Canada’s capital markets are very efficient and measure up to those of comparable-sized countries, but they still face several challenges going forward. That was one of the key messages delivered Thursday by the Bank of Canada’s deputy governor, Sheryl Kennedy, in a keynote address to members of Women in Capital Markets in downtown Toronto.

Kennedy’s speech, entitled “Canada’s Financial Markets: How do we Measure Up?” identified the three factors contributing to efficient markets: allocation of capital and risks; market operations (including improving liquidity and lowering transaction costs); and transmitting accurate information.

To compete against the very liquid capital markets in the United States, Canada must develop new markets, reduce transaction costs, improve transparency and create a cost-effective regulatory regime that encompasses a world-class code of conduct, Kennedy said. Most importantly, though, Canadian capital markets have to focus on increasing compliance efforts to bolster trust and integrity of the markets.

Though the Bank of Canada has no official position on the debate surrounding a single, national securities regulator, Kennedy emphasized the need for a regulatory system that addresses potential conflicts of interest before they occur.

“We need a regulatory regime and codes of conduct that tackle head-on the risks of market manipulation, insider trading and fraud,” Kennedy said. Such regulation shouldn’t impose unnecessary burden and costs, but rather work to enhance efficiency and competitiveness, Kennedy added.

As for the Canada’s economic outlook, Kennedy says the Bank of Canada’s expectations haven’t changed since the publication of its Monetary Policy Report, released in April. According to the Report, the Canadian economy is expected to grow by 2.75% in 2004, increasing to 3.75% in 2005. Kennedy said that outlook hasn’t been altered despite first quarter growth falling short of its potential growth rate of 3%. “More recent data suggest that momentum is picking up,” she explained.

The main risks to the outlook are how the Canadian economy adjusts to global developments, including higher commodity prices, stronger world demand and intensified competition from emerging-market economies, particularly China and India.