COVER STORY
Will exchange alliances work? To compete with bigger international rivals, Asia’s exchanges are working together through partnerships and networks. But some disconnects must be fixed before they reach their potential
Ashley Lee, staff writer have become eager to tout their relationships and establish far-reaching networks. They are striking lobal competition between securities deals to establish their own turf and, where exchanges has never been tougher. possible, keep out rivals. And it’s a phenomenon that will “Linkages are a means to an ends, and the aim become only more prevalent as a is to make access easier and cheaper,” says Nick Ggrowing number of platforms look to attract Ronalds, managing director and head of equities international investors. The US and European at the Asia Securities Industry and Financial markets have responded by consolidating, the Markets Association (Asifma). Their goal, he says, most recent example being is to make it as easy and efficient as possible for IntercontentialExchange’s (ICE) $8.2 billion investors and their intermediaries to access the purchase of New York Stock Exchange EuroNext market. (NYSE). According to Asifma’s executive chairman, Mark Exchanges in Asia, however, have taken a Austen, the big question is whether these links will different approach. Instead of M&A, they have drive costs down, or if costs will remain the same looked to expand their presence through links and or even increase. Ultimately, he says, these partnerships. agreements don’t create competition. Instead, they In the past, exchange cooperation agreements provide links between existing exchanges and ran the risk of being somewhat superficial. But as allow investors to trade on the link – perhaps with global competition has increased, many exchanges additional cost.
30 IFLR/September 2013 www.iflr.com COVER STORY
Asean Exchanges Trading Link This month marks the first anniversary of the Association of Southeast Asian Nations (Asean) Exchanges Trading Link (Asean Link). Established to attract investment from international and local retail investors, the Link is part of a broader initiative to strengthen the development and integration of Asean’s capital markets by 2015. The Asean Link “Regional financial integration will help will allow improve capital flows among the Asean countries, and those funds are likely to be investors to have more stable,” says Thiam Hee Ng, senior economist in Asian Development Bank’s more diversified Office of Regional Integration. “ The Singapore Exchange (SGX) and Bursa portfolios Malaysia (BM) launched the Asean Link in Thiam Hee Ng, September 2012, with the Stock Exchange of Thailand (SET) joining the following month. Asia Development Bank Together, these three exchanges contribute two-thirds of the market capitalisation of the seven-member Asean Exchanges initiative. The four members yet to join are the Hanoi Stock Exchange (HSE), Ho Chi Minh Stock Exchange (HOSE), PT Bursa Efek Indonesia (IDX), and the Philippine Stock Exchange (PSE). The Asean Link uses a broker-to-broker interface. It allows brokers in one jurisdiction because people may feel that their portfolios tax is waived for inbound investments into to execute trades through another that is need more diversification. Malaysia, Thailand that are executed on the Link. licensed in the corresponding market. It’s a Singapore and Thailand are close similar arrangement to that used in the initial economically, but there are enough Harmonisation phase of the Mercado Integrado Latino- differences to create portfolio diversity. The Link has been criticised for its lack of Americo (Mila), which links Peru, Colombia ambition, especially compared to the and Chile’s exchanges (see boxout). Local regulations European common market. The broker-to- Based on its first year of operation, sources The broker-to-broker interface helps the Link broker interface means that local exchanges have given the Link mixed reviews. Some sidestep some regulatory issues that would and regulators retain their independence, and dismiss it as a talking shop, and note that the arise if a direct link were established. For in many cases, their own rules. But the broker-to-broker interface involves higher instance, each jurisdiction applies its own politics behind the Asean Link initiative are fees. “It’s easy to overestimate what the taxation, currency controls and foreign vastly different from those that spurred the trading link does,” says one. Others are more investment policies. And there is no central creation of the European framework. positive, noting the success of its public clearinghouse for these trades. Some say that the Link doesn’t involve relations campaign among retail investors, But the member exchanges have urged passporting or mutual recognition, and which roadshowed across the region. regulators across Asean to consider local rules therefore isn’t