“Issues Confronting the Domestic Securities Regulator in an
Era of Globalisation”
YBhg Datin Zarinah Anwar
Deputy Chief Executive, Securities Commission
International Conference on Governance & Regulation: Challenges & Prospects
6 March 2003
Hotel Istana, Kuala Lumpur
YBhg Dato’ Dr. Jamaludin Dato’ Mohd Jarjis, Second Finance Minister of Malaysia.
YBhg Dato’ Megat Najmuddin Khas, President of the Malaysian Institute of Corporate Governance.
YBhg Dato’ Azlan Hashim, Executive Chairman of the Kuala Lumpur Stock Exchange.
Mr Paul Chan, President of the Malaysian Association of the Institute of Chartered Secretaries and Administrators.
Tan Sri-Tan Sri, Dato’- Dato’, distinguished speakers and guests, ladies and gentlemen.
Good morning. It is an honour and pleasure to be with you here today, and I congratulate the Malaysian Institute of Corporate Governance (MICG) and the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA) for having organised this conference.
Ladies and Gentlemen,
The topic I have been asked to speak on today, “Issues confronting the domestic securities regulator in an era of globalisation”, is a very pertinent one and, given recent events, a very difficult one confronting securities market regulators the world over. Securities regulators such the Securities Commission (SC) no longer have the choice of confining ourselves to domestic issues. The rapid globalisation of markets, mainly augmented by technology that allows business to be done in real-time with anyone in the world from wherever you are, have, over the last ten years, led to an exponential increase in investments across the globe. For purposes of illustration, the United States (US) holdings of foreign securities reached almost $2 trillion by end 2001, up by more than 500% from 1991, while foreign holding of US securities was roughly $5 trillion, up 425% over the same period . The International Monetary Fund (IMF) has found that at least 20% of total equity issued is held by non-residents of the issuing economy – testament to the growth in international capital market activities.
In Malaysia, foreign shareholding in the Kuala Lumpur Stock Exchange (KLSE) shares account for 18.1% of total shareholding in 2002 . The impending liberalisation of the financial sector will allow for even greater access to our capital market. Global activity in our capital market will allow for a whole array of opportunities for growth of our companies and the economy as a whole. Investors will be able to diversify their investment portfolios to generate greater returns. The rewards are many, but with rewards come risks. We all stand at a time when the global market place is experiencing an unparalleled series of far-reaching events from the Asian crisis in 1997 to the tragic events of September 11, to Enron and WorldCom, the uncertain health of the US economy, and now the tense political and military developments that are unfolding.
We all recall how the events of September 11 shook markets across the globe. The main financial market response was a flight to quality as investors’ appetite for risks fell. All major stock markets experienced rapid, sharp price declines in the immediate aftermath of the event.
Malaysia’s reaction to global events show that we are very much a part of the global market. It is clear that investment decisions are highly influenced by global factors. Malaysian investors face the same uncertainties and vulnerabilities as investors in markets across the world. With the inevitable liberalisation of the sector, the market and its regulators need to be able to confront global issues more effectively and speedily. Part of the SC’s agenda therefore, is to prepare the market and position ourselves to meet the challenges globalisation will pose to us.
Ladies and Gentlemen,
Let me first set the scene with regard to the effect of globalisation on securities market regulation. In many ways, the domestic capital market is now subjected to ‘global’ regulation. I do not mean this in the sense of a global regulator. In my view, the source of regulation of the capital market will remain predominantly domestic. I do not see the viability of a single international regulator, at least not for the foreseeable future. But if you go to any capital market around the world, be it the most advanced or the emerging market, you will see a recurring theme in capital market regulation towards market integrity, risk management and most importantly, the protection of investor interests. These themes are globally accepted as the ‘raison d’etre’ of a securities market regulator.
