Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 18, 2019 - March 24, 2019

FRESH from a leadership change last November, the Securities Commission Malaysia (SC) is seeking to resolve the conflicting priorities of Bursa Malaysia Bhd, operator of the Malaysian stock exchange.

In a nutshell, Bursa Malaysia has been wearing multiple hats since its demutualisation and listing in 2005.

On one hand, it operates the stock exchange as a commercially driven, public-listed entity. It is also the front-line market regulator policing 915 public-listed companies and market intermediaries.

In theory, the two mandates clash and may someday put Bursa Malaysia in a situation of conflicting interests.

“Yes, we do see it as an issue that we need to work on,” SC chairman Datuk Syed Zaid Albar tells The Edge. “The SC has engaged in talks with Bursa and we are discussing options.”

Commercially, Bursa Malaysia receives revenue and profits from its stock market operations. The bulk of its operating revenue is from securities and derivatives trading as well as listing and issuer services.

In addition to running an integrated, multi-asset class exchange, it also provides post-trade services, technology infrastructure and information services to market participants, according to its 2018 annual report.

As at Dec 31, 2018, there were 783 public-listed companies on the Main Market, 119 on the ACE Market and 13 on the Leading Entrepreneur Accelerator Platform (LEAP), aimed at small and medium enterprises.

Bursa Malaysia recorded an operating revenue of RM523.3 million in the financial year ended Dec 31, 2018 (FY2018), which translates into a profit after tax and minority interest of RM224 million.

However, Bursa Malaysia is also effectively tasked with policing the same public-listed companies and market intermediaries that are a source of its income.

It is also worth noting that while regulators are mandated to protect investors and uphold public interest, a disclosure-based regime (as opposed to merit-based regulation) requires investors to take responsibility for their investment decisions based on information provided by the listed companies. One of the issues arising from this is the quality of the disclosure.

That said, this potential clash between commercial interests and regulatory functions is a long-running concern when it comes to demutualised stock exchanges worldwide.

That is how the conversation with Bursa Malaysia on the matter started, says Syed Zaid. “Global regulatory trends show that many demutualised exchanges have established separate regulatory subsidiaries to carry out their regulatory functions to manage potential and perceived conflicts. Based on this observation, discussions with Bursa were initiated.”

While the logical solution may be the removal of the regulatory function from Bursa Malaysia, it is worth noting that some exchanges have not gone down that road when trying to resolve the conflict.

In 2016, the Singapore Exchange (SGX) and Hong Kong Stock Exchange (HKEX) announced contrasting plans to address the issue. The SGX eventually set up a separate entity called Singapore Exchange Regulation Pte Ltd to assume its regulatory powers in 2017. Meanwhile, HKEX proposed to remove its CEO from the decision-making process in listings and allow a local securities watchdog to wield greater influence. However, HKEX later dialled back on the proposals.

A market observer notes that to preserve their status as financial hubs, both Hong Kong and Singapore are mindful of the need to ensure a high level of trust and integrity among their public-listed companies.

“In Singapore, for example, you see the authorities going after those who break the rules with the full force of the law,” he says, pointing to the ongoing stock market manipulation trial in which Malaysians John Soh Chee Wen and Quah Su-Ling have been charged with 189 and 178 charges respectively, mostly relating to the giving of instructions with respect to several trading accounts used to manipulate shares in Asiasons Capital, Blumont Group and LionGold Corp.

As for what lies ahead for Bursa Malaysia’s own conflicting roles, Syed Zaid declines to comment on the options being discussed, given the exchange’s status as a listed entity. “Soon, hopefully, we will be able to make a decision and we will announce it.”

 

 

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