Monitoring and Management of Risks - Maintaining Market Integrity & Protecting Investors

Monitoring and Management of Risks

Despite improvement in the global financial market conditions following good inoculation rates against COVID-19 and resumption of economic activities, threats such as the emergence of new COVID-19 variants continued to bring uncertainties to the global and domestic capital market.

As such, early detection of emerging risks and vulnerabilities is crucial to maintain systemic stability in the capital market. Against this backdrop, the SC continued to remain vigilant of the potential downside risks and appropriate measures were put in place to ensure a fair and orderly operation of the capital market at all times.

Mitigating Systemic Risks And Promoting Financial Stability

Enhanced Risk Governance Framework
In 2021, the SC-wide risk governance framework was enhanced as part of an overall initiative to enable a more integrated and predictive risk surveillance approach. The risk governance framework integrated the wider spectrum of risks such as technology, cyber and conduct risk at the SC’s Systemic Risk Oversight Committee (SROC) and Accounting, Market and Corporate Surveillance Committee (AMCS).
Intensified surveillance
Regular SROC engagements were held to deliberate concerns emanating from various segments of the capital market. Domestic equity and bond market, foreign fund flows and trade participation continued to be monitored closely for potential stress points. In addition, financial position of listed companies and economic stimulus packages introduced by the government to weather the impact of COVID-19 were among the focus areas for discussion.
Thematic assessments
The SC also conducted thematic assessments covering investors’ fund flows, position of firms vulnerable to credit and market risks, and government policy decisions such as budget announcements to ascertain the possible impact on the capital market. In 2021, the SC reviewed and enhanced its crisis indicators on potential emerging risks in the capital market. The enhanced crisis indicators provided a reference point for escalation to SROC when the identified indicators and triggers materialised and ensured prompt response to manage and prevent any issues of concern that might lead to a systemic crisis.
Joint regulatory discussions
In 2021, the SC conducted frequent regulatory discussions and information sharing sessions with other regulators such as BNM and Labuan Financial Services Authority (Labuan FSA) to identify systemic risk concerns within the financial and capital markets in Malaysia.
Monitoring of various components of the capital market
The SC continued its efforts to undertake an integrated approach to monitor, mitigate or manage potential systemic risk. Figure 1 highlights the findings from the following risk assessments on the various components of the capital market.
figure 1: Risk Assessments On Various Components Of The Capital Market
Equity Market and Infrastructure
Sufficient domestic liquidity to facilitate efficient investment activities.
Market-wide circuit breaker and dynamic and static price limits for equities were in place as part of the risk management mechanism to address excessive market volatility. In 2021, no circuit breaker was triggered.
Securities and Derivatives Clearing Guarantee Funds have been in place to manage settlement of trades when there was payment or delivery default.
Bond Market
Yield movements were in line with regional peers amid accommodative
monetary policy.
Corporate bond default rate remained low.
Listed Companies
Corporate earnings for 2021 improved compared to 2020, mainly attributed to continued demand for medical gloves and higher prices of crude palm oil, crude oil and palm kernel. However, based on quarter-on-quarter (q-o-q) performance, corporate earnings deteriorated in Q3 2021 due to business disruptions impacted by the movement control order (MCO).
Affected public-listed companies (PLCs) with unsatisfactory financial condition were granted temporary relief from being classified as a Practice Note 17 (PN17)/ Guidance Note 3 (GN3) company. As at 31 December 2021, a total of 21 PLCs that have triggered the PN17/GN3 Suspended Criteria between 17 April 2020 and 31 December 2021 benefitted from the 18-month relief period.
As PLCs adjust to the new normal, corporate earnings momentum is expected to pick up as the country paves its way to economic recovery.
Investment Flows
Domestic liquidity continued to be supported by local institutions and retail investors.
Share of foreign holding in the bond market was slightly above the 5-year average mainly due to relatively high yield differentials against many developed market bonds, making it attractive to the investors, aside from strong domestic recovery outlook.
Foreign equity holding fluctuated below its 5-year average amid net outflows from the equity market.
Investment Management
Fund managers had in place adequate liquidity risk management processes to manage redemptions in an orderly manner.
Stockbroking Intermediaries
Stockbrokers’ risk management controls were sufficiently robust to manage exposures during periods of high volatility including credit risks arising from margin financing.
The current risk-based capital adequacy position remained above the prescribed minimum financial requirement.

Article 1: Covid-19 Relief

Mitigating Systemic Risks And Promoting Financial Stability

Enhanced Risk Governance Framework

In 2021, the SC-wide risk governance framework was enhanced as part of an overall initiative to have an effective integrated and predictive risk surveillance to maintain regulatory agility.

The structured risk governance framework integrated the wider spectrum of risks such as technology, cyber and conduct risk at the SC’s Systemic Risk Oversight Committee (SROC) and Accounting, Market and Corporate Surveillance Committee (ACMS).

Intensified surveillance

The SC continued to intensify its surveillance of systemic risk to maintain market resilience and stability. Regular SROC engagements were held to deliberate concerns emanating from various segments across the capital market. Domestic equity and bond market, foreign fund flows and trade participation continued to be monitored closely for potential stress points.

In addition, measures and economic stimulus packages introduced by the government to weather the impact of COVID-19, market trading conduct and the financial position of listed companies were among the focus areas for discussion.

Thematic assessments

The SC also conducted thematic assessments covering investors’ fund flows, the position of firms, and policy decisions to ascertain the possible impact on the capital market. In 2021, the SC reviewed and enhanced its crisis indicators on potential emerging risks in the
capital market.

The enhanced crisis indicators provided a reference point for escalation to SROC when the identified indicators and triggers materialised and ensured prompt response to manage and prevent any issues of concern that might lead to a systemic crisis.

Joint regulatory discussions

In 2021, the SC conducted frequent joint regulatory discussions with other authorities such as Bank Negara Malaysia (BNM) and Labuan Financial Services Authority (Labuan FSA) to identify systemic risk concern areas within the financial and capital markets in Malaysia.

Monitoring of various components of the capital market

The SC continued its efforts to undertake a methodological and integrated approach to ensure any potential systemic risk was being monitored, mitigated, or managed. Figure 1 highlights the findings from the following risk assessments on the various components of the capital market.