait Clearing Company (KCC), the sole company established for this purpose. - KCC functions as central clearing and settlement agent and also acts as the securities depository and registry; it was founded by major banks (payment banks), the KSE, and a few market intermediaries. - In the KCC system, securities are immobilized and not dematerialized. - Safekeeping with the KCC is optional, but settlement through the KCC is mandatory and all settlements are done electronically by transferring assets between investors’ accounts held within the KCC system. - Penalties imposed on members if they fail to meet obligations on settlement date. - Account and payment arrangements: - Traders allowed to open accounts in the CSD system; one beneficial owner allowed to open one account only. - Brokers act as agents and take full responsibility for client performance. - To avoid broker default risk, market rules dictate investor pays for a buy trade directly to the CSD; the CSD initiates payment on a sale trade in the name of the investor—cash transacted between the CSD account and investors’ accounts. - Market controls: - KSE has a surveillance mechanism to monitor trading and detect unusual activities. - Each security has its own market up/down daily limit; once limit is reached, security cannot be traded further that day. ### Self-regulation and institutional issues - KSE and KCC operate under special rules with their own management, but they are not officially recognized as self-regulating organizations (SROs). - From a statutory viewpoint, MC is an independent agency but in practice it is not: - MOCI serves as chair of its board of directors; the director-general is appointed and can be removed; majority of board members are appointed by the government. - MC has limited powers for fulfilling its mandate; most powers of licensing, supervision, and sanctions lie elsewhere. - Supervisory powers of MC over KSE and KCC are not sufficient; MC/KSE inspection, investigation, and surveillance powers are not adequate and lack power to supervise and inspect key market institutions. - Two key market participants, the KSE and the KCC, are not subject to the regulator’s inspection. - Human resources and organization: - MC/KSE human resources need strengthening to increase efficiency. - Recent efforts underway to reorganize supervision, surveillance, inspection, and investigation mandates. ### General preconditions and legal framework - Legal and institutional preconditions: - Regulatory environment generally does not conform to preconditions of IOSCO objectives and principles. - Securities law and regulations were prepared in reaction to 1982 crash; perceived deficiencies remain in major areas. - No explicit power given to regulator to develop the market as it evolves without legislative changes. - Protection of minority shareholders and prohibition of market manipulation and insider trading are not covered by present regulations. - IOSCO principles require appropriate legal setting, tax system, bankruptcy law, efficient court system, and accounting framework; these exist but need improvement. - Information, education, and transparency: - Need for market awareness and education for company directors, managers, investment intermediaries, and others; KSE seeks to implement an information and education program for market participants. - Rules and regulations are published in the Official Gazette and licensed intermediaries are informed by KSE correspondence; however, regulations, circulars, and administrative decisions are numerous, not compiled in a consolidated master reference, and difficult to track—this impedes accurate compliance assessment and market participants’ ability to keep abreast of rules. - KSE has developed a web site and plans to post all rules, regulations, administrative decisions, and guidelines and to develop a compendium or consolidated master reference. ### Main findings and coordination issues - Overall finding: some regulatory and institutional progress has been made recently, but the underlying legal framework remains inadequate and in need of improvement. - Fragmentation and harmonization: - Lack of regulatory harmonization has led to significant fragmentation of responsibilities among MC/KSE, CBK, and MOCI. - Power to set technical standards for the market is fragmented and not coordinated. - Information sharing and cooperation: - Law permits sharing information and coordinating actions with foreign authorities, but executive regulations limit sharing to public-domain and non-confidential information only because law did not explicitly permit sharing of all types of information. - Lack of formal protocols to streamline and institutionalize cooperation among national regulatory agencies and other domestic supervisory and inspection authorities. - Recommendation: law needs amendment to explicitly and clearly provide for cooperation and broader information sharing to support law enforcement and investor protection, especially given market opening to foreign investment. *Source: _cr04352 - 1. