Will Exchange Alliances Work? to Compete with Bigger International Rivals, Asia’S Exchanges Are Working Together Through Partnerships and Networks

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.

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