This, in my opinion, provides a very strong foundation towards effective regulation of global markets through domestic vehicles. We are seeing a change in focus of national regulators towards international co-operation in the surveillance, enforcement and prudential regulation of market players. This has in turn driven the agenda and focus of international financial institutions to tackle ‘international’ issues whilst giving cognizance to ‘domestic’ limitations. The International Organisation of Securities Commissions (IOSCO), of which the SC is a member, encourages the adoption by national regulators of global benchmarks through education, assistance and advisory services to its members. Most importantly, IOSCO with its 174 member agencies from 101 jurisdictions has established a framework to enhance and improve information sharing between national regulators to effectively regulate cross-border and global activities . IOSCO and other organisations such as the Bank of International Settlement, the Joint Forum and the Financial Stability Forum have led initiatives to introduce best practice or international benchmarks in regulation to counter global vulnerabilities such as weaknesses in market foundations, uncertain growth prospects, difficulties in surveillance and enforcement of financial conglomerates and increased investor risk aversion. The IMF and the World Bank, together with other international organisations such as IOSCO are currently carrying out the Financial Sector Assessment Program (FSAP) which seeks to examine in detail the financial framework and operations of jurisdictions in order to identify weaknesses and vulnerabilities in national jurisdictions, particularly where it may give rise to risks in global systemic stability. The SC has been at the forefront of international standards setting initiatives, contributing our views and opinions, especially from the perspective of our market and other emerging markets generally.
Within the regulatory community, we have expanded our international ties and supported the international sharing of information, particularly in the areas of market transgressions. We have a total of 16 Memoranda of Understanding with counterparts from Asia, Australia, Europe, Latin America and Africa. In addition, we have assisted less developed markets to enhance their quality of regulation through educational initiatives such as the SC’s Emerging Markets Program, attachments and IOSCO-sponsored on-the-job training programs. We firmly believe that regional and international financial stability is a shared effort and that more advanced markets are under an obligation to ensure less developed or newly emerging markets are given full assistance and guidance towards achieving this.
At the same time that we are active in the international regulatory community, framing international standards and policies, we have been diligent and committed to ensure that domestically, our market “measures up”. This is crucial in ensuring continued investor interest as well as to develop our capital market to become a world class capital market. Adopting international benchmarks will ease the integration of the Malaysian capital market into the global market in the era of globalisation.
You may already be aware of some of the initiatives undertaken:
We have implemented a T+3 settlement cycle within a fully scripless trading environment.
The KLSE’s trading system was fully automated in 1992.
To better position our intermediaries for the challenges of globalisation, a process of consolidation of stockbroking companies was undertaken which has now resulted in the creation of 6 Universal Brokers which are able to provide a whole range of capital market services.
Our exchanges have also been consolidated and are in the process of demutualisation in order to obtain the flexibilities and enhance their competitive positioning vis a vis other Exchanges.
Integrity in the performance of our public listed companies has been strengthened through the PN4 requirements where affected listed companies are required to take expeditious steps to regularise their financial conditions within a stipulated time frame.
New and existing market segments, such as the derivatives, high growth and venture capital markets, the Islamic capital market and the corporate bond market are being actively developed to further deepen the capital market.
We are single minded in our mandate to undertake due and proper enforcement to ensure that investor protection is safeguarded at all times. Enforcement efforts have been stepped up and the momentum is expected to continue.
Ladies and Gentlemen,
With the landscape of globalisation and securities regulation sketched out, I am sure you will appreciate that the issues confronting the domestic securities regulator in this era of globalisation are many. But let me now turn to developments in the area of corporate governance, an area which is of specific interest to this forum.
Investor confidence & corporate governance
We all know that confidence is a critical factor to the growth and success of the capital market, and on a larger scale, critical to economic stability. Confidence in some capital markets has deteriorated, partly because of corporate governance transgressions that have been under global scrutiny. The high profile collapses of Enron and WorldCom shocked investors not only in the US, but the world over. Surely, investors ask, if it can happen in the US, why not anywhere else?
A pertinent question, and therefore the challenge is presented to the domestic regulator to reassure investors that such abuses of the system will not be allowed to become the norm. The most recent meeting of IOSCO’s Asia Pacific Regional Committee (APRC), which the SC chairs, agreed that each jurisdiction’s regulator must continue with effective supervision and enforcement, and ensure that the individual capital markets adopt and maintain high standards of corporate governance.
For the Malaysian capital market, the highest standards of corporate governance have always been our priority. Measures to strengthen corporate transparency and accountability commenced long before the Asian crisis. Setting the highest benchmarks ensures that problems of information asymmetry, a factor that greatly influences investment decisions, is reduced. A study has shown that the ‘enhanced information environment should broaden the shareholder base, as greater transparency increases the willingness of global investors to commit capital.’ .