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation* ### 27. The clearing and settlement system prevents to a great extent payment default in case ### _cr04352 - 27. The clearing and settlement system prevents to a great extent payment default in case ### Clearing and settlement; dematerialization; investor protection - The clearing and settlement system prevents to a great extent payment default in case of the failure of a participant to meet his obligations. - Dematerialization of securities cannot be efficiently and promptly implemented in the absence of a compelling law. - It is expected that the risk of delay in securities delivery would remain high and more so in the event of a bankruptcy of a clearing member. - The plan to establish an investor protection fund (IPF) has so far not been implemented. ### Market regulation, self-regulation, and regulatory structure - There are no SROs at present in a proper sense. - Although the legal framework does not prohibit self regulation, it does not provide a set of clear rules for this purpose. - The MC, which is the market regulator, acts as the exchange’s board of directors, defeating the principle of self-regulation. - The Kuwait Clearing Company (KCC) is a self-regulated entity under the supervision and oversight of KSE and thus it is implicitly and indirectly subject to the oversight of the market regulating agency. - The securities market is regulated by more than one agency; division of responsibility does not avoid inequities and leaves gaps. - The various laws that govern the market do not form a comprehensive legal framework. - Cooperation between the regulating agencies is not formalized and there are no legal procedures in this respect. - The MC is the principal regulator, but has no staff and relies on KSE staff. - The power and jurisdiction of the MC is limited, as it is confined only to the KSE and member brokers. - While the law grants the independence of the MC/KSE, it is not, in practice, operationally independent from external political or commercial interference. - The minister is the chairman of the board; six members of the board represent the market players and business community, creating potential conflicts of interest. - The sanctioning system is too weak; MC/KSE needs to be empowered with pecuniary sanctions and a larger spectrum of sanctions. - Rules, procedures, and decisions are not available to the public; no consolidated master reference exists. - The regulator does not consult with industry or public; there is no established procedure for rule making. - No comprehensive inspection procedure is in place and no regular inspection is performed. - The regulator has no subpoena powers, and it cannot call witnesses or other parties to complete its investigations. - Insider trading is not prohibited and consequently not penalized. - There is no provision in the law that specifically authorizes the MC/KSE to share nonpublic information with domestic and foreign counterparts. - Information sharing procedures and mechanisms need to be formalized by way of a Memorandum of Understanding (MOU). - MOUs already signed need to be in line with IOSCO standards for information sharing. ### Listing, issuer regulation, and primary market shortcomings - Listing requirements are set by the KSE, subject to the approval of the MC and the MOCI. - For a company to be listed on the exchange, it must have published audited financial statements for the three fiscal years preceding the listing application. - Public offerings of securities require preparation of a prospectus and disclosure of complete and reliable information; supervision of this process is by the MOCI. - Such offerings cannot be listed on the exchange until one year following the publication of its audited financial statement for the first subsequent fiscal year. - The relevance of the prospectus becomes marginal due to insufficiency of information therein at the date of offering or the date of listing. - Investors invited for subscription, whether in an initial public offering or private placement, are not properly informed of the inviting company or potential risk, and are not provided with adequate protection. - Regulation of the primary market is not sufficient and needs improvement. - There are no regulations or detailed disclosure rules on: - mergers and takeovers, - reporting transactions by insiders and any changes in significant shareholdings, - equal treatment of shareholders to protect minority shareholders and outside investors. ### Market intermediaries: licensing, supervision, and enforcement - Licensing requirements for market intermediaries are few and broad. - With the exception of brokers who are supervised by the KSE, requirements for other intermediaries are regulated by different agencies. - The term “Investment Company” is not defined and therefore not clear; there are no rules to govern such a definition. - Regulations related to intermediaries and intermediation are generally inadequate. - Individuals are not licensed and no proficiency requirements exist for traders, advisors, portfolio managers, compliance officers, or officers and directors of investment firms and mutual fund managers. - No relevant general guidelines have been issued in the absence of these legal requirements. - The KSE can enforce laws and regulations with respect to brokers only and can enforce sanctions limited to warnings and revocation of licenses but not fines. - The KSE uses an electronic surveillance system to detect irregularities in market prices that might reflect market manipulation. - The KSE has authority to conduct regular inspections but carries out inspections only in cases of investor complaints or reported fraud, largely due to lack of staff and technical capacity. ### Investment fund regulation and collective investment schemes (CISs) - Regulation and supervision of CISs are segmented among three agencies. - Maintaining industry integrity requires detailed and comprehensive rules and