Ho Yew Mun Senior Vice President and Division Head, Securities Trading Singapore Exchange Limited 1 Singapore

Transcription

1 The Singapore Story Ho Yew Mun Senior Vice President and Division Head, Securities Trading Singapore Exchange Limited 1 Singapore The Singapore Exchange crossroad of the Eastern and Western investment communities is progressively adapting to the demands of a technologically driven world. Recently formed from the combination of the Stock Exchange of Singapore and the Singapore International Monetary Exchange, the Singapore Exchange is pursuing public ownership of the exchange, regulatory reform, and alliances with other exchanges around the globe. The Singapore Exchange has also launched a second board, Sesdaq, to foster development of newly formed small companies. T he Asian financial crisis of the late 1990s and the technological revolution have changed the trading environment in Asia, and the Singapore market is adapting to the new environment to ensure its survival. The new paradigm for the Singapore Exchange involves deregulation, integration, and technology and is leading to new global distribution strategies, new trading and access infrastructure, market liberalization, and new products. In this presentation, I will discuss the changing environment in Singapore and the opportunities that this changing environment provide for the Singapore Exchange. Financial Market Liberalization Singapore market liberalization includes demutualization, open access for dual membership, a regulatory framework similar to that of the U.S. SEC and U.K. Securities and Futures Authority (SFA), the use of Singapore dollars for fundraising, and the initial public offering (IPO) of the Singapore Exchange. In December 1999, the Stock Exchange of Singapore (SES) and the Singapore International Monetary Exchange (SIMEX) were merged into a new corporate entity the Singapore Exchange (SGX). 1 Mr. Ho is now managing director of equity capital markets in the Investment Banking Group of the Development Bank of Singapore. Editor s note: The joint Question and Answer session of Frederick J. Grede and Ho Yew Mun follows Mr. Ho s presentation. Consequently, a member can now be a futures member and a securities member with a single membership. The SGX believes that the benefits of convergence include savings through capital efficiency and allowing members to provide a complete, one-stop service to their clients in securities and derivative trades. At the time of the merger, restrictions on the number of securities trading memberships were lifted, and membership was opened to all market participants that met the membership requirements. This new structure offers an improved use of capital requirements and savings in terms of operational costs for entities that combine futures trading and securities trading operations. The capital requirements are now risk based, which allows brokerage firms to make a more efficient use of capital. Regulation of listed companies is also changing. Singapore is moving to what many call disclosurebased regulation for listed companies and toward creating an SEC/SFA-style regulator. Singapore is also writing new laws and regulations that will span the entire spectrum of securities traded in the market. Singapore recently liberalized securities commissions; now, the brokerage firms set the commission rates for their customers. The hope is that this liberalization of commissions will cause the use of online trading to expand. The government also decided to allow the use of Singapore dollars to fund local and overseas companies, which had been restricted in the past , Association for Investment Management and Research

