Enhancing Surveillance and Supervision of Capital Market

Proactive and robust surveillance and supervisory function and capabilities are important to ensure proper conduct and practices by market participants while maintaining trust in the capital market. Following the identified emerging risks and concerns in 2021, the SC carried out regulatory activities and initiatives aimed towards strengthening and broadening its supervisory and surveillance capabilities.

Fostering Resilience of Markets, Infrastructures and Institutions through Ongoing Monitoring and Supervision

Supervision and surveillance of institutions and markets

Oversight on Bursa Malaysia
Technology is central to efforts in promoting a fair, orderly, and transparent operation of market infrastructure. As IT infrastructure and systems become increasingly automated, interconnected and complex over time, the robustness and resilience of market technology, associated systems and processes are critical. As the only authorised integrated exchange in Malaysia, Bursa Malaysia is expected to offer the public a trading platform that is reliable, efficient, and transparent.
For information on the Regulatory Assessment on Bursa Malaysia, please refer to Figure 3.
Figure 3: Regulatory Assessment on Bursa Malaysia
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Bursa Malaysia as a one-stop centre for the ACE Market
Following the announcement in 2020 on the migration of the entire ACE market framework, including registration of prospectuses to Bursa Malaysia, the relevant rules and operational framework were put in place.
Bursa Malaysia will assume the role as a one-stop centre for the ACE market, effective 1 January 2022.
Oversight on recognised market operators
Given that recognised markets are non-intermediated markets that onboard investor-clients directly, the SC’s role is to supervise the recognised market operator’s (RMO) compliance with among others, the Guidelines on Recognized Markets (RMO Guidelines), Guidelines on Prevention of Money laundering and Terrorism Financing for Capital Market Intermediaries and Guidelines on Implementation of Targeted Financial Sanctions Relating to Proliferation Financing for Capital Market Intermediaries (TFS-PS Guidelines). In addition, RMOs are also expected to monitor and mitigate cyber security cyber security and IT infrastructure risks in compliance with the Guidelines on Management of Cyber Risks (Cyber Risk Guidelines).

For information on the Thematic Regulatory Assessment on Digital Asset Exchanges, please refer to Figure 4.
Figure 4 - Thematic Regulatory Assessment on Digital Asset Exchanges
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Ensuring Fair And Orderly Trading Through Proactive Surveillance

The SC continued to undertake proactive surveillance to ensure fair and orderly trading in the capital market. Amid market volatility and active retail participation, the SC heightened its monitoring of market activities to ensure timely detection and escalation of trading misconduct as well as identification of trends, and emerging risks. To this end, various thematic assessments were carried out to facilitate the SC’s overall market risk management function.

As part of the SC’s oversight over Bursa Malaysia as the frontline regulator, engagements were conducted with the stock exchange to ensure that swift preemptive measures were undertaken to curb trading irregularities at an early stage. Such pre-emptive measures included engagement sessions by Bursa Malaysia with capital market intermediaries to share concerns and discuss potential interventions.

Monitoring of regulated short selling activities

On 4 January 2021, regulated short selling (RSS) activities resumed after being temporarily suspended for nine months since March 2020. Upon resumption of trading, renewed risk management activities resulted in fairly active RSS trades before moderating to an average of about 1% of the total market value traded throughout 2021. In addition, developments surrounding the GameStop short squeeze incident by retailers in the US gave rise to concerns over similar risks associated with domestic short-selling activities. However, such risks did not materialise in the domestic market given its different environment and regulatory framework including prescribed limits on short selling positions, among others.

Notwithstanding, the SC closely monitored RSS activities to ensure that transactions were carried out in a fair and orderly manner, and that emerging risks were effectively managed. Overall, RSS activities were well governed with enhanced and existing control measures in place to ensure market stability and mitigate against risks of excessive net-short positions. Such controls include tighter aggregate net-short position limits, trading tick rules, and daily short selling volume limits.