Efforts towards achieving high standards of corporate governance began a long time ago. For example, our Listing Rules introduced requirements for independent directors on boards of public listed companies in 1987, and for the establishment of Audit Committees in 1993, much earlier than the US’ legislative requirements for an audit committee under the Sarbanes-Oxley Act, introduced after the Enron-WorldCom debacle. Also, in contrast to the US, the Malaysian financial reporting framework already mandates by law that directors must state whether the accounts of the company have been drawn up so as to give a true and fair view and whether they have complied with applicable approved accounting standards.
In the area of corporate accounting, the Financial Reporting Act 1997 established the Malaysian Accounting Standards Board, which has the authority to issue, approve and review accounting standards for Malaysia. The Code on Takeovers and Mergers had also been revamped, with the revised Code, requiring higher standards of disclosure and corporate behaviour from those involved in mergers and acquisitions, introduced in 1999, the same year that quarterly reporting was required.
Reform efforts in the area of corporate governance were given even more emphasis in the wake of the Asian crisis, with the formation of the High Level Finance Committee on Corporate Governance in 1998 and the subsequent release, in 1999, of the Finance Committee Report on Corporate Governance. This was followed by the release of the Malaysian Code on Corporate Governance in 2000. All listed companies are now required to disclose their level of compliance with the Code in their annual reports. It is worth mentioning that many of these measures are only now being considered in other markets, in the aftermath of Enron.
Supplemental efforts include the introduction of the Code of Ethics for Directors by the (then) Registrar of Companies, and of course, the role of institutions such as MICG and the Minority Shareholder Watchdog Group has been a positive influencing factor.
The Capital Market Masterplan builds on the momentum of the Finance Committee Report and further develops the corporate governance agenda in a number of key areas such as the promotion of shareholder activism, raising the standards of investor protection in related party transactions, and further enhancing the awareness and accountability of company directors, financial controllers and management, as well as strengthening the role of auditors of public listed companies.
Here, let me say that from our experience in engagements with international investors, more needs to be done to enhance awareness of the efforts we have implemented in terms of our regulatory framework. It is unfortunate that our market should be penalized as “not meeting the mark” because of this lack of awareness. This is an effort to be shared by all. We have achieved some success though, and I am happy to note that our efforts are increasingly being recognized by some of our strongest critics. CLSA’s 2002 Report on Corporate Governance gave Malaysia improved scores across all aspects of corporate governance including enforcement, political/regulatory environment, adoption of international accounting standards and corporate governance culture. McKinsey’s survey of 188 emerging markets companies – gave Malaysia the highest score for transparency among six emerging markets (others being South Korea, Taiwan, India, Mexico and Turkey) and second highest for Board oversight. ABN Amro in May 2002 mentioned that “Apart from Korea, Malaysia could be the best regulated and most transparent market in Asia right now.”
Continuing efforts and challenges ahead
Ladies and Gentlemen,
It is a good time to take stock of the global environment today. No doubt we are living in uncertain times. Notwithstanding the events of recent past, global growth was estimated to have recovered to 2.8% in 2002, a pick-up from 2.2% in 2001 . However, for this year, IMF is of the view that while global recovery will continue, the vigor of that recovery may fall short of expectations as downside risks predominate. For national capital markets, the competition for investors’ funds and liquidity will continue to be a significant challenge.
Our capital market has continued to be a key driver of growth over the years, with funds raised in the capital market accounting for 15% of GDP as at the end of the third quarter of 2002. Today, despite the 1997-98 crisis, Malaysia is the largest equity and bond market in ASEAN, and that is testament to our combined efforts in developing our capital market.
Ladies and Gentlemen
The securities industry has become global in its outlook, even in operation – and poses a significant array of issues for us all. It is heartening to note that the Malaysian investing community, through conferences such as these, is tackling these issues head on. The SC looks forward to more future engagements with industry, as we continue to prioritize investor protection and confidence in the midst of challenging developments brought about by globalisation.
It has been a privilege to address you. Thank you.