IT HAS been two years, but the Asean Trading Link (ATL) appears to be creeping along at a snail’s pace. There are still only three bourses on the ATL — Bursa Malaysia, the Singapore Exchange (SGX) and the Stock Exchange of Thailand (SET). Bursa and SGX were the original members, while SET came on board a month later, in October 2012.
The three markets provide brokers with a single point of entry — access to over 2,300 listed companies with a market capitalisation of US$1.4 trillion (RM4.7 trillion), or about 70% of the total market capitalisation of Asean.
This was supposed to have been followed by the Philippines and Indonesia in 2013 and Vietnam’s two bourses — the Hanoi Stock Exchange and Ho Chi Minh Stock Exchange — in 2014, but so far all of them have delayed their plans and adopted a wait-and-see attitude.
In the case of the Philippine Stock Exchange (PSE), it said its local brokerage industry and investing public hadn’t been as supportive of entering the arrangement as initially expected and that it would join at a future date. Also, it would like to upgrade its trading system first to be on a par with the rest.
In March, its Securities and Exchange Commission (SEC) chairman Teresa Herbosa came out to say that the SEC was looking to become a full member of the International Organisation of Securities Commissions (IOSCO), so it would be able to sign the agreements needed to join the initiatives under the ATL and that the PSE expects to be a part of the trading link next year.
A check with the IOSCO website reveals that it was successful and that the Philippine SEC is now an ordinary member. So, in the case of the Philippines, it looks like the ATL is still on the cards.
Indonesia, on the other hand, is dragging its feet. It has made no commitment whatsoever as to when it will join or if it ever intends to, as it seems to believe its domestic potential will outstrip that of the rest of Asean. Indonesia Stock Exchange (IDX) director Ito Warsito came out to say that for the time being, it would focus on enhancing domestic competitiveness in preparation to enter the integrated market.
As for Vietnam, though it initially appeared to be the most excited about the prospects (which is not surprising as it could use more foreign participation), there seems to have been little news since. The latest on the Asean Exchanges website on Vietnam was an update in December 2012 about an information technology services agreement between Ho Chi Minh Stock Exchange and the Korea Exchange for the design, procurement and installation of a complete IT solution.
The new system was expected to bring the Vietnamese stock exchanges, which include the Hanoi Stock Exchange, closer to international practices and standards. The system was expected to go live in 2015.
If all the stock exchanges were to come on board as originally planned, it would offer Asean Exchanges critical mass. Singapore has the largest stock exchange in Asean with a market cap of US$793.41 billion as at September. Second is Malaysia, with a market cap of US$517.61 billion.
This is followed by Thailand with US$439.51 billion, Indonesia with US$420 billion and the Philippines with US$260 billion. The market caps of the two Vietnamese stock exchanges are still negligible, but they are thought to have tremendous growth potential.
The seven Asean exchanges have a combined market cap of some US$2.9 trillion and more than 3,600 listed companies.
Malaysia has been one of the prime movers of the ATL but domestically, it has not really succeeded in increasing intra-Asean retail trade volumes. According to Bursa, intra-Asean retail trade grew 0.55% in 2012, 0.45% in 2013 and 0.49% in 2014. But it hastens to add that while the numbers are small, it is confident they will pick up, as Asean’s collective potential is larger than the sum of its parts.
“One pertinent point that we need to acknowledge is that the evaluation on the intra-Asean participation should not be based on the Asean Trading Link alone but should take into consideration all the other Asean initiatives that are being undertaken concurrently with the Asean Trading Link,” says Bursa.
A good example, it adds, is the Asean broker initiatives to promote Asean within Asean. “This has picked up in 2014 and will gain momentum in 2015.”
But why the poor showing? Surely, the ATL should have stimulated more retail trade than this? Why don’t the brokers seem to be buying in?
According to a former regulator, the technology used may not be suitable for the purpose. “The economics of it was unviable from the beginning. You need to have a cheap Android solution available for the brokers, and you don’t. What you have is an expensive solution that the brokers don’t want.”
He was referring to Bursa’s choice of US-based SunGard Data Systems Inc as its technology provider, which meant that it would be relatively expensive for the brokers to get on board.
One broker whose company decided not to be a part of the ATL puts it like this, “SunGard would characterise itself as the Ferrari of the industry. But do we need a Ferrari here? The ATL was not meant for institutional traders where latency [speed] is an issue. It’s for your moms and pops who do not care if there is a two-second delay in the execution of their trades. All they need is stable, cheap and consistent care to reach their destination.”
He says most of the big boys in Malaysia have two system vendors — one for retail trades and another for foreign and institutional trades. The more expensive systems, such as SunGard or Fidessa, are for institutional customers. As for the local retailers, they opt for a cheaper local system, such as Excel Force MSC Bhd, N2N or Solutions Lab.
In fact, when Bursa discontinued its broker front-end system in 2012, most of the brokers opted for either Excel Force or N2N for their retail execution system.
“Before they decided on the vendor, they should have asked themselves who it was for,” the broker points out.