supervision at all stages. - Owners, founders, operators, and managers need to be subject to strict fit and proper assessments. - Auditors of these funds should be selected from a list of auditors who meet eligibility criteria developed and maintained by the regulating agency. - It is recommended that the regulating agency develop and issue investment performance standards similar to those of the Association for Investment Management and Research (AIMR) of the United States. - Prudential rules are required to ensure fund solvency and asset diversification. - The law should develop guidelines and prudential rules regarding investment policy to ensure sufficient diversification of assets. - Classification of mutual funds by categories reflecting different investment strategies needs to be clearly defined. - There are no clear rules governing a fund’s net asset value (NAV) calculation: - The rules do not require funds to include in their prospectuses the methodology they intend to use. - It is not clear how NAV is calculated, what methodology is used, the frequency of calculation, or whether prior approval by the regulating agency is required. - No rules mandate publication of NAV on a daily or at least a weekly basis. - It is not clear how market prices of stocks are used in NAV calculation (average market prices during a trading week, the closing price of the day of calculation, or price of the last day of the trading week). - NAV methodology is only specified in general terms by the Articles of Association of the fund on the day it is licensed. - Neither the MC nor the CBK are authorized to set parameters of NAV calculation or its frequency, nor to issue detailed CIS guidelines. - The CBK is designated to monitor, supervise, and inspect CISs; supervision is usually done by external auditors appointed by the CBK. - Inspection is sometimes done by auditors due to shortage of staff; training should be organized for inspection teams. - CISs should be licensed, regulated, and monitored within the wider context of securities market functions. ### Market intermediary regulation recommendations - Entry standards for market intermediaries need redefinition for each type of service. - Prudential rules and regulations need to be in place for all intermediaries from incorporation to liquidation. - Licensed intermediaries are overseen and inspected by different agencies that may not use a consistent approach. - Rules should be supplemented by a code of ethics for each type of intermediary. - Intermediary companies should establish clear internal procedures in full compliance with rules and regulations, indicating market practice and monitoring. - Intermediaries must avoid conflicts of interest and should inform clients of any conflicts. - A compliance officer must be appointed for each intermediary. - The MC should be empowered to inspect books, records and business operations of all intermediaries; inspections should be regular, at least once a year. - The MC should be empowered to impose necessary and relevant sanctions to provide full protection to clients. - It is desirable that the KSE plan to establish an IPF be implemented to provide investor protection in case of bankruptcy of a financial firm. - All financial intermediaries should contribute to the fund based on their revenues from securities activities. - Criteria for capital adequacy and solvency should be established and closely supervised and monitored by the regulating agency. ### Secondary market regulation and system robustness - The MC and the KSE should be separate institutions, each with its own resources, staff, and separate management. - The MC should be empowered to perform regular on-site inspections to ensure reliability of KSE monitoring and supervising the trading system. - The MC should be explicitly empowered by law to license the KSE(s). - The nonprohibition of insider trading is a serious defect that undermines market fairness and integrity. - Although the surveillance system seems adequate for the present level of trading, the KSE should be able to implement a wider and more severe set of sanctions, including levying fines. - To exercise proper risk management, the system developed by the KCC should require ultimate dematerialization of outstanding securities and become fully automated on the basis of book entries; this requires an amendment to the current law. - The KSE is authorized to supervise the KCC, but there is no formalized system in place. - In order to improve clearing and settlement, dematerialization of securities needs a strong legal basis to ensure effectiveness of the risk management system. - Weaknesses in supervision of clearing, settlement and depository systems may cause high risk. - KCC inspection by the KSE needs strengthening; serious attention must be given to supervision of clearing and settlement systems and to addressing conflicts of interest arising from the governance structure of the MC, the KSE, and the KCC. ### Principle-by-principle assessment methodology and implementation categories - The implementation of the IOSCO objectives and principles of securities regulation by the MC in Kuwait was assessed based on existing laws, regulations, and practices. - Information was obtained from various reports, publications, and interviews with market authorities and institutions. - A principle will be considered to be fully implemented whenever all assessment criteria are generally met without any material deficiencies. - A principle will be considered to be broadly