Enhancing Cooperation & Regional Integration of ASEAN Equity Markets

9th OECD-ADBI after the financial crisis: Prospects towards the future Tokyo 27 February 2008

Jaseem Ahmed Director, Governance, Finance and Trade Division Southeast Asia Department Asian Development Bank Background Document

I. Overview: ASEAN Equity Markets II. Initiatives for ASEAN Financial Integration III. ADB‘s Technical Assistance: Progress to Date & Next Steps

2 Overview: ASEAN Equity Markets

3 Components of Securities Market Regulation

1. Issuers Equity and debt securities

2. Reputational intermediaries Accounting firms, investment banks, law firms and stock exchanges Investment funds, pension funds, financial press 3. Self-regulatory organizations Professional federations Standard setters Exchanges 4. Government institutions Securities Commission Courts 5. Laws Securities laws

4 Company laws Bankruptcy laws Asset Distribution in Southeast Asia

 With the exception of Hong Kong, and , all of which have large equity markets as a percentage of GDP, banks tend to dominate financial intermediation in East Asia. (percent of GDP)

Banks Assets Equity Market Bonds Outstanding Capitalization Economy 1997 2004 2005 1997 2004 2005 1997 2004 2005 PRC 124.6 176.4 163.1 11.2 23.1 17.8 12.9 24.9 24.4 Hong Kong, China 205.1 337.5 444.6 234.5 519.5 593.6 26.0 46.3 46.6 31.1 14.6 49.8 12.2 28.8 28.9 1.9 22.6 19.6 Republic of Korea 37.9 130.1 93.5 8.1 57.1 91.2 25.2 83.3 76.2 Malaysia 100.9 169.0 159.4 93.2 153.3 138.0 57.0 90.0 88.0 56.1 66.5 63.2 37.7 33.0 40.4 22.4 28.4 36.7 Singapore 122.0 176.8 185.4 110.8 202.3 220.4 24.7 73.1 68.2 79.7 129.2 103.6 15.1 71.4 70.1 7.1 41.1 40.8

PRC = People‟s Republic of China. Sources: International Monetary Fund, International Financial Statistics; Bank for International Settlements; Asian Development Bank, Asian Bonds Online; and Ghosh, Swati R. 2006. East Asian Finance: The Road to Robust Markets. Washington, DC: World Bank.

5 Different Stages of Development

 Among Southeast Asian countries, big differences exist in terms of market cap, velocity & risk premiums.

Market Cap Velocity Market Depth* Equity Risks (USD billion) (%) Mkt Cap/GDP Premiums

Malaysia 308 58 156 7.0

Singapore 531 78 291 5.5

Philippines 96 33 58 10.2

Indonesia 204 66 38 10.2

Thailand 193 69 68 6.5

World Federation of Exchanges (as of Nov. 2007) •IMF 2006/ World Federation of Exchanges Source: NYU Stern School, Goldman Sachs,

6 Market Capitalization

 While Singapore and Malaysia have relatively deep capital markets, Thailand, Indonesia, and the Philippines lag behind.

Mkt Cap/GDP (%) 2006

- 200 400 600 800 1,000

Philippines 58 Singapore 291 Malay sia 156 Thailand 68 Indonesia 38 Hong Kong 903 Taiwan 167 Korea 94 China 34 Japan 106 UK 160 Germany 57 US 146

* Source:ADB, World Bank Financial Structure Dataset * Singapore includes substantial foreign market cap of ‘23%, while Hong Kong has about 45% * Source: McKinsey, IMF, World Federation of Exchanges 7 Listed Companies & New Listing

 The larger global exchanges are pulling away in listing volumes, with more than ten times the volume of Southeast Asia.

Number of Listed Companies

2,000

1,500

1,000

500

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Malaysia Indonesia Korea Philippine China (Shanghai) Singapore Thailand

* Source: World Federation of Exchanges * Source: McKinsey, World Federation of Exchanges

8 Value of Share Trading

 Value of share trading in each country of the region is less than US$500 billions.

Value of Share Trading (USD billions)

4 , 5 0 0

4 , 0 0 0

3 , 5 0 0

3 , 0 0 0

2 , 5 0 0

2 , 0 0 0

1, 5 0 0

1, 0 0 0

500

0 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006 2007

M a l a y si a I ndone si a K or e a P hi l i ppi ne China (Shanghai) S i nga por e Tha i l a nd

* Source: World Federation of Exchanges

9 Turnover Ratio

 No regional exchange has turnover ratio of over 100%, and only Thailand has a ratio of over 50%. • This places Southeast Asia far behind the developed markets and North Asian exchanges.

* Source: ADB, World Bank Financial Structure Dataset 10 Transaction Costs

 As a result of small markets with low velocity, trading costs in Southeast Asian markets are significantly higher than in many other regions.  Market impact costs, while higher than in larger markets, have been heading in the right direction recently.

* Source: McKinsey, Elkins McSherry Survey * Source: McKinsey, Elkins McSherry Survey * Market impact cost is the difference between the transaction price and what the market price would have been in the absence of the transaction. 11 Composition of Equity Markets in ASEAN

 Composition of equity markets also shows different landscape among Southeast Asian countries. • Non-Resident composition: Indonesia 74% vs. Malaysia 17%. 2005/06 (in %) Total Non- Retail Institutional Other Resident Resident Singapore n/a n/a n/a 56 44 (36) Malaysia 19 - 64 83 17 (17) Philippines n/a n/a n/a 69 31 Indonesia 4 5 17 26 74 (56) Thailand 62 10 n/a 72 28 (30) China 6 9 36 51 49 Japan 20 27 29 76 24 Korea 18 11 31 60 40 Source: ADB. Figures in parentheses refer to year 2001. 12 Performance of Stock Market Indices

 Indonesia has been outstanding and the other Southeast Asian countries have also showed good performance.

Broad Market Indices

800

700

600

500

400

300

200

10 0

0 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006 2007

Malaysia (KL Composite) Indonesia (JSX Composite) Korea (KOSPI) Philippine (PSE Composite) China (Shanghai, SSE Composite) Singapore (all Sing Equities) Thailand (SET) Japan(Tokyo, TOPIX)

* Source: World Federation of Exchanges (1998 = 100)

13 Market Infrastructure: Exchanges

 Exchanges have merged and consolidated their operations. • To improve efficiency, in addition, most exchanges vertically integrated clearing, settlement and depository operations (Malaysia, Singapore, Philippines and Thailand).