2 The Singapore Story Finally, in September 2000, the SGX announced its plans to go public before the end of the year. 2 Changing Environment Those who have been following the Singapore market have seen many significant changes over the past several years. The government has had several study groups and committees reviewing financial market operations. Most of their recommendations have been accepted or are being considered for implementation. The SGX itself is responding to the changing environment by putting more emphasis on crossborder listings, alliances, and new product development and by improving its mutual offset system and cross-border trading linkages. Increased Cross-Border Listings. The SGX is trying to increase the number of listings by foreign companies. As Table 1 shows, currently about 80 entirely foreign-owned, foreign-operated, and foreign-located companies are listed on the SGX. Table 1. Foreign Enterprises Listed on the SGX, July 2000 Domicile of Enterprise Number Hong Kong 37 China 12 Southeast Asia 11 Japan 7 Taiwan 3 Australia 2 Europe 3 Alliances. The SGX has undertaken a number of global alliances and cooperative agreements to expand cross-border listing of companies and other products. In the fall of 2000, the SGX had established or was in the process of pursuing relationships with the following exchanges. CME (Chicago Mercantile Exchange)/GLOBEX: The SGX has an established and successful relationship with the CME/GLOBEX alliance. This alliance was the world s first arrangement to facilitate trading of the same product in different time zones. ASX (Australian Stock Exchange): The SGX is working on an alliance with the ASX to crosstrade securities on both markets. The venture is scheduled to launch sometime in June On November 23, 2000, after this presentation was given, the SGX became a publicly listed company. Amex: The SGX entered into a joint venture with Amex to trade Amex exchange-traded funds (ETFs) in the Singapore market. KSE (Korean Stock Exchange): The SGX is in discussions with the KSE to develop opportunities together. TSE (Taiwan Stock Exchange): The SGX and TSE are continuing to discuss regulatory issues and the cross-trading of securities. Some of these bilateral regulatory issues have a long timeline for completion and many aspects to be addressed. NSE (National Stock Exchange of India): The SGX has launched the S&P Nifty Index futures contract with the NSE. It is another partnership that the SGX is building on. The developments are expected to cover trading in futures contracts as well as trading in securities. New Products. The SGX is working on launching (or has launched in some cases) a number of new products: the ST Index (Straits Times Index) futures contract, the S&P Nifty Index futures contract, Amexlisted ETFs, and ASX-listed stocks. Technology The primary force that the SGX and other exchanges and markets in Asia are responding to is the unrelenting advancement in global technology. The advent of wireless technology, the popularity of online trading, and the proliferation of electronic communications networks are the imperatives forcing change. The SES, and now the SGX, had always been in the forefront of trying to adopt new technology. The SES had electronic or computer trading since 1989, and by about 1990, there was no longer a physical trading floor at the SES. In 1993, the Singapore Telecom IPO was the first to use the SES s electronic share application system. The electronic share application system is a convenient way to buy shares. A person can use an automatic teller machine card at the local ATM to apply for shares and confirm the number of shares bought and subsequently allocated. There is, therefore, no physical handling of applications nor scrips. The system has a fast turnaround and does not affect the overnight cash market. Another example of the SES s use of technology is the electronic payment of dividends in Singapore since The SGX is committed to being at the forefront of technology. In October 2000, the SGX published a white paper on the outlook for the exchange. The paper includes an outline of what the SGX is doing and what it expects to be doing one or two years down the road. The basic message is that the SGX will adopt the FIX 4.2 protocol, the documentation and testing of which will be available to the public by March , Association for Investment Management and Research 7

3 Evolution in Equity Markets This protocol allows the participant brokers to enter the SGX computer directly without using the SGX s current proprietary trading system. Development of New Markets The SGX continues to look for opportunities in new markets. As do other exchanges in the region, the SGX has a second board the Sesdaq (Singapore Securities Dealers Automated Quotation). A common misconception is that the second boards will be inferior to the main boards. The SGX, however, is committed to maintaining a high degree of regulatory integrity for the Sesdaq. The introduction of this new exchange was intended to complement and foster growth in the Singapore economy by promoting the listing of start-ups and by helping smaller companies that are unable or have difficulty finding and getting bank financing. The Sesdaq was established to engender the confidence of market participants, and this sense of confidence is paramount to the corporate governance of the exchange and the transparency of its reporting. The Sesdaq includes companies of all industries, ranging from manufacturing to hotel/restaurant services. Some of these companies have grown to be main-board companies, and some were mentioned in Forbes Global s list of the 300 best small companies in the world. 3 The SGX also revised its requirements to help high-quality emerging companies list on the main board. Most exchanges use a track record requirement for listing, but in 1999, the SGX adopted a market capitalization requirement of at least S$80 million based on the IPO s issue price. Metamorphosis of the Regulatory Regime The SGX has undergone a metamorphosis in its regulatory regime and has emerged with a disclosurebased regime. In 1999, the SGX proposed the adoption of the International Organization of Securities Commissions standards of prospectus disclosure and documentation. In doing so, the SGX recognized all internationally accepted accounting standards U.S. generally accepted accounting principles, U.K. GAAP, and International Accounting Standards GAAP. Many professionals trading in the Singapore markets are familiar with U.S., U.K., or European companies and are generally aware of the accounting standards that apply to them. Moreover, public information is now readily available and accessible. The SGX was one of the 3 Forbes Global, The 300 Best Small Companies (October 30, 2000). early users of the Internet to make information available to investors. In the early days, the SGX also adopted what the SEC now calls fair disclosure. All listed companies are required to their corporate news to the SGX on a secure network. This news is then posted on the SGX Web site. Thus, the financial community and the public have concurrent access to every announcement, every prospectus, and any other important financial news involving a Singapore-listed company. Consequently, no one dealing in the Singapore investment community should operate at a disadvantage. As a guiding principle, the SGX seeks growth in the marketplace without any compromise in quality. The goal is quality, integrity, and transparency. Challenges in the New Environment The SGX will face many challenges as a result of the new market environment. These challenges include retaining liquidity, educating investors and analysts, and continuing to get listed companies to make greater disclosure and be more transparent in what they are doing. As the market experiences greater intraday volatility, our market surveillance will likewise increase. Market participants in general, and retail investors in particular, need to understand risk and that they have to take responsibility for their investment decisions. The public still complains loudly about losing money in the stock market. The SGX is focusing on three main areas to meet these challenges: deregulation, competition, and education. To address deregulation, the SGX is adopting international standards of corporate governance and disclosure. To address competition, the SGX is encouraging contests that rate the best companies according to their standards of disclosure. To address investor education, the SGX is sponsoring seminars to create awareness about a wide range of issues, from how the market operates to new products on the exchange. For example, the SGX recently held successful seminars to educate market professionals about the life sciences and technology businesses. The SGX arranged for a series of wellinformed scientists and entrepreneurs, including one of the top life science analysts from the United Kingdom, to talk about investing in life science companies and the dangers in the valuation models being used for these companies. The SGX will continue in its efforts to help the Singapore market grow by helping the investment community to become better informed , Association for Investment Management and Research

