Speech by. Shane Tregillis Assistant Managing Director Monetary Authority of Singapore. for

Transcription

1 Speech by Shane Tregillis Assistant Managing Director Monetary Authority of Singapore for Regional Seminar on Non-Bank Financial Institutions in East Asia Region Organised by the Thailand Securities and Exchange Commission 5 September 2002, 9.00 am Session 5: Policy and Regulatory Challenges for NBFIs in the Region

2 A Policy and Regulatory Challenges with Globalisation 1 There are many challenges for the regional markets and regulated exchanges in today s globalised environment. Dr Prasarn has asked that I touch on policy and regulatory responses to globalisation, including how transformation in our regulated stock and derivative exchanges relates to the conduct of capital market policy. 2 My colleagues on this panel have highlighted some challenges faced by smaller markets. In essence, globalisation means that exchanges can no longer solely depend on geographically or nationally defined catchment areas within which they provide a venue for local companies to raise funds and for investors to invest their savings. Instead, continued relevance increasingly demands that exchanges build critical mass in a variety of ways. 3 The most common strategies available for exchanges to respond to these developments include: creating scale via domestic consolidation of separate exchanges; cross-border linkages and alliances; developing new products; investing in technology to enhance their trading, clearing and settlement infrastructure; and attracting cross border listings in selected niches where some form of comparative advantage exists. 4 The reality in today s market place is that these strategies often need to be pursued simultaneously. In addition, the regulatory framework for newly demutualised markets needs to be updated to reflect the change in the status of exchanges and to address potential conflict of interests. 5 I will comment on these developments based on Singapore s experience over the last few years. In doing so it is important to note

3 the broad policy context in which these changes have taken place in Singapore. 6 Singapore s overall policy response to globalisation of the financial markets has been to progressively liberalise the financial sector with the aim of promoting Singapore as a sound and progressive international financial center. So our focus has not just been on reforms oriented towards the domestic market but also outwards to develop an international orientated financial market more generally. We have also taken steps to strengthen our regulatory and supervisory framework so that it remains robust in ensuring the soundness of the financial system. B Formation and Demutualisation of SGX 7 One of the most significant capital market initiatives was the formation of SGX as the first demutualised, integrated securities and derivatives exchange in the Asia-Pacific when it was inaugurated in December The merger of the markets was designed to enhance both the scale of the market and create synergies from combining the cash and derivatives markets 8 SGX subsequently undertook an IPO and listed on its Main Board in November As a listed entity, its structure allows for funding to be more efficiently and easily raised directly from the capital market. This gives the exchange financial capacity to make substantial long-term strategic investments and creates the possibility of equity alliances with like-minded partners. 9 The demutualisation and listing of the exchange means that its share value and dividends today are better able to reflect the market s appraisal of its performance, earnings and prospects. In this sense, it is

4 no different from any other listed company that is subject to market valuation and discipline. This ensures that shareholders and management pursue operational efficiencies and seek competitive advantages. 10 Howeve r, it is this pursuit of its own interests as a for-profit commercial entity that gives rise to concerns whether it will reduce its commitment and resources to meet its regulatory responsibilities and on whether its commercial orientation will impact upon its important role in overall capital market development in Singapore. 11 In short, our response is that we consider that it is in the interests of the exchange to ensure good regulation and confidence in the integrity of its marketplace, and at the same time it is in the interests of the overall development of Singapore's capital markets generally for SGX to be purse commercial opportunities for new products, new listings and strategic alliances. Let me expand briefly on each of these issues. C Exchanges a nd Regulation 12 On the regulatory front SGX retains the frontline responsibility for regulating its markets. However, MAS has put in place several measures to address the potential conflicts that might arise. 13 First, MAS assumed the role of the listing authority for SGX's own listing and monitors continuous disclosure requirements while conducting surveillance of trading in SGX's shares. 14 Second, MAS has expanded its supervisory and enforcement functions to oversee SGX s front-line supervisory duties and to act as a backstop, if necessary. In this regard, MAS and SGX have recently each acquired