Country Exchanges • One exchange (SGX), Merger of Stock Exchanges of Singapore & Singapore Singapore Monetary Exchange (derivatives). Central depository is also a division. • Three Exchanges - Securities Exchange (Bursa Malaysia), Derivatives Malaysia Exchange and the Offshore Exchange (Labuan Int‘l Financial Exchange) • SET is the main exchange. The SET also operates wholly owned subsidiaries to trade corporate & government bonds under the name of Thailand Bonds Exchange (BEX) & Thailand Futures Exchange (TFEX) that trades SET 50 futures contracts. • The PSE, Inc. is the only market for equity securities in the Philippines. Philippines • Bonds are also traded at the PSE, and at the recently established Philippine Dealing and Exchange Corporation (PDex) Indonesia • One exchange (consolidated in Dec. 2007)

14 Status of Demutualization

 Exchange has been demutualized and listed in Singapore, Malaysia, and Philippines.

Country Status of Demutualization • Exchanges in the region continue to • Demutualized (Dec, 1999) Singapore face increased competition from • Listed (Nov, 2000) other exchanges and trading • Demutualized (April, 2004) platforms. Malaysia • Listed (March, 2005) • To raise needed capital to enable Thailand • Not Demutualized them to modernize their operations • Demutualized (Aug, 2001) and operate more efficiently, most Philippines regional exchanges have converted • Listed (2003) from a not-for profit membership • Capital Market Master plan owned entity into a for profit envisages demutualization after Indonesia the merger of and corporation (demutualized) or are in Surabaya stock exchanges in the process of demutualizing. December 2007. 15 Legal & Regulatory Framework

 Lack of adequate disclosure/transparency and poor corporate governance in the Philippines & Indonesia undermines investor confidence. (%)

Institutional Country Rules & Enforcement Political/reg Adoption Mechanisms score – Country Regulations environment of iGAAP and CG highest to culture lowest Hong Kong 60 56 73 83 61 67 Singapore 70 50 65 88 53 65 Korea 45 39 48 68 43 49 Malaysia 44 35 56 78 33 49 Thailand 58 36 31 70 39 47 PRC 43 33 52 73 25 45 Philippines 39 19 38 75 36 41 Indonesia 39 22 35 65 25 37

* Source: CLSA “CG Watch 2007

16 Compliance with IOSCO Principles

Country Compliance

• FSAP Assessment (2002-2003), most principles are fully and broadly implemented Singapore • Further Strengthening valuation methods & disclosure practices of CIs was recommended

• Self Assessment (2006), most principles fully and broadly implemented Malaysia • Further alignment of Malaysian Accounting Standards with International standards was mentioned

• Assisted Self-Assessment (2004) in preparation for FSAP. Most principles fully & broadly implemented • Strengthening was recommended in the legal provisions & procedural arrangements for the Thailand following areas: information sharing, investigation powers, appointment of administrators to take control over market intermediaries when warranted, and access to collateral & clearing funds of clearing house in case of member default

• FSAP assessment (2002), and its assisted self-assessment update • Majority of the principles are fully or broadly implemented, with several principles only partially implemented Philippines • Strengthening of laws, regulations, and practices in the following areas was recommended: regulation of investment advisors, full implementations of exchange governance arrangements, segregation of client assets, standards for NAV calculations & CIS disclosures, oversight of SROs, and regulators access to market surveillance system, etc

• Assisted self assessment (2005) • Several principals are only partially implemented strengthening recommended in: transparency of Indonesia regulators approach, independence of regulator, information sharing/cooperation arrangements. Procedures to deal with failures of intermediaries, and supervision & governance of mutual funds

17 Transformation of Regulators

Southeast Asian securities markets have established securities market regulators, although a few markets have integrated all financial regulators to reflect the integrated nature of their markets (Singapore, Korea).

• In Hong Kong & Singapore, securities regulators are independent, provided with adequate funding, are able to attract competent staff and are provided with sufficient powers to effectively regulate the market.

Where stock exchanges have self listed, regulators have assumed primary oversight over the listing and trading of exchange shares.

• In some jurisdictions, self listed exchanges are no longer primary market regulators. For example, The Hong Kong Stock Exchange is no longer an SRO – the Government regulator has primary oversight of the market.

18 Openness of National Markets

Singa Malay Indone Thail- Phili- Hong Indicator Korea -pore -sia -sia and ppines Kong Nonresident holdings of 44 17 73 34 61 36 40 equity as % of market cap (36) (17) (56) (18) (-) (-) (-) No. of domestic companies 0 n/a 5 2 0 n/a n/a listed abroad No. of foreign companies 267 n/a 0 0 2 n/a n/a listed domestically (34) Equity holdings in other 19 43 65 24 3 2 1 ASEAN as % of total equity (27) (44) (-) (46) (-) (-) (-) assets held abroad Equity holdings of ASEAN investors as a % of total 1.5 19 24 13 6 9 2 non-resident equity liabilities (1.0) (20) (17) (17) (6) (-) (-) of each country Index of Capital Account .38 .92 .85 .85 .92 .92 .85 Restrictions *Figures in parentheses are for 2001 Source: ADB 19 In Sum: ASEAN Equity Markets

• While ASEAN capital markets have made significant progress in recent years, much more remains to be done.

• Many countries still have fairly shallow capital markets, reducing their flexibility with capital allocation & resilience.

• These countries exchanges tend to be sub-scale, with low turnover, liquidity & high transaction costs.

• In addition, levels of development and openness are different Among them.

20 II. Initiatives for ASEAN Financial Integration

21 ASEAN Financial Integration Initiative (1)

 The multitude of ASEAN level initiatives underway to foster ASEAN Regional Financial Integration are as follows:

• ASEAN leaders at their Summit in Cebu in 2006 decided to accelerate regional integration by bringing forward to 2015 (from 2020), the target date for the realization of the ASEAN Community, consisting of (as envisioned in Bali Concord 2003) the ASEAN Economic Community; ASEAN Security Community; and ASEAN Socio-cultural Community.

• Under the ASEAN Economic Community (AEC), the target for regional economic integration has been defined mainly as free flow of goods, services, investment, skilled labor, and freer flow of capital — commonly referred to as ―a single market and production base‖.

22 ASEAN Financial Integration Initiative (2)

 Work toward these targets has been going on since 2003 through the ASEAN Free Trade Agreement (AFTA); ASEAN Framework Agreement on Services (AFAS); and ASEAN Investment Area (AIA).

