Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 17, 2019 - June 23, 2019

SINCE its demutualisation in 2004/05, Bursa Malaysia Bhd has been operating as a profit-driven entity whose revenue is dominated by trading activities while still acting as the front-line market regulator for publicly listed companies.

It is noteworthy that the Securities Commission Malaysia (SC) has been looking into resolving the conflicting priorities of Bursa Malaysia, which operates the Malaysian stock exchange.

In fact, SC chairman Datuk Syed Zaid Albar told The Edge in March that it was in talks with Bursa Malaysia and that the two regulators “are discussing options”.

Bursa Malaysia CEO Datuk Muhamad Umar Swift does not shy away from answering the big question. 

“Well, firstly, it has been our practice to be wary of any conflicts. That’s our first step — recognising the potential conflict of interest. We are fully mindful of that,” he says. “We have always kept an eye on our governance structure, which aims to separate the profit-making portion from the regulatory role through careful composition of committees.” 

He explains that Bursa Malaysia’s governance structure is made up of separate regulatory committees in four areas: listing, regulatory and conflicts, market participants, and appeals.

Each committee is chaired by a public interest director or independent non-executive director. Members comprise different combinations of independent non-executive directors, independent directors or public interest directors.

“These directors are all suitably experienced and hold relevant qualifications. There is a careful composition and separation of committees and areas of governance,” says Umar.

He stresses that Bursa Malaysia is on the same page as the SC in seeking improvements in developing the regulatory space, and both remain in close consultation.

What can we learn from other countries where the stock market regulator is also a profit-driven entity?

Globally, there are various approaches. In 2017, the Singapore Exchange transferred its regulatory unit to a new subsidiary to handle the exchange’s regulatory functions and address potential conflicts. Other markets that have adopted a similar regulatory subsidiary (RegSub) model are Japan Exchange and Brasil Bolsa Balcao.

Meanwhile, the Australian Securities Exchange (ASX), Hong Kong Exchanges and Clearing Ltd (HKEX) and New York Stock Exchange (NYSE) have adopted the oversight committee model, which comprises mainly independent directors overseeing regulation and conflicts.

After the demutualisation of the London Stock Exchange (LSE), its regulatory functions for listing were transferred out in 2000 to the UK Listing Authority, a division of the country’s Financial Conduct Authority. However, the LSE remains responsible for monitoring trading for compliance.

Some exchanges, such as the ASX and NYSE, had initially adopted a RegSub model but eventually reverted to a non-RegSub model some years later, Umar points out. 

“There is no one-size-fits-all approach. Each approach has its own merits and limitations, and must be carefully considered against the circumstances and local context of the market and exchange. We have to find the right fit for our own market,” he says.

Besides, it is important to ensure that the costs of adopting any approach must not outweigh the benefits from managing the conflicts.

“We are learning from these various approaches to help shape a solution that works. There must be considerations for our particular needs and aspirations of both the market as well as the nation’s overall economic progress,” says Umar. 

“To us, the real question is not so much if regulations are managed by a subsidiary or by any other model, but how regulations are designed and enforced. Regulations can serve as a positive force in the market if they are formed in a holistic and far-sighted manner.”

According to Umar, there are a number of guiding principles for developing an appropriate solution. 

First, the structure should promote a good balance between financial stability, investor protection, market development and vibrancy objectives.

Secondly, the regulator must be equipped with the necessary powers, policy tools and full resources to respond swiftly to the evolving needs of the market — thus ensuring competitiveness and maintaining a fair and orderly market.

The structure also cannot affect the ability of the exchange to discharge its legal mandates or statutory functions as a market operator and regulator.

Finally, regulations must provide clarity, minimise the occurrences of overly broad or subjective interpretation, and give consideration to market development objectives.

“It is a complex task to design a solution to this issue. On the one hand, we need to solve the perceived and potential conflict of interest. On the other hand, we need to protect and grow the concrete economic benefits that a capital market attracts and drives in the broader national economy,” Umar explains.
 

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