News: Improving transparency in unlisted and OTC markets

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 3, 2018 - December 09, 2018.
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Retail investors who trade unlisted securities, such as crowdfunding shares and over-the-counter (OTC) bonds and sukuk, can look forward to the measures outlined in the Securities Commission Malaysia’s (SC) blueprint on blockchain, which was announced on Nov 28.

The blueprint, titled the Capital Market Architecture Blueprint in a Decentralised World, is aimed at encouraging industry players in the unlisted market space to provide investors with greater access to information on these securities so they can make better investment decisions. For instance, those interested in buying or selling a particular OTC bond would want to know the last transacted price before making an investment decision.

But obtaining such information can be challenging as financial institutions only provide selling prices upon request. Retail investors are not able to determine what the best price is because recently transacted prices are not made public.

Those who trade crowdfunding shares on the secondary market face a similar situation. To get the last transacted price of a start-up’s shares, they have to approach the Companies Commission of Malaysia (CCM) for information. And they may only obtain general information such as the names of the registered shareholders.

During the SC’s technical briefing on the blueprint, the regulator said this information could be made available to investors in the future when market players — such as banks, equity crowdfunding (ECF) platform operators and custodians — adopt and implement the distributed ledger technology in accordance with the blueprint.

How does it work? Each market operator will maintain a ledger, where the operator, regulator and trustee have access to the same set of data and receive updates almost in real time. The information recorded on the distributed ledger will be available to key players. Some of this information, such as the last transacted prices, could be shared with retail investors in a more transparent manner, according to the SC.

The regulator says this sharing of information could lead to more trading activity in the unlisted and OTC markets, which could see the bid-ask spread of these securities narrowing. It says the technology could also help key players increase work efficiency and lower operating costs.

Take an ECF platform operator that helps start-ups with their fundraising campaigns. At the end of these campaigns, the operator will have a list of the funders and the number of shares they hold. Then, it will send this information to the custodian via email or fax for confirmation. The custodian will check the list and send it back to the operator. The custodian will then distribute the shares accordingly.

The SC says these processes can be eliminated with the distributed ledger technology as all of the key players, including the platform operators and custodians, will have access to the same set of information and subsequent updates. However, this will not be a fully decentralised ecosystem as the regulator will still have access to the information recorded on the distributed ledger so that it can monitor market activities.

The SC says this is no different from market players submitting reports on market activities to the regulator, only that it will be more efficient as the regulator will be able to receive market updates almost immediately. It adds that market participants who are willing to adopt the distributed ledger technology in accordance with the blueprint and share information with the SC will receive market information from the regulator.

Also, the SC can grant permission to those eligible to participate in the ecosystem and determine the kind of information the participants can have access to.

However, players in the unlisted markets — including banks and ECF platform operators — are not mandated to participate in the ecosystem yet. The blueprint only aims to show market players the benefits of implementing the technology and encouraging them to embrace it.

The SC says the blueprint was produced based on a careful study and real-life test case. It aims to show players in the financial industry the direction in which the SC is moving and that the goal of implementing blockchain technology is achievable. More information can be found on the regulator’s project website,