 In addition in 2003, a Roadmap for Financial and Monetary Integration of ASEAN (RIA-Fin) was adopted by the ASEAN Finance Ministers and the ASEAN leaders to promote free flow of financial services. Some of the main action areas that were triggered are:

• Financial Services Liberalization through successive rounds of negotiations based on a transparent positive list approach. One round of negotiations was concluded in 2004, and the second round is underway; • Capital Markets Development Program (e.g. Asian Bond Market Initiative); • Capital Account Liberalization; and • Currency Cooperation

23 III. ADB’s Technical Assistance (TA) Progress to Date & Next Steps

24 TA: Objective & Methodology

Objective: The ADB TA on Enhancing Cooperation Among Southeast Asian Equity Markets was undertaken in 2007 to develop an actionable strategy for Southeast Asian equity markets -- ASEAN equity markets in particular — to work together towards greater cross border cooperation.

Methodology: ADB in collaboration with key stakeholders in the ASEAN region has held a series of workshops in 2007 under the TA aimed at supporting reforms at the country level to enhance cross border collaboration among equity markets in the region.

• The TA prepared country stocktaking studies and reviewed the readiness of each market for enhanced cooperation and options and stepping stones that can serve as a catalyst for moving forward.

• As part of a collaborative and consultative process, three workshops were held to identify issues and build consensus on how to address these among all the major stakeholders which have an interest in or would be affected by integration of equity markets in the Southeast Asian region.

25 TA: Summary of Workshops

Workshop Host Outcomes • Brought together the capital market regulators, stock exchange 1st officials, fund managers, national and international capital market Workshop Securities experts as well as the ASEAN Secretariat to review recent and 29~30 Commission evolving developments in national, regional and international March 2007 Malaysia capital markets (Kuala • Identified the barriers to regional cooperation among equity Lumpur) markets in the ASEAN region. • Focused on the constraints to regional integration of equity Thai Securities 2nd markets, in particular exchange controls & capital account & Exchange Workshop restrictions and considered some global models for exchange Commission & 26~27 July market alliances. Stock 2007 • The Workshop was notable for bringing together senior officials Exchange of (Bangkok) from central banks, ministries of finance, regulators & market Thailand participants. • Served as a high-level forum for ADB to present to the Ministries 3rd Philippine DOF, of Finance, central banks, securities commissions, stock Workshop Bangko Sentral exchanges and the ASEAN Secretariat an overall strategic 29 October ng Pilipinas, review of the project findings and its recommendations for equity 2007 Philippines market integration in ASEAN. (Manila) SEC & PSE • A strategic Framework paper was endorsed by participants.

26 TA: Strategic Framework for Integration

 The Strategic Framework consists of seven recommendations designed to promote enabling conditions, overcome constraints, and build a mutual recognition and exchange alliance framework.

1. Refine domestic capital market development plans from a regional integration perspective. 2. Establish a coordinating mechanism for ASEAN financial and monetary integration process. 3. Sequence the liberalization of capital account and portfolio restrictions. 4. Implement a mutual recognition framework while continuing to strengthen and harmonize legal and regulatory framework in line with global standards. 5. Strengthen and coordinate exchange governance arrangements, the SRO functions, the listing rules and corporate governance framework. 6. Agree on and work toward an exchange alliance framework. 7. Promote new products, including ASEAN ―star‖ companies and new intermediaries to foster regional integration. 27 Key Aspects of The Strategic Framework

28 Need for a Comprehensive & Coordinated Strategy or Strategic Framework for Regional Cooperation

• To build consensus on the modalities, benefits and costs of regional integration of securities markets generally, and equity markets in particular

• To overcome constraints to regional integration, including capital account restrictions, and the absence of a level playing

• To build a mutual recognition regime that can support exchange market alliances in the region and foster common standards

29 National Strategies for Capital Market Development – Linked to Regional Cooperation

• Complete demutualization and improvements in infrastructure. • Strengthen investor protection and enhance regulatory surveillance of market practices. • Adopt common international standards such as IOSCO. • Promote cross border regulatory cooperation and judicious use of mutual recognition in finance and business. • Further liberalization of capital controls and exchange restrictions. • Further strengthening of prudential safeguards and risk management capabilities to help manage volatility and compete effectively

30 Rationalizing the Process – A Regional Cooperation & Integration Council

• Act as a sounding board and feedback mechanism to identify, analyze, and propose priority actions on key issues in implementing regional integration of financial markets in ASEAN. • Help advise the ASEAN Finance Ministers and ASEAN Capital Market Forum to set priorities for the various ASEAN Working groups and Taskforces, propose additional taskforces and working groups as needed.

• Help to review the findings of these bodies, highlight the policy implications of the findings to Ministers of Finance and central banks. • Help monitor implementation of regional integration initiatives and the actual progress in achieving integration in various markets.

• Help harness the support of APRC, IOSCO, and other regional and global bodies to facilitate regional financial integration.

31 The Exchange Alliance Framework

32 SWOT for Exchanges in Small Economies

Strengths Weaknesses

• Part of national structure • Highly dependent on a few big listings • Local securities base • High fixed costs • Domestic investor base • Too few international members

Opportunities Threats

• Attract foreign members • M&As may imply de-listings • Become the regional exchange • Domestic investors diversify • Neighbor exchange may become • Own national silo aggressive • Participate in alliances • International exchange may try to skim • Develop new markets the cream • Develop new services • Next generation of systems could be • Seek cost reductions costly • Members may develop competing • Sell to larger exchange market * Source: WWW.TVRonsult.dk

33 Equity Markets – Lessons from Europe

• Radical transformation in equity market trading in Europe as a result of competition and technology developments • Automated trading and convergence to common trading model with central limit order book trading for most liquid stocks • Demutualization and emergence of for-profit exchanges: increased ability to raise capital for investments in automation, freed opportunities for consolidations and acquisitions, strengthened exchange networks, created economies of scale by sharing costs • Exchange strategy has shifted to acquire critical mass before their competitors, • Successful model – exchanges have independent identity, are members of ―regulated markets‖ that have mutual recognition and harmonized aspects, ―single passport‖ or single point of access for investors and intermediaries, achieve consolidation through holding company and/or shared trading structure.

34 Need for an ASEAN Exchange Alliance

 Three plausible scenarios for Southeast Asian capital markets: (1) Dwindling relevance, (2) ―Cherry-picked‖ and absorbed in global market?, and (3) A new force in global markets.