5 a new market surveillance system. While SGX is the primary operator of the system, terminals allow MAS also to review market activity. 15 Third, the regulator has been given the power by legislation to issue directives to SGX to resolve any conflicts of interest arising from its selflisting. The principle here is to ensure the regulator retains the means to ensure fair and orderly markets and management of systemic risks, without unduly constraining the exchange in its commercial operations. 16 SGX itself recognises the potential for conflict in its commercial interests and responsibilities as a self-regulatory organisation. It has established a Conflicts Committee following from its Deed of Undertaking to MAS at the time of its listing. The SGX Board with MAS as the approving authority appoints the Committee. Its role is to consider possible conflicts of interest that may arise from the listing and quotation of SGX shares. 17 As the statutory regulator, MAS also administers the corpus of statutory laws regulating the capital markets. It has oversight over SGX's regulatory functions to assure that SGX is performing its regulatory functions competently and responsibly, and that there are no gaps in the overall regulatory framework. 18 We have also updated the legislative framework for the regulation of markets and clearing houses. The Securities and Futures Act ( SFA ) was passed by Parliament in October 2001 enhances the legal and regulatory framework for securities clearing and settlement facilities in Singapore. For example, it provides MAS with the powers to approve and regulate clearing -houses.

6 19 In addition, the financial stability of a clearing house s operations is now more directly addressed in the Act by expressly giving primacy to the default rules of the clearing house over the general laws of insolvency. This means that the insolvency of a member will not disrupt the clearing and settlement of trades that have already been executed. By doing so, participants that utilise the clearing house s services are given greater assurance that their obligations will be fully met. This is a critical aspect for the sound functioning of a securities settlement system. 20 We have recently implemented a more integrated exchange oversight program designed to more systematically assess that SGX is continuing to meet it licensing obligations both for its market and clearing activities and that it is carrying out its regulatory responsibilities. D The Role of Exchanges in Capital Market Development 21 As well as their regulatory responsibilities, exchanges often form a key part of the domestic capital market infrastructure. Issues of ownership and control therefore become important considerations. Shareholder limitations are one measure put in place in a number of jurisdictions. 22 In Singapore, the Act requires that MAS approval be obtained for individual shareholdings in SGX that exceed 5%. Such approval may then be given subject to conditions that may include requiring further approvals for subsequent increases in shareholding above specified limits. The policy here is not to impose a ban on substantial stakes of 5% or more in SGX. Indeed, the intention is to allow investors who are inte rested in promoting SGX's growth and development to acquire a strategic stake in SGX.

7 23 MAS is also open to approval of fund managers that seek to exceed the 5% shareholding level arising from portfolio investments. This recognises their role as key institutional players who, as shareholders, add to the diverse shareholder base with an interest in SGX's business. MAS will therefore, and has, approved applications by fund managers to hold SGX's shares beyond the 5% limit. A fund manager would not, however, ordinarily be represented on the SGX Board because of their holdings unless it has a substantive, strategic relationship with the exchange. E Exchange Mergers and Alliances 24 Small scale is a feature of most exchanges in the region. I have noted above that domestic consolidation, as occurred in Singapore, is one way to respond to this issue. But even the merged entities remain relatively small by world standards. Accordingly, the issue of mergers and alliances remains high on the agenda for many exchanges with the aim of achieving economies of scale and deepening liquidity pools. 25 The Singapore Exchange and the Australian Stock Exchange launched the world's first co-trading linkage in December last year. The link facilitates trading of SGX-quoted securities by Australian investors, and of ASX-quoted securities by Singaporean investors. Under the arrangement, orders are matched in the home market s order book that effectively pools, rather than segregates, liquidity originating from both markets. 26 Meanwhile, the SGX and the Tokyo Stock Exchange have also entered into a Heads of Agreement in October 2001 to explore co-operation in both the cash and derivatives markets. As with the linkage project with