4 The Singapore Story Conclusion The Asian financial crisis and the technological revolution have changed the trading environment in Asia, creating the need for structural change. The Singapore market needs to make this structural change to ensure survival; thus, the SGX is being reengineered in a number of ways (e.g., improving its trading engines, front end, clearing system, and so on) and has plans to introduce international standards. More challenges are sure to come as additional developments unfold, which is very exciting. The SGX intends to ride these waves of change and come out on top. 2001, Association for Investment Management and Research 9

5 Evolution in Equity Markets Question and Answer Session Frederick J. Grede Ho Yew Mun Question: How do you deal with the conflict between the need to have a transparent market and the need to preserve market confidentiality? Grede: The stock exchange discloses broker names, but the futures exchange is completely anonymous. This practice may be partly attributable to historical reasons, but markets, particularly electronic markets, have to be anonymous. The real issue is which type of investor you are trying to attract. Retail investors like to know what the institutional investors are doing so that they can follow in their footsteps. But the only way to attract activity from institutional investors is to provide anonymity. Ho: The trading in the market offers and orders has to be anonymous to engender confidence. Hence, the dealers know the counterparty only after the trade is done. We are beginning, however, to make available to market participants (other than brokers/dealers) and the end clients information on the extent of the depth in the market. Doing so will provide substantial information about market liquidity. Question: What steps have been taken to alleviate the perceived credit problems of broker/dealers? Grede: Different steps have been taken to address some of the credit issues including direct investor participation, where investors can deposit their funds directly with the exchange and bypass the broker. We probably have 5,000 or 6,000 direct investor participation relationships. Question: How does the cost of the regulatory burden on market participants in Asia compare with other areas of the world? Ho: We have reviewed and revised our trading and listing rules in response to and in consultation with the market. I don t think our rules are out of sync with international practice, and I am sure that our regulation costs are lower than in the United States. Grede: My basis for comparison is the United States. I can list a myriad of issues involving U.S. regulations with which I have some difficulty. Hong Kong, like most of the other Asian markets, is still locally focused; it is not focused on attracting business from outside its borders. For example, for a broker to open up an account with a retail customer, the broker has to have a face-to-face interview with that customer. That requirement makes no sense to me, because how are local brokers in particular going to be able to attract international business? The derivative business has many disclosure rules such as having to disclose the beneficial ownership of any position of more than 200 contracts. The hedge fund proprietary traders, institutional investors, and business in Hong Kong are discouraged because of some of these requirements. Question: Do you believe that your government fully understands the economic benefits of a highly sophisticated and transparent international exchange? Ho: Yes, because the changes that the Singapore market has experienced over the past two years have been initiated by our government. Grede: Yes, the government in Hong Kong has been particularly supportive of these major restructuring initiatives. Question: Which products were the most successful and which were the most disappointing relative to your original expectations? Ho: We expected the recent launch of the STI futures to do better than it did, but it has not sparked the interest of the retail sector of the market. A factor in its lack of acceptance may be poor understanding of the futures market. On the other hand, a recent success was the Taiwan equity index futures contract. Grede: Electronic trading has probably been the biggest accomplishment in Hong Kong over the past year. The Hong Kong Futures Exchange actually closed the trading floor and put everything on an electronic system. Worldwide floor-based trading system growth is flat to negative; electronic trading system growth is positive. Electronic trading also allows us to do a number of different things. We ve seen significant growth in our main product, the Hang Seng Index (HSI), as well as option trading on the HSI contract. Our HIBOR (Hong Kong Interbank Offered Rate) contract, which is a short-term money market instrument to which we added some strip functionality, allows you to extend the yield curve and has had some considerable success , Association for Investment Management and Research