* Source: McKinsey 35 Potential Benefits of an ASEAN Exchange Alliance

 Global presence

 Shared infrastructure that reduces costs

 Momentum for harmonization of governance and regulatory structures and market practices

 Star companies are enabled to raise finance regionally

36 Models of Exchange Alliances

 Based on general agreement on the recommendations contained in the Strategic Framework, developing a mutual recognition framework was considered the key to successful regional integration. • Options for mutual recognition are as follows:

Asian Alliance ASEAX AsiaNext

• All exchanges •All exchanges •All exchanges owned Ownership independent independent by holding companies

• Separate, but Separate, but Mgm’t • Single team (with Management market structure team for alliance with representation from and data aligned decision authority all the exchanges)

• Membership • Membership managed • Single membership managed independently but Membership across all exchanges independently standards converge

• Independent • Common trading • Independent infrastructure but platform across Infrastructure infrastructure some convergence all exchanges

Regulation • Local regulation • Local regulation • Local regulation * Source: McKinsey 37 Proposed Exchange Alliance – ‘pipe’

 Among the mutual recognition models, the easiest formulation is to construct bilateral linkages (‗pipe‘) or a purely technical IT link between exchanges to facilitate cross border trading between brokers in the home & host exchanges.

• The attractiveness of the bilateral exchange to exchange links is that they do not bypass the brokers, nor do they disrupt the current licensing, trading and clearing mechanisms in place. • One of the main issues is how to gain support from the market players and the need for a technical study to clarify the benefits and costs of such an alliance, including related tax issues and the need to address competition risks to small brokers.

 The ‗pipe‘ idea provides a framework for discussion and could be the first step toward broader collaboration as long as it does not require too extensive investments in the short term.

38 The Elements of the ‘pipe’

 For a start, each exchange would allow a certain number of shares (which could be say 20 or 50 highly liquid or index stocks) to be available on an ―ASEAN Board‖.

• The ASEAN Board would comprise, say, up to 200 top ASEAN companies. The Board would be electronic, and be equivalent to the second or third board. A network can easily be established linking all the member exchanges. The Board could be made available on the internet or Reuters, preferably real-time.

 Investors in country (A) would be able to route orders to buy and sell through their home brokers, who can then trade on the ASEAN Board, via placing orders to the ―host exchange‖, via clearing and settlement arrangements with a ―host broker‖.

 Clearing and settlement arrangements will remain as normal, except that each home and host broker must negotiate bilateral credit-risk management facilities to help settlement. The exchanges and clearing houses could help facilitate this electronically.

39 Options to Implement the ‘pipe’ Idea

• No direct linkages among exchanges, clearinghouses (CLH), or CSDs Current state • Brokers from bilateral linkages with one another direcly for trading, (interbroker) clearing and settlement

Remote • No direct linkages among exchanges, CLHs, or CSDs Trading • Foreign brokers can be members of exchange and trade directly Membership • Brokers still need local partners to access the CLH and CSD

• Exchanges form trading links, allowing brokers to trade cross-border Interexchange through their local exchanges trading links • Brokers still need local partners to access the clearinghouse and CSD

CLH/CSD link • No direct trading linkages among exchanges • CLHs and/or CSDs have links allowing local brokers to clear and/or without settle cross-border through the local CLH (eg local CLH is a member Trading link of the foreign CLH)

• Exchanges form trading links, allowing brokers to trade cross-border • Through their local exchanges Trading and • CLHs and/or CSDs have links allowing local brokers to clear and/or CLH/CSD link settle cross-border through the local CLH (eg local CLH is a member of the foreign CLH)

40 Further Progress Meeting of CEOs of ASEAN Stock Exchanges

 The ADB team including Andrew Sheng and Emmanuel Pitsilis from McKinsey made a presentation on the exchange alliance framework at the CEO‘s annual meeting in Bangkok on 25 November 2007.

 The CEOs concluded that they wished to move forward towards implementing the concept of a virtual ASEAN Board – on a Reuters or Bloomberg platform.

• They formed a technical working group to develop a road map.

41 The ASEAN Board

Description of ASEAN Board Benefits • Strengthen ASEAN capital markets‟ • Comprise of a number of shares from presence and enhance the visibility each exchange (i.e. 20 or 50 highly of ASEAN as an asset class liquid stocks) • Would be electronic and equivalent to • Attract more international funds into the second or third board of each ASEAN and encourage more intra- exchange • Show information on local currency ASEAN trading • Link among exchanges through a network, which can easily be • Allow local companies to raise established funds through regional capital • Could be made available on the internet and data vendor (e.g., Reuters), preferably real-time

42 Operationalizing the Proposal

Trading

Remote acc w/ Broker-to-B Exch-to-exch CCG* one platform

1 4 5 7 Local Interbroker Interexchange CCG with Remote trading basis trading links assigned local membership with broker 1 platform Clearing, (NYSE Euronext) (OMX‘s 1st step**) settlement & depository 2 4 6 CLH/CSD CLH/CSD link Trading and CCG with link w/o trading link CLH/CSD link CLH/CSD link (Euronext, OMX)

• Stands for “common customer gateway” ** Together with one trading rulebook Source: SET 43 Selection Criteria

Drivers Selection criteria

1. Ease of accessibility Objective can be 2. Ability to mitigate risks, e.g., credit risk, achieved Counterparty risk

3. Maintain liquidity in host markets Conditions 4. Support from local brokers in both home and are met Host markets 5. Ability to monitor trading volume

6. High technical practicality and regulatory support It is feasible 7. Reasonable investment costs for exchanges

44 6. (page 11)

Options 1 2 3 4 5 6 7 Inter- CLH/ Interex- Trading CCG w/ CCG w/ Remote broker CLS link change and assigned CLH member- w/o trad- trading CLH/ local CSD link ship w/ 1 ing link links CSD link broker platform Selection criteria 1. Ease of accessibility x x √ √ √ √ √

2. Ability to mitigate risks x √ √ √ √ √ √ 3. Maintain liquidity in host markets √ √ √ √ √ √ √ 4. Support from local brokers √ √ x x √ x x 5. Ability to monitor trading volume √ √ √ √ √ √ √ 6. High technical practicality and √ √ x x √ √ x regulatory support

7. Reasonable investmt costs for exchanges √ √ x x √ √ x

45 Summary

• Securities markets depend on (i) transparency and disclosure and (ii) enforcement; complex interaction between reputational intermediaries, enforcement agencies, SROs and enforcement of laws critical to market development • Significant improvements in Southeast Asia since 1997; markets and intermediaries stronger, regulation enhanced, greater financial system stability and resilience • But cross country differences in market development are pronounced, as are differences in linkages between regulatory stance and market development • Equity market trading in Europe undergoing radical transformation: ASEAN exchanges need to act now to remain relevant: they need support from regulators and policymakers.

46 Questions and Comments

Thank you!