8 ASX, this is the first step towards collaboration in the fo rm either of a trading linkage or product development. 27 While there are many practical barriers that make successful exchange linkages difficult and commercial returns may not occur in the short term, a focus on linkages and alliances remains an important imperative for securities exchanges in this region as is the case elsewhere. F New Products and Services 28 At the same time as they are exploring ways to increase scale many exchanges are looking to increase the range of products and services they offer. Again it is not easy to find new products that will result in significant trading volumes in short time frames. New products often take time to grow and even then not all those that are introduced will necessarily succeed. 29 The SGX has introduced a number of new products in the past year. These include: Exchange Traded Funds the first local ETF in April 2002, based on the Straits Times Index that is widely followed domestically. A 5-year Singapore Government Bond Futures contract in Jun 2001 to complement the growing Singapore Government Securities ( SGS ) market. The futures contract allows dealers to hedge their positions in SGS, thereby benefiting both the derivatives and government bond markets. Single Stock Futures contracts based on Singapore stocks were launched in Oct In time, this may generate synergies and

9 hedging opportunities made more effective with the introduction of a Securities Lending facility in January 2002 by the Singapore Central Depository. 30 The Securities Lending facility provides brokers with a cost efficient access to a significant pool of securities and enables brokers to offer securities lending services to their customers. As brokers access to a lendable pool of securities is enhanced, this should facilitate the establishment of an equity options market that represents another product line. Initial borrowing activity has been modest, partially due to the fact that the initial phase of the SBL facility involves setting the borrowing period at 3 days with loan rollover options. In the coming months, this will be extended with negotiable lending periods and rates. 31 Time alone will tell which of these and other new product initiatives will succeed and generate significant ongoing trading interest. G New Listings and Technology Upgrades 32 Notwithstanding the impetus to introduce value-added products and services to the market, company listings continue to form the core business of equities markets. Many exchanges are looking overseas and in some cases targeting a focused group of companies with the appropriate capitalisation and profile that fits that individual exchanges niche market. 33 Exchanges also have to focus on significant technology enhancement for their operations. Another reason why size and scale remain important as this technology often involves significant capital outlays with uncertain returns in the short term.

10 34 In Singapore, SGX has embarked on initiatives to improve its infrastructure in a major move towards open architecture with the use of new systems. At the front-end, this includes the enhancement of its global distribution and connectivity with the launch of an open access SGX Access trading interface based on a global financial messaging interface standard. This gives broking members the option of utilising their own client management systems and provides value-added services that are otherwise constrained by features on the older proprietary system. 35 A corresponding project is underway to enhance the clearing and settlement structure to implement a straight-through-processing environment for Singapore s securities market. This involves the development of a Central Pre-matching Engine with participants implementing a common Participant Access Module that provides automated updates on the progress at each stage of trade settlement. This will provide more timely risk management information to participants and also enhances efficiency in post-trade processing of transactions through the reduction of manual intervention. H Conclusion 36 It can be seen from this quick run through that capital markets and exchanges are facing many challenges on many fronts. This is the case even for the more established exchanges in this region and elsewhere. No single response is adequate and exchanges are being forced to respond across a range of dimensions to create sufficient scale, offer new viable and attractive trading products and other services, enhance their underlying technological platforms and compete for new listings. But it is clear that they must do all of these things to continue to remain relevant in today s increasingly global world.

11 37 In Singapore we have put in place a regulatory framework designed to ensure high standards of market integrity and an appropriate division of responsibility between the exchange and the statutory regulator. No doubt this will continue to evolve over time. At the same time we support SGX efforts to develop new products and attract new listings as important elements in Singapore s efforts to develop its capital markets. 38 In these endeavours we see the private incentives of a for-profit exchange and the public good as being mutually reinforcing.