as effective as the European The Asean Link is likely to boost trading when adding new members to the trading common market. But that is a poor analogy volumes on the participating exchanges, but link. Dr Pakorn Peetathawatchai, executive because the underlying political driver for the sources were not aware of data backing its vice president and head of corporate strategy closeness that led to some EU securities impact. More data will help evaluate its and finance division of SET, notes that market developments aren’t present in Asean, success. countries looking to join the link must says Stephen Revell, co-head of Freshfield consider currency controls. Bruckhaus Deringer’s global capital markets Retail focus “For example, if the Vietnamese exchanges practice. A major criticism of the Asean Link is that it were to join, the Central Bank of Vietnam “The analogy with the EU doesn’t get you focuses on retail investors rather than would have to think about whether that anywhere because the underlying politics are institutional investors, who already have would be possible without lifting the currency fundamentally different, and therefore the access to the different markets. controls,” he says. output is very different,” he says. “The Link Ng says the Link will help with the Sources agree that the cost of trading is an is more about collaboration than mandated allocation of funds across different countries, issue. The broker-to-broker interface means cooperation.” and allow investors to have more diversified investors must pay fees to two brokers – one The collaboration between Asean portfolios. While he doesn’t expect investors in their local jurisdiction and one in another jurisdictions is multi-layered, however, and to move money from their savings accounts Asean jurisdiction – for arranging the the Association’s securities regulators work to invest in stocks, they may move some of transaction. Some governments have closely as members of the Asean Capital their assets to different jurisdictions. In turn, responded by reducing tax burdens for those Markets Forum (ACMF). In April this year Ng says, this may increase overall investment that use the Link. For example, capital gains the ACMF announced the Asean Disclosure www.iflr.com IFLR/September 2013 31 COVER STORY
Mila: the original exchange integration Next steps When considering the Asean Link’s success As the Asean Link wards off criticisms, it should take inspiration from its counterpart in and prospects, it’s important to remember Latin America. The Mercado Integrado Latino-Americano, or Mila, is the Andes’ that it has only been in operation for one year. integrated capital market, which links the trading platforms of Peru, Colombia and “We are still in the early stages if you look at Chile’s national exchanges. the number of members and types of product IFLR’s cover story from April 2012 revealed Mila’s first year to be mired by low being traded,” says Peetathawatchai. trading volumes, the extension of phase I operations, and the seemingly insurmountable He confirms that the Asean Link is challenge of integrating platforms subject to different regulatory burdens and opera- contemplating improvements to its online tional capabilities. trading platform, to facilitate retail investor But today, Mila’s fortunes have significantly improved. As at June 2013 the platform interest. “Retail investors may want to trade had 553 listed companies, a $667 billion market capitalisation, three indexes, and was online and buy or sell other countries’ stocks, followed by seven investment funds. Perhaps its greatest success, however, is the but that service isn’t ready yet,” he comments. exposure it has given local companies to other Andean and non-Andean investors. “We need to improve the Link’s infrastructure “Important players in the Latin American financial sector such as BTG Pactual, to support online trading.” Credicorp and Larrain Vial have entered our market, and also consolidated their In May, FTSE announced its collaboration presence in the other Mila countries,” says Juan Pablo Cordoba, chief of the Bolsa de with the exchanges of Malaysia, Indonesia, Valores de Colombia. the Philippines, Singapore and Thailand to The integration has helped the three countries and its regulators to think beyond the establish the benchmark FTSE/Asean Index, local landscape, said Cordoba, and has generated opportunities as a region and not just and the FTSE/Asean 40 index which as a country. comprises the top 40 companies on the In Peru, Mila has amplified investment opportunities and seen foreign investors FTSE/Asean index by market capitalisation. diversify their portfolios, says Francis Stenning, head of Bolsa de Valores de Lima. The creation of a benchmark Asean index The integrated market’s quest for greater visibility and investment, along with full may prompt the creation of sector indices, consolidation, is a