6 In October 2000, we launched a minicontract on the HSI contract (on the size of the Hang Seng Index), and it has been doing about 10 percent of the total volume about 2,000 contracts a day. For a new contract, this is very encouraging. It is designed to attract the retail segment of the marketplace, and that s a trend that is occurring worldwide. It took us awhile to get the minicontract approved, but we persisted. I think that retail investors should have every possible tool available so that they can participate in the marketplace to the extent that the large institutions do. The launch of that contract was done in conjunction with a significant educational campaign on the use of futures and options. I think we re very clear: We don t want retail business unless participants understand the mechanics of trading futures and options. Question: To what extent is Shanghai a threat down the road? Grede: I don t think that Hong Kong and Shanghai are in competition. The Shanghai market will grow; the Chinese markets will grow. Shanghai s percentage of business coming out of China will continue to increase. But there is still a considerable way to go with the Chinese stock markets before they meet international standards. Many brokerage firms and investors will participate in and invest in those markets, but before they put significant amounts of capital at risk in them, they re going to have to be comfortable with the ways of doing business international standards of accounting, disclosure, regulation, and so on. The Chinese markets have a way to go before they will have the confidence of the international investing community. Question: Over the past years, numerous attempts at crossborder listings have been made in Europe and the United States. Recently, similar attempts have been made in Hong Kong and Singapore. (I call them unnatural listings whereby U.S. companies are brought to Hong Kong or Singapore with a huge furor and large press attention, and then no trades take place.) Is this one aspect of the cross-border business that is doomed to failure? Ho: For a successful cross-border listing in Singapore, the company has to do an IPO at the early stage. A secondary listing or a subsequent listing without an offer would not work to create interest and liquidity. Companies from China or Taiwan that have come to Singapore do enjoy sustained interest and liquidity because they were issued as IPOs with a concurrent listing/offering in Singapore. Grede: I think you will see crossborder listings migrate to most liquid markets, and they will increase. We trade seven Nasdaq stocks in Hong Kong, but they don t trade that actively. And we ve had a number of difficulties with the trades in Hong Kong dollars: They ve been very expensive for retail investors and have had different board lot sizes. I can t quickly say what the price of Intel is that trades on the Hong Kong Exchange, because it takes me half an hour to do the conversions to Valuation Fundamentals in Asia figure out what the relevant price is. On the other hand, the United States has a pretty active and growing after-hours market. Nasdaq is looking for international outlets in the exchange community for its stocks as competition to the afterhours ECN markets. So, I would continue to look for various types of worldwide cooperative arrangements throughout the U.S., European, and Asian time zones and then within the same region. There is an ADR (American Depositary Receipts) market that is pretty strong in the United States and a GDR (Global Depositary Receipts) market in Europe, so why isn t there something similar in Asia? Question: How would one value the HKEx s stock? Grede: It is hard to determine the value of the stock. Only three exchanges worldwide are publicly listed: the OM Stockholm Exchange, which is the Swedish exchange, HKEx, and ASX, which is the Australian Stock Exchange. The London Stock Exchange (LSE) is not really publicly traded. OM is not a comparable situation to the HKEx because it has a large technology business that provides trading systems not only to the brokerage community but also to the exchange community. ASX is not comparable because it has a 90 percent dividend payout policy. Thus, the HKEx is in new territory. That said, on a P/E basis, the HKEx trades at 20 times earnings compared with 56 for the OM, 26 for the LSE, and 23 for the ASX (data are as of October 2000). 2001, Association for Investment Management and Research 11