47 The Different Layers of Securities Market Regulation

48 1. Issuers

Country Regulation

• The Issuer or the Public Company is fully responsible for the accuracy, adequacy and the truth of opinions and all information presented in the Registration Statement submitted to Bapepam. If an item contained in a Bapepam rule or form regarding disclosure requirements does not apply to a specific Issuer, Public Company, or Public Offering, it need not be disclosed in the Registration Statement. Indonesia • In addition to the information and documents which must be included in the Registration Statement, the Person who submits the registration Statement must also include other material information that is needed to ensure that investors have adequate information regarding the financial condition and business activities of the Issuer or the Public Company and that the disclosure is not misleading.

• Issuers are required to make full, timely and accurate disclosure of information to the public under the securities laws, and guidelines issued by the SC. Malaysia • In addition, the listing requirements impose continuous disclosure obligations on listed issuers and seeks to ensure that equal access to such information is practiced.

• Disclosure requirements are another area which was purposely strengthened under the SRC. Philippines • The disclosure requirements in the SRC and the IRR are modeled after those in the United States.

• Initial public offerings and continuing disclosure requirements for issuers are in place, providing timely, adequate, and accurate disclosure of material information to investors. Prospectus disclosure requirements are state of the art. • Issuers and their directors and underwriters are subject to criminal and civil liability if a prospectus contains false or misleading information or if material information is not disclosed. Company law and listing rules accord fair and equitable Singapore treatment to all shareholders. The Take-Over Code provides additional protections to all listed Singapore companies and to unlisted public companies with 50 or more shareholders and net tangible assets of S$5 million or more. Singapore generally follows international auditing standards. • Quarterly financial reporting is also required for listed companies above S$75 million.

• The SEC Act prohibits companies from offering newly issued shares and other securities for sale without prior approval from the SEC, except for the rights offering to existing shareholders. The SEC focuses on the accuracy and sufficiency of Thailand information disclosure in order to allow the public to make their investment decisions. • All forms of public offering of securities must receive approvals form the SEC as well as conform to SEC prescribed disclosure and accounting standards. The SEC also licenses and regulates all investment intermediaries as well as the SET.

49 2. Reputational Intermediaries

Country Regulation

• Among Singapore, Malaysia, Thailand and Indonesia, the later has the least number of equities and derivatives as investment products. Indonesia • Only a Company licensed by BAPEPAM may carry on business as a Securities Company. • Licensing requirements and procedures include such things as: requirements with respect to management, capital and expertise; and procedures for submitting license applications

• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the SIA and FIA. Minimum entry standards, which include initial capital requirements, are applied equally and consistently to applicants applying for the same category of licenses. Malaysia • All license applicants must meet „fit and proper‟ criteria. Ethical, educational, industry knowledge, skills and experience are assessed in approving principal officers which include directors, company secretary and key management personnel. • The Syariah Advisory Council (SAC) advises the SC on issues relating to market compliance with Syariah principles in the Islamic capital market.

• The legal infrastructure for regulating market intermediaries has been enhanced in the SRC which, among other things, raises capital requirements (initial and ongoing), provides a disciplinary bar to registration, provides for indefinite registration, and clarifies that all regulated intermediaries must register under the new law. Philippines • Investment Houses (Presidential Decree 129), Broker Dealers (SRC), Financing Companies (Financing Company Act of 1998) are primary NBFIs authorized and regulated by the SEC. Among them, the Investment Houses and Broker Dealers are the primary securities market intermediaries while the Financing Companies are essentially credit institutions without deposit taking.

• The MAS has adopted a single modular licensing framework for securities and futures market intermediaries. The SFA regulates intermediaries conducting regulated activities. The FAA regulates intermediaries providing financial advisory services. The MAS has adopted a risk-based approach to supervising its licensed intermediaries. Capital requirements for licensees will Singapore be largely based on the analysis underlying the Basel Core Principles. The new capital rule supersedes an adjusted net capital rule and is being phased in conservatively to test the potential impact on capital. • Holders of Capital Markets Licenses must observe customer protection procedures.

• Domestic institutional investor base is still under developed. Except for Government Pension Fund (GPF) there is no compulsory retirement pension scheme. Thailand • This narrow domestic institutional investors base coupled with investment restrictions for GPF and PVD meant that their participation in the equities market have lagged behind those of retail investors and foreign institutional investors who have played a much more active role in the equities market. 50 3. Self-regulatory Organizations (SRO)

Country Reguation

• SROs are; - Securities Exchange: A Stock Exchange sets rules for the members, listing, trading and other activities related to its business. - Clearing Guarantee Corporation: As a Self Regulating Organization, LKP is required to set rules on Guarantee, securities Indonesia transaction clearing, and other activities to its business. PT KPEI obtained its business license on June 1, 1998. - Central Securities Depositary: As a Self Regulating Organization, LPP is required to set rules on depository, securities transaction settlement and other activities related to its business. PT KSEI obtained its business license on November 11, 1998.

• The Federation of Malaysian Unit Trust Managers (FMUTM) is the industry body for unit trust managers in Malaysia, responsible for the conduct of the following functions: - The registration of Institutional Unit Trust Agents (IUTAs) through the Guidelines for Registration of Institutional Unit Trust Agents for the Marketing and Distribution of Units); and Malaysia - The registration of Persons Dealing in Unit Trusts (PDUTs) and the conduct of the examinations for the registration of PDUTs; • The Malaysian Accounting Standards Board (MASB) and the Financial Reporting Foundation, both created by the Financial Reporting Act of 1997, oversee accounting and corporate governance standards. • The Minority Shareholder Watchdog Group (MSWG) was set up to promote better and more effective corporate governance practices which could set a benchmark for others in the region. Its public mandate is to inform the investing public.

• Building a self-regulating market is part of the expressly stated objectives of the SRC. Section 39 of the SRC defines the role of SROs and types of organizations that can apply for an SRO status. Philippines • The Philippine Stock Exchange (PSE) is working as a front line regulator of the market as an authorized SRO. • The Investment Company Association of the Philippines (ICAP) and the Securities Clearing Corporation of the Philippines (SCCP) set code of conducts for the members, they are not (yet) formally recognized as SROs.

• The SGX-ST (securities) & SGX-DT (derivatives) are recognized by statute as the front line regulator of trading activities. • The MAS has enhanced its supervisory arrangements for oversight of the exchanges and clearing houses since the Singapore demutualization of the SGX. The MAS oversight includes testing the quality of the exchange front line program. The MAS cannot, however, review access denial determinations. The arrangements in place to avoid conflicts of interest between its regulatory and other functions could be more clearly specified.