long process, though. Cordoba is working on a timeframe of five to 10 such as an Asean banking index. “That would years. certainly help businesses such as asset Its next challenges include new instruments such as quota funds and exchange management companies list exchange-traded traded funds, incorporation of international custodian operations, and reinforcement of funds as an Asean asset class, which is a part brokers’ clearing processes. Its operations will expand in January 2014, when the incor- of the process that we’d like to push,” poration of the Mexico Stock Exchange will commence. Peetathawatchai says. IFLR’s feature on Mila’s first 12 months is available at www.iflr.com/mila More products may be added to the Link. Sources believe that its retail emphasis means it will focus on equities. But it will consider Standards Scheme for multi-jurisdictional would be considered material elsewhere. But adding bonds and tradable Islamic products, equity and vanilla debt offerings. But these some companies may feel duty bound to which are important for investors in Malaysia standards are on an opt-in basis, and have disclose such details. “Further, while the same and Indonesia. only been implemented by Singapore, rules may apply across jurisdictions, the Other Asean exchanges are looking closely Malaysia and Thailand. In addition, separate content and detail of the announcements at the Link. The market originally predicted review and discussion with each regulator is may be very different,” Boon Ann says. that the IDX’s participation was needed to still required. “A common disclosure regime would be attract international investors. But since then, It’s difficult to harmonise disclosure the ultimate goal,” says Clifford Chance’s the PSE has been the Asean exchange to draw standards, says Sin Boon Ann, deputy Raymond Tong. According to Tong, it’s significant international attention. An managing director of Drew & Napier’s hoped that the Asean Link is a precursor to original participant in the Link, the PSE corporate and finance practices. This is cross-listings, such as a Singapore-listed pulled out in November 2011 because it because they are determined by culture, company listing on BM or SET. For this, believed further effort was needed to generate judgement and past practice. counsel hope that a more harmonised regime interest and support from both the investing Some jurisdictions, for example, permit will evolve. public and local brokers. There is, however, companies to withhold information that Tong explains that although the unified no known timeline for the PSE or IDX to disclosure rules comply with basic join the Link. The Cambodia Securities International Organization of Securities Exchange (CSX) and Lao Securities Exchange Commissions (Iosco) standards, each (LSX) may participate in the future. exchange still maintains its own rules. The “We are looking to invite more exchanges next step will be to cross that bridge, and it’s to join the Link, including the LSX and CSX. It’s easy to understood that regulators are working But the exchanges in Asean are at different towards that goal. stages of development,” says Peetathawatchai. overestimate Corporates are looking forward to having “They don’t all have to join the link at once. an expedited process for secondary listings. The next step might be expanding it to five what the trading But until disclosure rules emerge, it’s a topic exchanges, then six, then eight.” link does that will remain in its exploratory phase. Once those rules are in place, however, the Frontier partnerships Link will present significant opportunities for The world’s most developed exchanges are corporates, bringing them to the attention of also expanding their reach, by forming “ investors from new markets. relationships with frontier exchanges and 32 IFLR/September 2013 www.iflr.com COVER STORY
Rather than creating a new market, the partnership was meant to address the issues that have held the MSE back from achieving world-class status. “The partnership has shown upbeat results,” says MSE’s deputy chief executive officer and chief regulatory officer Saruul Ganbaatar. “We’ve identified We are looking to and dealt with outstanding issues and done much work in improving operations and invite more visibility of the exchange to attain MSE’s full potential.” exchanges to join the He highlights the LSEG’s guidance on the MSE’s operations. Together with the MSE’s link, including the Lao team, he says, the exchange has enhanced its “ clearing and settlement systems and moved Securities Exchange from prefunded trading to T+3. This reflects an upgrade from an older, more basic system and Cambodia to an advanced one that is used globally. The Securities Exchange LSEG was also integral in the drafting of Mongolia’s new Securities Markets Law, Dr Pakorn Peetathawatchai, which introduces the concepts of depositary Stock Exchange of