Surveillance of corporate activities
Proactive surveillance on disclosures and corporate activities of listed companies was carried out to detect potential breaches of securities laws or non-compliances with approved accounting standards by leveraging surveillance tools and technology, and conducting thematic reviews to identify risk areas.

Based on the risk areas identified in 2021, surveillance activities and reviews were carried out on the corporate practices of listed companies. In addition, engagements were undertaken with directors, statutory auditors, and other stakeholders involved in 25 listed companies.

When the review and assessment of corporate practices of listed companies revealed potential breaches of the securities laws, such matters would be referred for further investigation and/or enforcement action. In instances where potential irregularities noted were beyond the remit of the SC, referrals would be made to other authorities for their necessary action.
Misleading disclosures
In 2021, potential wrongdoing detected by the SC included possible misleading disclosures made by listed companies, which may have induced trading activities or influenced the market price of securities. Given the increase in the number of announcements into COVID-19 or healthcare-related ventures, the SC monitored and assessed such disclosures to ensure they do not take advantage of the current pandemic by making any false or misleading statements that may influence investors’ investment decisions.
Non-compliance with Financial Reporting Standards
Among the breaches noted in 2021 was the non-compliance with the approved accounting standards in relation to the accounting treatment of investments in wholesale funds.

The SC observed that certain listed companies managed their cash surplus by investing in wholesale funds and there were instances where the wholesale funds appeared to cater primarily to the listed company’s specific cash management requirements. Some of these wholesale funds held investment portfolios that consist mainly or wholly of the financial instruments of the listed company and its related companies. This may result in the listed company having effective control over the wholesale funds. If such control exists, the accounting treatment for the listed company’s investments in the wholesale funds should be assessed and reflected accordingly.

In addition, the SC also noted an instance of non-compliance with approved accounting standards in relation to the failure to reclassify certain perpetual sukuk from equity instruments to financial liability when the listed company no longer has an unconditional right to avoid the redemption of the perpetual sukuk.
Other areas of corporate transgressions
Other areas of corporate transgressions pursued in 2021 include:

Fraud in connection with acquisitions entered into at inflated prices;
Fraud in connection with the issuance of securities pursuant to employee share option scheme;
Wrongful loss via misappropriation of loans drawndowns from credit facilities;
Wrongful loss via misappropriation of proceeds from fundraising exercises;
Accounting fraud involving fictitious transactions booked in the financial statements to inflate revenues and profits; and
Non-compliance with approved accounting standards in relation to disclosure of significant-related party transactions.
Surveillance on corporate bond and sukuk markets
As part of the SC’s continuous supervisory activities on the corporate bond and sukuk market, corporate bond issuers from identified business sectors that were impacted due to the COVID-19 pandemic were closely monitored. These sectors included, among others, property, infrastructure, and utilities as well as oil and gas. Several corporate bond issuers had requested investors’ indulgence for exemptions in either payment of coupon, profit or principal, or extension of time to meet agreed-upon financial ratios as well as other forms of refinancing. These corporate bond issuers, however, make up a very small portion of the corporate bond and sukuk market.

The corporate bond and sukuk market had one issuer default (in February 2021) amounting to RM70 million or 0.0009% of total outstanding corporate bonds and sukuk. Ten rating downgrades were also observed in 2021, compared to six in 2020. The ten rating downgrades were from the infrastructure and utilities sector (3), property sector (2), financial sector (2) and consumer receivables as well as trading and services sector (3). As for the rating outlook, there were 10 downward revisions in the corporate bond outlook in 2021 compared to 16 in 2020. Of the 10 revisions, one issuer was revised from positive to a stable outlook, and nine issuers were revised from stable to negative outlook.

Enhancing off-site monitoring of market intermediaries

Supervision Of Capital Market Intermediaries
To complement its desktop online assessments, frequent engagements on intermediaries’ risk profiles were held with the senior management of the intermediaries.