implemented whenever the ability of the jurisdiction to provide affirmative responses to applicable key questions are limited to the questions excepted under the benchmark and such exceptions do not substantially affect the overall adequacy of the regulation that the principle is intended to address. - A principle will be considered partly implemented whenever the assessment criteria specified under the relevant benchmark for that principle are generally met without any significant deficiencies. - A principle will be considered not implemented whenever major and material shortcomings are found in adhering with the assessment criteria. - Whenever a system is assessed to be broadly, partly or not implemented with respect to a particular principle, recommendations should be proposed for achieving full implementation. *Source: _cr04352 - 27. The clearing and settlement system prevents to a great extent payment default in case* ### 44. A principle will be considered not applicable whenever it does not apply given the ### _cr04352 - 44. A principle will be considered not applicable whenever it does not apply given the ### Overview and institutional structure - Main legal framework: Amiri Decree (August 1983) and its executive regulations govern the Kuwait securities market. - Market regulator: Market Commission (MC) and Kuwait Stock Exchange (KSE) function almost as a single body under the same management; MC/KSE is managed by a committee chaired by the MOCI. - Committee composition: chair (MOCI), deputy chairman/general manager (KSE GM), one representative each from CBK and MOF, two experts, four members nominated by the chamber of commerce and industry including one broker. - Staff and resources: KSE total staff = 160; majority technical/professional with a university degree. Cost of new trading system was totally covered by the government—approximately US$1 million. - Financial independence: MC/KSE financially independent, relies on own resources; annual report published but does not contain authority’s financial statements. - Assessment highlights for Principles Relating to the Regulator: - Principle 1: Assessment = Not implemented. - Principle 2: Assessment = Not implemented. - Principle 3: Assessment = Not implemented. - Principle 4: Assessment = Not implemented. - Principle 5: Assessment = Not implemented. ### Key deficiencies in regulatory powers, independence, and processes - Responsibilities and powers: - MC objectives (Article 4) and powers (Article 6) are broadly defined and limited in scope (mainly supervision of KSE and member brokers). - No clear authority for MC to license, inspect, investigate all market participants; sanctioning powers limited to administrative sanctions with no pecuniary fines. - Organizational conflicts: - MC and KSE merged in one body; no separation of regulator and exchange undermines supervisory role; no inspection has ever been carried out by MC over KSE. - MC has no technical staff and relies on KSE staff. - Legal protections and transparency: - No legal protection for MC/KSE staff acting in discharge of functions. - No clear legal procedure for contesting MC/KSE decisions. - Rules, procedures, and executive decisions are not consolidated or publicly available; not fully published on KSE web site. - Ethics and confidentiality: - AD Article 69 prohibits violation of confidentiality, but no formal code of ethics; staff prohibited from investing in market except with prior approval under an administrative instruction only. ### Self-regulation (SROs) - Current status: - No full SROs in proper sense; KSE is not a self-regulated entity under law; KCC operates as a private company responsible for clearing, settlement, and depository functions and is supervised by KSE. - Assessments: - Principle 6: Partly implemented. - Principle 7: Partly implemented. - Comments: - Law does not empower MC to license SROs or provide oversight mechanisms; amendments recommended to permit SROs and empower regulator to inspect and sanction SROs. ### Inspection, investigation, surveillance, and enforcement - Present powers and practice: - No comprehensive inspection and investigation rules; inspections are ad hoc and not routine. - Investigating staff have judicial power to prove actions but no subpoena power; cannot compel testimony. - KSE has an online surveillance system to monitor transactions; MC has not developed surveillance to oversee KSE. - Sanctions: - KSE administrative sanctions: admonition; suspension up to 4 months; confiscation of bank guarantee; cancel KSE membership; suspension or delisting for listed companies (up to 4 months). No pecuniary fines permitted by law. - Assessments: - Principle 8: Partly implemented. - Principle 9: Partly implemented. - Principle 10: Partly implemented. - Specific concerns: - Insider trading is neither prohibited nor penalized. - No subpoena powers for regulator; record-keeping rules not sufficiently detailed (type and retention periods unspecified). - Enforcement powers segmented across agencies (MC/KSE, CBK, MOCI) with no formal coordination. ### Cooperation and information sharing - Legal basis: - Law authorizes MC/KSE to establish links and cooperate domestically and internationally but does not explicitly authorize sharing nonpublic information with domestic or foreign counterparts. - Some MoUs exist (Bahrain, Egypt, Jordan, Tunisia) but experience in exchanging nonpublic information with foreign counterparts is lacking. - Assessments: - Principle 11: Partly implemented. - Principle 12: Partly