• The SET is a statutory body under the Securities and Exchange Act with its own governing board of directors half of whom are appointed by the SEC and the other half elected by members brokerage firms. Any changes in the legal structure of the SET enquires an amendment in the law. Thailand • According to the existing legal structure the SET is empowered under the Act to issue rules with regard to an orderly operation of the exchange. Nevertheless, the Act makes clear that the SET is subject to regulatory oversight by the SEC. • The SET performs the role of Self Regulatory Organization particularly in the areas of market disclosure and trading. An official 51 memorandum of understanding has been signed between the SEC and the SET in 2000. 4. Government institutions

Country Regulation

• Bapepam-LK is not an independent authority but an agency within the Ministry of Finance (MoF). It is the principal regulator Indonesia and is supported by a number of selfregulatory organizations (SROs).

• The Securities Commission (SC) is a statutory body with investigative and enforcement powers and it reports to the Minister of Finance. The SC is the regulatory authority for the Malaysian capital market; it also supervises the activities of market institutions, including the exchanges and clearing houses, and regulates persons licensed under the Securities Industry Act Malaysia (SIA) and Futures Industry Act (FIA). • Bursa Malaysia is vested with regulatory powers under the law and has a statutory responsibility to ensure a fair and orderly market and prudent risk management. These responsibilities relate to the regulation and surveillance of securities markets.

• The Securities Regulation Code of 2000 empowered SEC to make it a more enforcement-oriented & independent regulator. • The supervision of the Philippine financial market is divided among different regulatory agencies. Banking supervision is the under the responsibility of the Bangko Sentral ng Pilipinas; supervision of the insurance industry is under the Insurance Commission; and the supervision of the securities market is under the Securities and Exchange Commission. Moreover, the mandate and jurisdiction of these agencies are defined under different legislations. Philippines • The “Compliance and Surveillance Group”(CSG) of the PSE carries front line responsibility for market surveillance, compliance inspections, and investigation by PSE or SEC depending upon the type and scope of violations. SEC exercises some oversight of PSE in order to enhance the independence and capacity to perform surveillance and compliance activities through the CSG, the CSG was transformed into Market Regulations Division, supervised by a semi-independent, Market Integrity Board (MIB).

• The MAS is legally and institutionally independent of the executive and legislative branches of the government and accountable to the public. The MAS‟ responsibilities with respect to securities regulation are clearly stated in the applicable Singapore legislation and rules in the SFA of 2001, the FAA, the Exchanges Demutualization and Merger Act, and related regulations. • Exercise of regulatory powers in securities is subject to the SFA. The MAS clearly has the staff, powers, expertise, and resources to conduct effective regulation. The consultation process with the industry and the public is in place and sound.

• Regulatory framework is quite advanced though fragmented. The Bank of Thailand is the main regulator for commercial banks and finance companies and is in the process of implementing the BASLE II capital requirement as well as consolidated Thailand supervision of financial institutions. The Bank also has limited jurisdiction over specialized banks and non bank activities. • The Securities and Exchange Commission is an independent statutory body responsible for regulating all aspects of fund raising, financial investment dealings, market activities as well as promotion of good corporate governance.

52 5. Laws

Country Regulation

• The legal basis for capital market activities in Indonesia is the Capital Market Law Number 8/1995 . The Indonesia • Law governs the operations of the Capital Markets Supervisory Agency, Badan Pengawas Pasar Modal • dan Lembaga Keuangan (Bapepam-LK).

• The Capital Market is governed by the following Acts of Parliament: • Securities Industry Act 1983/ Securities Industry (Central Depositories Act) 1991/ Securities Commission Act 1993 Malaysia • Companies Act 1965/ Futures Industry Act 1993/ Labuan Offshore Securities Industry Act 1995 • All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the Securities Industry Act and Futures Industry Act. Minimum entry standards, which include capital adequacy requirement, must be met.

• BSP draws its supervisory and regulatory powers from Article XII, Section 20 of the 1987 Constitution, the New Central Bank Act of 1993, and the General Banking Law of 2000. The mandate of the Insurance Commission is mainly based from the Philippines Insurance Code of 1974. • The Securities and Exchange Commission derives its authority from the Securities Regulation Code of 2000, the Investment House Law of 1973, the Investment Company Act of 1960, and the Financing Company Act of 1998.

• The order of precedence of the various legislative and quasi-legislative instruments applicable to the Singapore capital market and its participants are as follows in descending order: - The statutory Act and related regulations - The rules contained in the Rulebook Singapore - Directives issued pursuant to the Rulebook - Practice Notes - Circulars • In the event of a conflict between any provisions in the instruments provisions contained in the higher level instruments shall prevail.

• To initiate a new legal framework and mark a new era for the Thai capital market, on March 16, 1992, the Securities and Exchange Act B.E. 2535 (1992) or “the SEC Act” was promulgated and came into force on May 16, 1992 so as to reinforce the unity, consistency, and efficiency in supervision and development of the market. The enactment of the SEC Act empowered the Securities and Exchange Commission, Thailand to be established as an independent state agency with responsibility for Thailand supervision and development of the capital market under the direction and guidance of the Board of the SEC. • On July 3, 2003, the Derivatives Act B.E. 2546 (2003) was promulgated and came into force on January 6, 2004 so as to create a legal certainty for derivative contracts, provide a regulatory framework for derivatives markets and intermediaries, and allow the SEC to oversee the financial integrity of the market and take action to prevent adverse systemic effect.

53 1. Indonesia

Layer Regulation

• The Issuer or the Public Company is fully responsible for the accuracy, adequacy and the truth of opinions and all information presented in the Registration Statement submitted to Bapepam. If an item contained in a Bapepam rule or form regarding disclosure requirements does not apply to a specific Issuer, Public Company, or Public Offering, it need not be disclosed in the Registration Statement. Issuers • In addition to the information and documents which must be included in the Registration Statement, the Person who submits the registration Statement must also include other material information that is needed to ensure that investors have adequate information regarding the financial condition and business activities of the Issuer or the Public Company and that the disclosure is not misleading.

• Among Singapore, Malaysia, Thailand and Indonesia, the later has the least number of equities and derivatives as investment products. Reputational • Only a Company licensed by BAPEPAM may carry on business as a Securities Company. intermediaries • Licensing requirements and procedures include such things as: requirements with respect to management, capital and expertise; and procedures for submitting license applications

• SROs are; - Securities Exchange: A Stock Exchange sets rules for the members, listing, trading and other activities related to its business. - Clearing Guarantee Corporation: As a Self Regulating Organization, LKP is required to set rules on Guarantee, securities Self-regulatory transaction clearing, and other activities to its business. PT KPEI obtained its business license on June 1, 1998. organizations - Central Securities Depositary: As a Self Regulating Organization, LPP is required to set rules on depository, securities transaction settlement and other activities related to its business. PT KSEI obtained its business license on November 11, 1998.

