Islamic Capital Markets: Theory and Practice

Chapter 18

Institutions and Regulations of Capital Markets

This chapter describes the regulations as well as the institutions operating in the capital market. Over the decades, capital markets have gone through considerable innovations. Competition among capital market players induces greater innovation to attract investors, increase liquidity, reduce transaction cost, reduce tax liabilities, and bypass regulation. Many new institutions and products appeared and contributed to deepen the financial infrastructure. Likewise, considerable trading is made online. There has been a financialization of the economy with the size of the financial sector increasing in relation to the economic activity. The regulatory framework has been in constant evolution. Most of the regulations were introduced on the heel of major financial crises. For instance, the creation of the U.S. Securities and Exchange Commission (SEC), along with banking reforms, was a response to the 1929 stock market crash. Likewise, major reforms to strengthen capital market regulations were introduced in the wake of the 2008 financial crisis. More specifically, the recent crisis was explained in part by a large gap between innovations and regulations in the capital market. The intent of regulations is to protect investors, prevent fraud, stop schemes, and promote financial stability. Often, investors lost fortunes when they were victims of swindles in the capital market.1

The chapter addresses the role of the SEC, which ...