implemented. - Principle 13: Partly implemented. - Recommendation: promulgate explicit legal provision authorizing exchange of nonpublic information and formalize information-sharing mechanisms (MoUs) in line with IOSCO standards. ### Issuers and disclosure - Disclosure regime: - Prospectus requirement: not mandated by securities market law; prospectus required as a listing requirement for companies seeking listing; prospectus typically includes issuer characteristics and a summary of audited financial statements for the last three years. - Listed companies: required to disclose financial information quarterly; prepare financial statements in accordance with International Accounting Standards (IAS) and audited under International Auditing Standards. - Immediate disclosure required when a shareholder reaches 5 percent ownership (and for companies to disclose shareholders reaching 5 percent). - Assessments: - Principle 14: Partly implemented. - Principle 15: Partly implemented. - Principle 16: Partly implemented. - Key gaps: - Primary market regulation deficient: public offerings can be sold and traded for a year before listing without regulator-reviewed prospectus; lack of detailed prospectus content rules; no regulations on tender offers, mergers and acquisitions; minority shareholder protections inadequate. - Capacity constraint: present human capacity insufficient to examine all financial statements. ### Collective Investment Schemes (CISs) - Legal framework: Law No. 31 of 1990 and Ministerial Decree No. 113 of 1992; CD of MOCI enforces, licensing requires CBK approval. - Types and structure: - Two types allowed: open-end (variable capital) and closed-end (fixed capital). Funds must be established by a joint-stock company; capital must be paid in cash. - Management/oversight: independent trustee, external auditors, CBK conducts inspections; manager must hold minimum 5 percent of units. - Disclosure and valuation: - Prospectus required with specified content under Executive Regulations (Article 40); periodic reporting: annual (within 45 days), semi-annual (within 30 days), quarterly. - NAV valuation frequency defined in Articles of Association; trustee responsible for valuation and publication in at least two newspapers; no regulatory empowerment to mandate NAV frequency or methods. - Assessments: - Principle 17: Partly implemented. - Principle 18: Partly implemented. - Principle 19: Partly implemented. - Principle 20: Partly implemented. - Concerns and recommendations: - Regulation and supervision of CISs are segmented among CBK, CD, and MC; recommendation to formalize consultation mechanism and consider consolidating supervision under MC. - Need clear standards for NAV calculation, publication frequency (suggestion: daily), classification of funds by strategy, and prudential investment limits (e.g., concentration limits). ### Market intermediaries and prudential rules - Licensing and entry: - Market intermediaries licensed by CD of MOCI; brokers and CISs have specific requirements; brokerage minimum paid-up capital = KD 100,000; bank guarantee = KD 50,000. - Certification examinations are not required. - Prudential requirements: - Brokers: initial capital KD 100,000; bank guarantee KD 50,000; closed-end funds capital requirement = KD 5 million; minimum capital for open-ended funds = KD 5 million (note: text lists KD 5 million for closed-end and states "This amount is the minimum capital in case of open-ended funds"—preserve as presented). - Ongoing capital maintenance rules limited to bank guarantee remaining valid; no comprehensive ongoing capital adequacy framework. - Internal organization and conduct: - No comprehensive rules for internal organization and operational conduct across all intermediaries; brokers and CISs subject to specific prohibitions and conduct rules. - No universal code of ethics; no mandatory compliance officer requirement across all intermediaries. - Assessments: - Principle 21: Partly implemented. - Principle 22: Partly implemented. - Principle 23: Partly implemented. - Principle 24: Partly implemented. - Failure resolution: - Existing protections: bank guarantees and Settlement Guarantee Fund (SGF) supporting DVP on T+3 settlement. - Investor Protection Fund (IPF) envisaged but not yet in place. ### Secondary market, trading systems, clearing and settlement - Trading and exchange oversight: - KSE trading rules set by KSE and approved by MC; all transactions executed through licensed brokers; trading automated with online real-time information. - KSE publishes daily and monthly trading bulletins and displays information on website. - Clearing, settlement, and depository: - KCC (Kuwait Clearing Company) manages clearing, settlement, and depository functions; KCC supervised by KSE; settlement = T+3, DVP principle; 50 percent of outstanding shares immobilized in KCC. - Brokers deposit KD 50,000 bank guarantee; SGF operated within KCC covers member failures; large penalties for settlement failures. - Settlement and transfer via book-entry system; settlement through KCC mandatory, safekeeping optional. - Assessments: - Principle 25: Partly implemented. - Principle 26: Partly implemented. - Principle 27: Partly implemented. - Principle 28: Partly implemented. - Principle 29: Partly implemented. - Principle 30: Partly implemented. - Key operational points: - Electronic trading system provides transparency; market up/down limits exist per security. - KSE surveillance exists but MC lacks direct surveillance and routine on-site