Government • Bapepam-LK is not an independent authority but an agency within the Ministry of Finance (MoF). It is the principal regulator institutions and is supported by a number of self-regulatory organizations (SROs)

• The legal basis for capital market activities in Indonesia is the Capital Market Law Number 8/1995 . Laws • The Law governs the operations of the Capital Markets Supervisory Agency, Badan Pengawas Pasar Modal dan Lembaga Keuangan (Bapepam-LK).

54 2. Malaysia

Layer Regulation

• Issuers are required to make full, timely and accurate disclosure of information to the public under the securities laws, and guidelines issued by the Securities Commission (SC). Issuers • In addition, the listing requirements impose continuous disclosure obligations on listed issuers and seeks to ensure that equal access to such information is practiced.

• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the SIA and FIA. Minimum entry standards, which include initial capital requirements, are applied equally and consistently to applicants applying for the same category of licenses. Reputational • All license applicants must meet „fit and proper‟ criteria. Ethical, educational, industry knowledge, skills and experience are intermediaries assessed in approving principal officers which include directors, company secretary and key management personnel. • The Syariah Advisory Council (SAC) advises the SC on issues relating to market compliance with Syariah principles in the Islamic capital market.

• The Federation of Malaysian Unit Trust Managers (FMUTM) is the industry body for unit trust managers in Malaysia, responsible for the conduct of the following functions: - The registration of Institutional Unit Trust Agents (IUTAs) through the Guidelines for Registration of Institutional Unit Trust Self- Agents for the Marketing and Distribution of Units); and regulatory - The registration of Persons Dealing in Unit Trusts (PDUTs) and the conduct of the examinations for the registration of PDUTs; organizations • The Malaysian Accounting Standards Board (MASB) and the Financial Reporting Foundation, both created by the Financial Reporting Act of 1997, oversee accounting and corporate governance standards. • The Minority Shareholder Watchdog Group (MSWG) was set up to promote better and more effective corporate governance practices which could set a benchmark for others in the region. Its public mandate is to inform the investing public.

• The SC is a statutory body with investigative and enforcement powers and it reports to the Minister of Finance. The SC is the regulatory authority for the Malaysian capital market; it also supervises the activities of market institutions, including the Government exchanges and clearing houses, and regulates persons licensed under the Securities Industry Act (SIA) and Futures Industry institutions Act (FIA). • Bursa Malaysia is vested with regulatory powers under the law and has a statutory responsibility to ensure a fair and orderly market and prudent risk management. These responsibilities relate to the regulation and surveillance of securities markets.

• The Capital Market is governed by the following Acts of Parliament: • Securities Industry Act 1983/ Securities Industry (Central Depositories Act) 1991/ Securities Commission Act 1993 Laws • Companies Act 1965/ Futures Industry Act 1993/ Labuan Offshore Securities Industry Act 1995 • All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the Securities Industry Act and Futures Industry Act. Minimum entry standards, which include capital adequacy requirement, must be met. 55 3. Philippines

Layer Regulation

• Disclosure requirements are another area which was purposely strengthened under the SRC. Issuers • The disclosure requirements in the SRC and the IRR are modeled after those in the United States.

• The legal infrastructure for regulating market intermediaries has been enhanced in the SRC which, among other things, raises capital requirements (initial and ongoing), provides a disciplinary bar to registration, provides for indefinite registration, and clarifies that all regulated intermediaries must register under the new law. Reputational • Investment Houses (Presidential Decree 129), Broker Dealers (SRC), Financing Companies (Financing Company Act of 1998) intermediaries are primary NBFIs authorized and regulated by the SEC. Among them, the Investment Houses and Broker Dealers are the primary securities market intermediaries while the Financing Companies are essentially credit institutions without deposit taking.

• Building a self-regulating market is part of the expressly stated objectives of the SRC. Section 39 of the SRC defines the role of Self- SROs and types of organizations that can apply for an SRO status. regulatory • The Philippine Stock Exchange (PSE) is working as a front line regulator of the market as an authorized SRO. organizations • The Investment Company Association of the Philippines (ICAP) and the Securities Clearing Corporation of the Philippines (SCCP) set code of conducts for the members, they are not (yet) formally recognized as SROs.

• The Securities Regulation Code of 2000 empowered SEC to make it a more enforcement-oriented & independent regulator. • The supervision of the Philippine financial market is divided among different regulatory agencies. Banking supervision is the under the responsibility of the Bangko Sentral ng Pilipinas; supervision of the insurance industry is under the Insurance Commission; and the supervision of the securities market is under the Securities and Exchange Commission. Moreover, the Government mandate and jurisdiction of these agencies are defined under different legislations. institutions • The “Compliance and Surveillance Group”(CSG) of the PSE carries front line responsibility for market surveillance, compliance inspections, and investigation by PSE or SEC depending upon the type and scope of violations. SEC exercises some oversight of PSE in order to enhance the independence and capacity to perform surveillance and compliance activities through the CSG, the CSG was transformed into Market Regulations Division, supervised by a semi-independent, Market Integrity Board (MIB).

• BSP draws its supervisory and regulatory powers from Article XII, Section 20 of the 1987 Constitution, the New Central Bank Act of 1993, and the General Banking Law of 2000. The mandate of the Insurance Commission is mainly based from the Laws Insurance Code of 1974. • The Securities and Exchange Commission derives its authority from the Securities Regulation Code of 2000, the Investment House Law of 1973, the Investment Company Act of 1960, and the Financing Company Act of 1998.

56 4. Singapore

Layer Regulation

• Initial public offerings and continuing disclosure requirements for issuers are in place, providing timely, adequate, and accurate disclosure of material information to investors. Prospectus disclosure requirements are state of the art. • Issuers and their directors and underwriters are subject to criminal and civil liability if a prospectus contains false or misleading information Issuers or if material information is not disclosed. Company law and listing rules accord fair and equitable treatment to all shareholders. • The Take-Over Code provides additional protections to all listed Singapore companies and to unlisted public companies with 50 or more shareholders and net tangible assets of S$5 million or more. Singapore generally follows international auditing standards. • Quarterly financial reporting is also required for listed companies above S$75 million.

• The MAS has adopted a single modular licensing framework for securities and futures market intermediaries. • The SFA regulates intermediaries conducting regulated activities. • The FAA regulates intermediaries providing financial advisory services. Reputational • The MAS has adopted a risk-based approach to supervising its licensed intermediaries. intermediaries • Capital requirements for licensees will be largely based on the analysis underlying the Basel Core Principles. The new capital rule supersedes an adjusted net capital rule and is being phased in conservatively to test the potential impact on capital. • Holders of Capital Markets Licenses must observe customer protection procedures.

