Tacit agreement that SGX’s dual role is untenable

Tacit agreement that SGX’s dual role is untenable

Business Times

11 Feb 2014

Michelle Quah

SINGAPORE’S market regulators seem to finally be in agreement with a position that The Business Times has taken for years – that having a profit-driven market regulator, one with dual roles of revenue generation and market oversight, is simply not tenable.

The Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) issued a joint consultation paper last week, proposing some of the most extensive changes to market function and regulation to date. Not surprisingly, it caused quite a stir among market participants.

There have been murmurs of approval on how the proposals are a much-needed step in the right direction, whispers of concern from brokerages who worry about their impact on liquidity, and grumbles from those who feel these measures are long overdue.

While the regulatory proposals contained in the consultation paper are informed and necessary, many of them should have been implemented earlier.

In particular, BT has argued for years that vesting the regulatory oversight function in SGX, which is also a publicly listed business accountable to its shareholders, does not make for optimum functioning of the market.

The latest consultation paper appears to affirm this view.

BT believes that SGX’s dual roles are in conflict with each other – it is questionable how SGX could conceivably expect to remain an effective regulator when it is also concerned with its growth.

For a market to be well-run, SGX needs to be an effective regulator with teeth – or at the very least, give the impression that it is one. This is especially so in times of crisis, when the incidence of corporate scandals and failures increases, making for a riskier marketplace and a more challenging regulatory environment.

For its part, SGX has its business needs to take care of, needs, which are increasingly difficult to meet in a more competitive global environment. Stock exchanges around the world are stepping up their game significantly, coming up with alternative markets to capture more clients, growing larger by taking over rival exchanges and constantly innovating by releasing numerous innovative trading products.

Despite its efforts, SGX has never been able to fully fight off the perception that its effectiveness as a frontline regulator is hampered by its profit-driven motives, or that its ability to grow as a global business is impeded by regulatory concerns.

BT reckons that MAS – which is ultimately responsible for the regulatory framework here – ought to set up a separate, independent, well-manned and authoritative body to regulate the market, one that is unencumbered by profit considerations.

It is a model that has been adopted, with great success, in major markets, such as Australia, the United States and Hong Kong.

For years, as we understood it, MAS resisted going down that route because it did not feel the need for a separate frontline market regulator.

Clearly, things have come to a head in recent times, with the growing number of corporate scandals and market fiascos the regulators have had to deal with – the China Sky Chemical Fibre debacle and last year’s penny stock sell-off, to name just two.

In this latest consultation paper, “to address perceived and actual conflicts of interests in relation to SGX’s role as the listing authority, MAS and SGX propose that an independent Listings Advisory Committee be established to consider listing policy issues and listing applications that meet specified referral criteria”.

They have also suggested establishing an independent Listings Disciplinary Committee and Listings Appeals Committee, to improve the transparency of SGX’s disciplinary process and ensure fair administration of sanctions for listing-related matters. Along with this is the suggestion that the range of regulatory sanctions for listing rule breaches be expanded to include powers to impose fines, restrict the activities that issuers may undertake, as well as make offers of compositions for minor and technical breaches.

While these committees are not on the same level as an entity such as the US Securities and Exchange Commission (SEC) or the Australian Securities and Investments Commission (ASIC), as this paper hopes for, they are a grudging move in the right direction.

The next important step, which will come much later, will be to ensure that these committees – paling in comparison to the SEC and ASIC though they may be – are effective.

The right people need to be chosen for these committees. They need to be folks who do not just understand the workings of the market, but also represent a wide range of interests. For example, MAS and SGX intend for the Listings Advisory Committee to “introduce practitioner experience to the decision-making process”, but it is also important that the committee include investor representatives, to ensure that those interests are safeguarded.

As for the Listings Disciplinary Committee and Listings Appeals Committee, it is important to ensure that they are able to carry out their duties effectively and that overall market enforcement is not compromised.

One concern is that if it does not cost much to appeal against a disciplinary action, it may become a matter of course for every disciplined entity to lodge an appeal. This could drag out the entire enforcement process and make it difficult/tedious/costly – and maybe even, eventually, pointless – to discipline an entity.

Such concerns should be considered at the relevant time to ensure that the committees and the new sanctions hit their mark.

That would perhaps, then, pave the way for the eventual setting up of a full-fledged independent regulator that BT believes is necessary for the effective regulation of the marketplace and the realisation of the true business potential of SGX.



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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