Thailand receipts, custodian banks, and beneficial and nominee shareholders. The MSE plans to continue engaging with helping governments establish new platforms. attracting dual-listings from Mongolian the LSE. Ganbaatar confirms that the MSE is These countries’ securities regimes often companies. It also reportedly received a $14.2 in the process of creating conditions for dual- feature local quirks and are more basic than million fee for the MSE’s management. listings, and is working with the LSE to create those of their competitors. “It’s important to The LSEG appointed an MSE team to a channel in which any issuances approved for remember that frontier markets are so diverse oversee its development and privatisation, listing in Mongolia can automatically be – from Pakistan to Mongolia, every exchange and establish an education programme for considered for listing on select LSE markets. has its own issues,” says Thomas Hugger, market participants. The partnership goals Public relations are a priority. One of the fund manager at Asia Frontier Capital. “It’s included implementing LSEG’s Millennium continuing goals is to boost the presence of important to analyse them individually.” IT system to provide trading and surveillance the MSE in the international public eye. “All These tie-ups are two-way relationships. infrastructure, modernising market rules and the important dirty work has been done on Frontier exchanges seek partnerships to raise structures, and broadening tradable asset the ground, but the key now is visibility,” their profiles and streamline their regulations classes. Hankin says. It may soon receive more to meet the standards expected by The market gives the MSE-LSE tie-up recognition from international investors. international investors. For developed market positive reviews. But many stress that this was Mongolia has already been tapped by FTSE exchanges, partnerships can bolster their for possible promotion to frontier market international credentials. But there is debate status, which would be key to enhancing the as to the best approach when assisting these MSE’s profile globally. exchanges. Here are the different models that have been used to-date. For Asia, exchange JPX/Daiwa Institute of Research- Myanmar Stock Exchange MSE-LSE competition to the In May 2012, the Central Bank of Myanmar On its 20th anniversary in January 2011, the signed a memorandum of understanding Mongolian Stock Exchange (MSE) signed an level seen in the (MoU) with the Tokyo Stock Exchange (now exclusive strategic partnership agreement with Japan Exchanges Group) and the Daiwa the London Stock Exchange Group (LSEG) US and Europe is a Institute of Research (DIR) to develop the for the MSE’s restructure and development. Myanmar Stock Exchange. Originally In 2010 the frontier had been the world’s radical idea scheduled to open in 2015, central bank fastest growing exchange, and the proposed officials have confirmed that its opening triple listing of state-owned Erdenes Tavan “ would be pushed to later this year following Tolgoi (ETT) on the MSE, HKEx and the passage of Myanmar’s Securities Law. London Stock Exchange (LSE) kept it in DIR and Japan Exchanges Group (JPX) are international focus. MSE sought a a natural step for the frontier exchange. The providing technical assistance on market partnership to meet international investor fundamentals were already there as the MSE infrastructure, rule implementation, and standards. had been operating since the early 1990s, says information technology systems needed for Its relationship with the LSE would allow it Gibson Dunn & Crutcher counsel Myles trading, clearing and settlement. They will to tap the established exchange’s expertise on Hankin. Despite its relatively small market also host seminars on finance and capital infrastructure and regulatory matters. The capitalisation, the MSE had a track record, markets. LSEG benefitted too, bolstering its listed companies, and active trading, even if This partnership follows the Korea competitive edge over Asian exchanges in turnover wasn’t necessarily massive. Exchange’s (KRX) work in developing the www.iflr.com IFLR/September 2013 33 COVER STORY