• The SGX-ST (securities) and SGX-DT (derivatives) are recognized by statute as the front line regulator of trading activities on their markets. Self-regulatory • MAS has enhanced its supervisory arrangements for oversight of the exchanges & clearing houses since the demutualization of the SGX. organizations • MAS oversight includes testing the quality of the exchange front line program. MAS cannot, however, review access denial determinations. The arrangements in place to avoid conflicts of interest between its regulatory and other functions could be more clearly specified

• The MAS is legally and institutionally independent of the executive and legislative branches of the government & accountable to the public. • The MAS‟ responsibilities with respect to securities regulation are clearly stated in the applicable legislation and rules in the SFA of 2001, the FAA, the Exchanges Demutualization and Merger Act, and related regulations. • The MAS has both prudential and conduct of business responsibility for those intermediaries for which Capital Markets Services Licenses Government are required. Because there are significant interrelationships between the government and statutory boards, greater disclosure of the MAS‟ institutions operating procedures that guide implementation of policies would enhance accountability and transparency. • Exercise of regulatory powers in securities is subject to the SFA. • The MAS clearly has the staff, powers, expertise, and resources to conduct effective regulation. The consultation process with the industry and the public is in place and sound.

• The order of precedence of the various legislative and quasi-legislative instruments applicable to the Singapore capital market and its participants are as follows in descending order: 1. The statutory Act and related regulations; 2. The rules contained in the Rulebook; 3. Laws Directives issued pursuant to the Rulebook; 4. Practice Notes; and 5. Circulars • In the event of a conflict between any provisions in the instruments provisions contained in the higher level instruments shall prevail.

57 5. Thailand

Layer Regulation

• The SEC Act prohibits companies from offering newly issued shares and other securities for sale without prior approval from the SEC, except for the rights offering to existing shareholders. The SEC focuses on the accuracy and sufficiency of Issuers information disclosure in order to allow the public to make their investment decisions. • All forms of public offering of securities must receive approvals form the SEC as well as conform to SEC prescribed disclosure and accounting standards. The SEC also licenses and regulates all investment intermediaries as well as the SET.

• Domestic institutional investor base is still under developed. Except for Government Pension Fund (GPF) there is no compulsory retirement pension scheme. Reputational • This narrow domestic institutional investors base coupled with investment restrictions for GPF and PVD meant that their intermediaries participation in the equities market have lagged behind those of retail investors and foreign institutional investors who have played a much more active role in the equities market.

• The SET is a statutory body under the Securities and Exchange Act with its own governing board of directors half of whom are appointed by the SEC and the other half elected by members brokerage firms. Any changes in the legal structure of the SET enquires an amendment in the law. Self-regulatory • According to the existing legal structure the SET is empowered under the Act to issue rules with regard to an orderly operation organizations of the exchange. Nevertheless, the Act makes clear that the SET is subject to regulatory oversight by the SEC. • The SET performs the role of Self Regulatory Organization particularly in the areas of market disclosure and trading. An official memorandum of understanding has been signed between the SEC and the SET in 2000.

• Regulatory framework is quite advanced though fragmented. The Bank of Thailand is the main regulator for commercial banks and finance companies and is in the process of implementing the BASLE II capital requirement as well as consolidated Government supervision of financial institutions. The Bank also has limited jurisdiction over specialized banks and non bank activities. institutions • The Securities and Exchange Commission is an independent statutory body responsible for regulating all aspects of fund raising, financial investment dealings, market activities as well as promotion of good corporate governance.

• To initiate a new legal framework and mark a new era for the Thai capital market, on March 16, 1992, the Securities and Exchange Act B.E. 2535 (1992) or “the SEC Act” was promulgated and came into force on May 16, 1992 so as to reinforce the unity, consistency, and efficiency in supervision and development of the market. The enactment of the SEC Act empowered the Securities and Exchange Commission, Thailand to be established as an independent state agency with responsibility for Laws supervision and development of the capital market under the direction and guidance of the Board of the SEC. • On July 3, 2003, the Derivatives Act B.E. 2546 (2003) was promulgated and came into force on January 6, 2004 so as to create a legal certainty for derivative contracts, provide a regulatory framework for derivatives markets and intermediaries, and allow the SEC to oversee the financial integrity of the market and take action to prevent adverse systemic effect. 58 Markets in SE Asia – Lessons from Europe

• In Asia, progress towards international standards, IOSCO, etc. adoption of risk based supervision, demutualization of exchanges. • Greater market depth, transactions volume and openness. • But each market is small, with limited openness to region, high transactions cost because of sub-scale volume. The challenge is from Europe • In Europe, demutualization is complete, for-profit exchanges have invested in automated trading and convergence to common trading model with central limit order book trading for most liquid stocks • Lower transactions cost and ability to link trading venues • Greater competition between venues within and across borders • But also alliances and mergers which have brought significant advantages in terms of greater access to capital raising and lower costs • Need to ensure competitive markets in trading, clearing, settlement and deposit

59 The Way Forward

. Phase 2: bilateral/multilateral linkage • Agreed to pursue option 5 with determination of having option 6 as an end game . Phase 2: issues to be addressed ASEAN level • Business requirement for selecting solution provider - Tools (e.g., short selling, SBL) - Infrastructure (e.g., speed) • Business model, including data dissemination • Revenue model, including investment costs and operating costs to conduct the feasibility analysis • Marketing messages Bilateral level • Ways to deal with credit risk • Supporting rules and regulations at each exchange • Support from market participants and regulators 1 2 3 4 5 6 7

60 The Common Customer Gateway

‘Home’ ‘Host’ • Common customer gateway (CCG): Exchanges set up a common customer gateway Exchange A Exchange B routing orders from brokers directly to local 1 exchange (1) • Foreign brokers do not have to be a member Common Customer Gateway 2 of the local exchange. For non-member foreign brokers, bilateral agreement with a local broker 1 is required (2) • Clearing, settlement and depository services Broker A Broker B by Local participants: Credit, clearing, and settlement all are intermediated by host-country 3 4 participants (3) (4) Custodian B Clearing Clearing • No home country exchange, CLH or CSD have member A member B any involvement in the trade, so no international 4 coordination is required 3 • Alternatively, Broker A may have a direct CSD B relationship with a clearing member and a CLH A CLH B sub-custodian in the host country which clear and settle for him (not shown on the chart) Matrix Table DMT 61