The SC also intensified data collection from intermediaries to proactively monitor and assess the risks stemming from the pandemic. Additional data and information were assessed at shorter intervals with more granularity to enable the SC to develop key supervisory indicators to facilitate the analysis and monitoring of emerging risks. In addition, stress tests were conducted more frequently to assess the financial resilience of intermediaries as well as tracking funds’ liquidity and redemptions.

In addition, the SC enhanced its data collection platform and developed new analysis tools. These improved efficiency in the collection, extraction and exploration of supervisory data. A number of thematic reviews were conducted as part of the supervisory activities.
Thematic review on bond trustees
An offsite thematic review was conducted on identified registered bond trustees to assess key areas of the bond trustees’ operations, pandemic response plan as well as the duties and responsibilities of bond trustees vis-à-vis its operational department and compliance with the Guidelines on the Registration and Conduct of Capital Market Services Providers (CMSP Guidelines).

Based on the thematic exercise undertaken, supervisory letters were issued to the relevant bond trustees on the SC’s observations and findings, including lapses noted and expected remedial actions to be undertaken.

A summary of the observations is detailed in Figure 5 - Thematic Review on Bond Trustees: Areas of Findings and Observations.

Figure 5 - Thematic Review on Bond Trustees: Areas of Findings and Observations
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Thematic Review on SRI Practices
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Outreach Programme on Anti-Money Laundering/Counter Financing of Terrorism
The SC held a one-day seminar to share with the industry the outcomes and recommendations of the National Risk Assessment on Money Laundering and Terrorism Financing (ML/TF) Risk, prepared by the National Coordination Committee to the Counter Money Laundering Working Group. At the seminar, the sectoral risk assessment rating methodology was also discussed to support the industry in designing effective measures to manage their ML/TF risks, as well as the corresponding mitigating AML/CFT controls. The seminar would further enhance the industry’s understanding of the risk-based approach for AML/CFT following a compliance workshop on AML/CFT in 2020.
Guidance to market intermediaries
The SC continued to maintain close communication with market intermediaries and provided guidance through the issuance of Guidance Notes, circulars and communications to the industry. Among them were:
Guidance Note on Controls by Fund Management Companies in Managing Material Non-Public Information.
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Guidance Note on Practices by Fund Management Companies in respect of Wholesale Funds.
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Guidance Note on Oversight of Licensed Representatives by Stockbroking Companies.
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GUIDANCE NOTE ON OVERSIGHT OF LICENSED REPRESENTATIVES BY STOCKBROKING COMPANIES
Practice Note on Controls for Higher Daily Online Settlement.
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Article on Upholding Corporate Anti-Bribery and Corruption Measures in the Capital Market issued in the SC publication, The Reporter.
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Sharing of observations and good practices by capital market intermediaries with the corporate liability provision.
Communication to intermediaries on the need in ensuring customers information is kept updated.
Circular to holders of capital markets service license carrying on the business of dealing in securities on the treatment of clients’ monies.
These Guidance Notes and communications outline best practices, clarifications, and areas where intermediaries should pay special attention or heighten their monitoring.
New and Revised Guidelines
To ensure that the SC’s regulatory framework remain relevant, clear and updated, new guidelines were issued and revisions were made to relevant guidelines to include additional provisions to address various emerging concerns.
Guidelines
Guidelines on Prevention of Money Laundering and Terrorism Financing for Reporting Institutions in the Capital Market (Revised: 26 April 2021)
Guidelines on Market Conduct and Business Practices for Stockbroking Companies and Licensed Representatives (Revised: 20 May 2021)
Guidelines on Compliance Function for Fund Management Companies (Revised: 5 July 2021 and 21 December 2021)
Guidelines on Corporate Governance for Capital Market Intermediaries (Issued: 31 December 2021)
Guidelines on Conduct for Capital Market Intermediaries (Issued: 31 December 2021)
Guidelines on Conduct for Capital Market Intermediaries (Issued: 31 December 2021)