inspections of KCC and KSE. - No legal obligation for full dematerialization; cross-border transaction rules absent. ### Summary observance statistics (Table 2) - Partly implemented: 25 — Principles: 6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22,23,24,25,26,27,28,29,30 - Not implemented: 5 — Principles: 1,2,3,4,5 - Fully implemented: none listed - Broadly implemented: none listed - Not applicable: none listed ### Selected exact figures and thresholds (preserved verbatim) - KSE staff total = 160 - Cost of new trading system = approximately US$1 million - Broker minimum paid-up capital = KD 100,000 - Broker bank guarantee = KD 50,000 - Closed-end funds capital requirement = KD 5 million - Minimum capital for open-ended funds described as = KD 5 million (as presented in source) - Settlement cycle = T+3 - Percentage of outstanding shares immobilized in KCC = 50 percent - Shareholder disclosure threshold = 5 percent - Assessment grades explicitly stated for Principles 1–30 as above ### Principal recommended actions (condensed from Table 3) - Principles Relating to the Regulator (CP 1–5): - Enact one comprehensive securities market law unifying present laws; clearly define MC objectives, responsibilities, functions, and authorities. - Ensure MC independence and accountability; publish audited financial statements in annual report and web site; provide judicial appeal for MC decisions. - Empower MC to license, inspect, investigate, and sanction all market intermediaries; authorize a broader spectrum of sanctions including cash fines and set ceilings. - Institute formal rulemaking processes with public consultation and require publication of investigation outcomes and guidance. - Establish explicit confidentiality rules and an ethics code for MC personnel. - Self-Regulation (CP 6–7): - Amend law to allow SROs; explicitly vest MC with authority to license, oversee, inspect, and sanction SROs including pecuniary sanctions. - Enforcement (CP 8–10): - Empower MC to develop and enforce comprehensive inspection, investigation, and surveillance powers; prohibit and penalize insider trading; formalize inter-agency coordination. - Implement regular routine on-site inspections; grant regulator subpoena powers. - Develop and implement an effective compliance program across intermediaries. - Cooperation (CP 11–13): - Legislate explicit authority to share public and nonpublic information with domestic and foreign counterparts; formalize MoUs and consider joining IOSCO or signing IOSCO collective MoU. - Issuers and CISs (CP 14–20): - Empower MC to regulate IPOs, public offerings, tender offers, mergers and acquisitions; require prospectus approval and define prospectus content and distribution. - Strengthen minority shareholder protection and corporate governance requirements as listing conditions. - Build MC capacity to oversee application of International Accounting Standards and auditing; consider MC approval of auditors. - Consolidate CIS supervision (formal consultation among CBK, CD, MC or centralized supervision under MC); define NAV calculation parameters and require regular NAV publication (suggested daily). - Define fund categories by investment strategy; require prospectus publication and risk disclaimers. - Market intermediaries and failure procedures (CP 21–24): - Define clear entry standards and ongoing prudential requirements for all intermediaries; require fit and proper assessments for owners and officers. - Require codes of ethics, internal procedures, appointment of compliance officers; empower MC to inspect books and records and to impose sanctions. - Establish IPF and require contributions by intermediaries; set capital adequacy and solvency criteria. - Secondary market, clearing and settlement (CP 25–30): - Separate MC and KSE into distinct organizations with separate management and staff; empower MC to license and perform regular on-site inspections of KSE and KCC. - Prohibit insider trading and provide heavy penalties; develop systems to deter and detect market manipulation. - Enable legal dematerialization of securities; empower KCC to achieve ultimate dematerialization and consider KCC as central corporate registry; develop cross-border transaction rules. *Source: IMF staff detailed assessment of observance of the IOSCO Objectives and Principles of Securities Regulation for Kuwait (excerpts as provided).* ### 45. The authorities in Kuwait are in broad agreement with the assessment and ### 45. The authorities in Kuwait are in broad agreement with the assessment and ### Authorities' stance - The authorities in Kuwait are in broad agreement with the assessment and recommendations. ### Planned reform action - The KSE has prepared a four-year development plan to be implemented as soon as possible. - The plan was prepared in recognition of the recommended reforms to the securities market and the need for immediate initiation of the reform actions. ### Objectives of the four-year development plan - Improve the regulation and the regulatory framework. - Strengthen the enforcement and the supervisory role of the market regulator. - Improve the current stock exchange mechanism and systems. ### Expected outcomes - Implementation of the four-year plan is expected to institutionalize a dynamic process for the reform and development of the securities market in conformity with the international standards and best market practices. *Source: IMF mission text provided in content unit _cr04352 - 45.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04352.pdf_