China Exchanges Services Company Exchange cooperation throughout the Asia- Pacific has taken many forms including partnerships, MoUs, links, and strategic agreements. New alternative routes, however, are now being explored. For example, in 2012 the Hong Kong, Linkages are a Shanghai and Shenzhen bourses established a joint venture known as the China Exchanges means to an ends, Services Company (CESC). CESC is meant to develop index-linked and other equity and the aim is to derivatives, cross-border indices for products traded on the three markets, and an industry make access easier classification system for listed companies. In “ July 2013, it introduced futures linked to its and cheaper CES China 120 Index. Nick Ronalds, Asifma When acquisition isn’t an option While partnerships may facilitate cross- border trading, a lack of competition has led to higher prices. Asifma’s Ronalds notes that Asia’s relatively high trading costs are a problem. “We’ve started looking at costs in CSX and LSX, and the corresponding approach. “It fits better for the market’s the region and at Asian exchanges specifically, regulatory framework. Both KRX and JPX current stage of development,” he said. and have found that some are higher by are developing the infrastructure of emerging DFDL’s William Greenlee emphasises that orders of magnitude than those of the US, exchanges – particularly in Southeast Asia – the timing of the stock market’s establishment Europe or Japan,” says Ronalds. to showcase their know-how and soft power is very important for investors, as they need The mentality across the Asia-Pacific that in the region. an exit strategy. “It’s not just a badge of every jurisdiction must have an exchange is honour,” he says. “It’s a very important part of part of the issue. SGX’s 2011 bid for the OTC alternatives any commercial business environment.” Australia Securities Exchange (ASX), for While the DIR worked with Myanmar to example, was rejected due to national interest create the Myanmar Securities Exchange Multiple partners concerns – a decision Australia’s then- Centre (MSEC) in 1996, only two Sources warn that JPX’s suggested listing rules treasurer described as a “no brainer”. companies are listed on the platform. Instead, for the Myanmar exchange could include At this point in time, Asifma’s Austen says, some Myanmar corporates trade shares on an stringent standards, such as a requirement for Asian jurisdictions operate along the lines of a over-the-counter (OTC) and self-regulated candidates to demonstrate two years of ‘national airline’ mentality. “Every basis. profitability. It’s feared that this would jurisdiction must have an exchange,” he says. Some query the need to bring in advanced preclude the listing of most OTC companies “It’s a point of pride.” But it’s a view that no IT systems, let alone development partners, and SMEs, as they would require significant longer holds sway in the US or Europe, where to improve the country’s capital markets. pre-deal restructuring. exchanges are considered trading venues that “The ‘build it and they will come’ approach is But lawyers note that companies going public bring investors together at the lowest cost hardly ideal,” says one. “Organic growth will – regardless of jurisdiction – undertake possible, and allow issuers to raise capital in be better in the long-term.” Although sources rigorous preparation, to meet regulatory the most efficient manner. agree that the OTC system needs requirements. For Asia, exchange competition to the level improvements, they feel that it can be Myanmar’s exchange is scheduled to open seen in the US and Europe is a radical idea. adapted to the financing needs of Myanmar’s by the end of this year and more advisors may But greater competition may prompt small to medium-sized enterprises (SMEs). informally participate. While JPX has signed innovation. “There is less competition among “Honestly, people here don’t understand a MoU with the Myanmar government, exchanges than in Europe and the US,” says what a stock is, much less how to trade one,” Greenlee says this doesn’t mean that it will be Ronalds. “As a result, they’re not driven by the says Jeremy Rathjen, vice president of the only group advising officials on the same dynamic that has been driving research at Myanmar research and consulting creation of the stock exchange. innovation and cost efficiencies in Europe firm Thura Swiss. There isn’t that level of In Laos, for example, KRX was highly and the US to the benefit of investors.” financial education in Myanmar, he explains, influential in the LSX’s development, and had He cites ICE’s acquisition of NYSE as an and so installing the world’s most an equity stake in the exchange. But SET also example. This will introduce a new model, technologically advanced system feels like the appeared to maintain close, albeit unofficial new ideas, new technologies, and will wrong fit. ties, while other international organisations transform the global exchange market. But in As an alternative to a full-fledged exchange, provided capacity building. Given the Asia, the potential for transformative Thura Swiss has developed an OTC platform tremendous international interest in acquisitions is limited because of the ‘national on which companies such as First Myanmar Myanmar, it seems likely that others will offer airline’ mentality. “That does limit some Investment can trade. Rathjen says that their input. paths on the evolutionary road for Asian whether a company uses this or another exchanges,” says Ronalds. platform, the bottom-up approach is the right
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