But these are not the only issues dogging the success of the ATL and the integration of the capital markets. A fundamental problem is the disparate legal systems. The laws in Singapore and Malaysia are based on the English common law, while Indonesian laws have a Dutch framework left by its former colonial masters. Thailand’s laws are a hybrid of French, German and English common law while Vietnam has a mix of Soviet law, common law, and European civil law with Asian influences. All this has to be somehow reconciled and harmonised before the markets can integrate properly.
And then there is the little matter of demand. Why aren’t the moms and pops biting, and why aren’t they interested in buying, say, Thai stocks? Because they don’t know enough about it. Basically, there is not enough research on regional counters, apart from those in Singapore. This needs to be tackled if we are to stimulate the appetite of retail traders for regional counters.
There have been three Invest Asean roadshows so far to educate retail investors on Asean opportunities. The inaugural Invest Asean 2013 roadshow was held in Singapore, Malaysia and Thailand to promote the exciting companies listed on the seven Asean exchanges to domestic and foreign investors. Later, it was held in Vietnam for regulators, brokers and fund managers, in a move to align market players towards integration with other Asean capital markets in the future.
Invest Asean 2013 profiled 11 listed companies, including the Asean Stars companies on Bursa, SGX and SET. CEOs and other business executives were present to engage directly with the investors. The roadshow also garnered strong support from the ATL’s participating brokers, who were present to educate investors on cross-border trading.
However, since then, there has been no news of the next Invest Asean, even though these countries have been promoting their own bourses. For instance, Invest Malaysia this year was held in Kuala Lumpur, Tokyo, Hong Kong, London and New York while SET went to Japan in July, with Nomura promoting 10 Thai listed companies.
Has the impetus for promoting Asean as a single tradable asset waned? Not really. Despite all this, there has been progress. For instance, earlier this year, Bursa introduced the Asean Post Trade services to its participating organisations for outbound (non-Bursa securities) trades executed on participating Asean stock exchanges that are currently on the ATL.
These post-trade services will facilitate the clearing and settlement of outbound trades executed on the respective participating stock exchanges, including the safekeeping of securities traded on participating exchanges of the ATL. Bursa is the single contact point for clearing, settlement and custody of foreign securities in relation to their outbound trades executed on any of the participating bourses.
Bursa said in its background briefing that among other things, the post-trade services enable funding efficiency as the custodian bank (the Asean Exchanges signed a custody agreement with Deutsche Bank AG on April 4) will be the window to execute foreign exchange, thus removing multiple banking channels.
Having one custodian bank would solve one of the problems of intra-Asean trading, that is, difficulties relating to foreign exchange. Before this, intra-regional trades often took place in US dollars due to a lack of rate standardisations between Southeast Asian currencies. Now, the link should be able to help investors close transactions at exact spot prices.
It will also enhance the efficiency of processing corporate action activity and have shorter lead times in receiving cross-border announcements on corporate action and other entitlements.
Bursa CEO Datuk Tajuddin Atan said during the launch of these services that they would allow for more efficient cross-border post-trade processes and lower the risks that exist in the current inter-broker arrangements. These services will be implemented progressively for all outbound trades for the remaining Asean stock exchanges, as and when they become part of the trading link.
But whether or not they decide to be part of the ATL, Asean is already being promoted as a single asset class. Just take a look at the Asean Exchanges website, which was launched in April 2011. The website, www.aseanexchanges.org, allows investors access to aggregated Asean market data and analytics, market performance of the seven Asean exchanges individually, broker research reports and FTSE/Asean Indices weekly reports.
It is built around the Asean Stars — the 180 Asean blue-chip stocks that represent the 30 most exciting companies in each Asean country — ranked by investability, in terms of market capitalisation and liquidity. The Asean Stars index was introduced in May when the FTSE introduced three new Asean indices to bring the region’s tradable opportunities to investors and enhance liquidity among the exchanges.
These were the FTSE All-Share Index, FTSE Asean Stars Index and FTSE Asean All-Share Ex-Developed Index. The new indices would include constituents from Vietnam’s two stock exchanges — the Ho Chi Minh Stock Exchange and Hanoi Stock Exchange — thereby expanding the universe of stocks on offer.
The index is free float-adjusted and rebalanced/updated on a quarterly basis.Although the FTSE Asean Stars Index will be compiled independently of the exchanges, it was introduced to act more as a barometer for regional strengths rather than as a guide for investment products.
Many feel that it is time for a new index, one that is more representative of the breadth of Asean companies. The FTSE Asean 40 is thought to be dominated by telecommunications companies and banks, which do not provide a good representation of the region.
PSE chief operating officer Roel Refran agrees. He points out in a news report that while the FTSE Asean 40 serves as a broad index for the bigger companies in the Asean market and caters for a specific set of investors who may have more stringent requirements, the new index provides better opportunities to look at the performance of companies in all Asean markets, including the smaller ones.
Although it may seem that the ATL has not reached its ambitious objectives, it has achieved much. The appointment of a custodian bank for clearing and settlement effectively addresses the foreign exchange woes, while the post-trade services ensure that the clearing and settlement process is essentially hassle-free. And the creation of indices and stock baskets based on the most liquid counters offers investors useful Asean indices from which to create new funds.
This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.
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