Keynote Address


Y Bhg Tan Sri Zarinah Anwar

Chairman, Securities Commission Malaysia

15th Malaysian Capital Market Summit

December 8 – 9, Kuala Lumpur


Ladies and Gentlemen



The first decade of the new millennium will draw to a close in a matter of weeks. For us at the SC, this milestone is significant in marking the completion of the 10-year Capital Market Masterplan which is more popularly known by its acronym the CMP. As many of you would be aware, the formulation of the CMP took place in the aftermath of the Asian financial crisis. During the crisis, many measures had to be immediately implemented to address the critical and urgent problems posed by financial contagion.


With the immediate threats subsiding, there was increasing recognition at the SC on the need to move beyond fire-fighting and to establish a holistic strategy for the orderly and sequential development of the Malaysian capital market. At that point in time, the Malaysian market was very narrow and highly dependent on the equity market. There was therefore much foundation building to be done.


Directly, or indirectly, we believe that the improvements to the regulatory and industry architecture have contributed to the healthy and sustained growth of the capital market. The size of our capital market has more than doubled from RM717.5 billion in 2000 to RM1.7 trillion in 2009.

Efforts to broaden financing sources have been very successful with the emergence of sizeable segments that were previously very small. This includes a bond market that now ranks as the third largest in Asia benchmarked to GDP, the largest domestic unit trust industry in the region and the most comprehensive and innovative Islamic capital market globally.


The intermediation landscape has also changed from being weak and fragmented to one that is financially sound and resilient. The exchanges were consolidated, demutualised and listed, local brokers were consolidated to build a strong core of strong domestic players – some of whom are now expanding regionally. The capital market is also largely liberalised and the increasing level of competitiveness is reflected by the increasingly diverse range of services and products available to Malaysian investors.


The outbreak of the global financial crisis provided the first serious test of our resilience. While market prices generally followed the volatile movement in global prices, the market was able to function effectively and without any signs of stress. In the aftermath of the Asian crisis, Malaysia had applied measures to ring-fence contagion risks more extensively and the usefulness of these conservative and prudential measures have been validated.


But nonetheless, the seriousness of the global financial crisis and its lingering impact on economic activities will prompt a re-think of the structure of capital markets and the behaviour of its participants. A study commissioned by the Asian Development Bank (ADB) estimated losses of financial assets of US$9.6 trillion for Developing Asia as well as for Newly Industrialised Asian Countries in 2008, slightly more than a year’s GDP. On a global scale, financial assets were estimated to have declined by US$50 trillion at the time. While the markets have since recovered, the impact of the crisis on investor confidence is far reaching; and the ensuing economic slow down saw millions of lives affected by home foreclosures, pay cuts and job losses.


Given that we are soon to enter a new decade in an environment of uncertainty and have to cope with the lack of visibility on future prospects and direction, let me then take this opportunity to share with you our thoughts on some regulatory themes – the progress we have made during the CMP and the challenges to be addressed in the future.

Ladies and gentlemen

Protecting investors


Let me begin by emphasising that the protection of investors is the core business of the SC. The regular episodes of financial crises serve only to remind us of the central role of regulation in maintaining public confidence in capital markets. In this regard, regulation serves to maintain minimum standards for participants and products, ensure timely and relevant disclosures and maintain the integrity of transactions. To the best extent possible, regulation seeks to provide reasonable safety from fraudulent and predatory practices and to allow investors to assess and manage market and business risks.


In this context, Malaysia has progressed a long way from the Asian crisis where governance weaknesses both at public-listed companies and intermediaries led to financial distress and caused investors to experience massive losses in wealth. Today, one of the most important achievements of the CMP is the international recognition of Malaysia as a well-regulated capital market.


The strengthening of Malaysia’s regulatory framework started with the implementation of a prudential framework for our stockbroking industry. This was followed by the launch of the Malaysian Code of Corporate Governance in 2000, and then by successive improvements through strengthening accountabilities of boards and audit committees, introduction of whistle-blowing provisions and widening of enforcement actions against securities offences. Malaysia also adopted international financial reporting standards and have recently established an Audit Oversight Board.


The framework for investor protection was also considerably strengthened through extension of oversight over many aspects of intermediation such as trading, sales and the management of conflicts of interests. Generally, participants in Malaysia’s capital market are subjected to high standards of accountability and ethical conduct. The investor safety net was also strengthened with the establishment of compensation funds, the establishment of a dispute resolution centre for small claims by retail investors as well as through enforcement efforts to seek restitution for aggrieved investors. In addition, this is reinforced through comprehensive efforts to widen financial literacy and strengthen investor education with the various programmes covering more than 40,000 participants this year.


As a result of the progress we have made, there has been increasing international recognition that Malaysia is a well-regulated capital market. Certainly, the highly positive external assessment by the international body of securities regulators known as IOSCO is one, and the admission as a signatory of the IOSCO multi-lateral MOU which signifies our ability to undertake cross-border enforcement is another. Malaysia continues to be highly ranked for investor protection by the World Economic Forum’s Global Competitiveness Report. We have ranked 4th for several years in running now. More recently, the two key US regulators namely the SEC and the CFTC have granted recognition to the Malaysian market and our intermediaries that opens up vast new opportunities for our market to grow. The recognition acknowledges that the Malaysian regulatory framework is based on internationally acceptable standards and offers comparable protection to investors relative to the US. In addition, Malaysia became the only emerging market to be recognised by both the Chinese Securities Regulatory Commission and the Chinese Banking Regulatory Commission as an investment destination for Qualified Domestic Institutional Investors while Malaysia’s status in FTSE Global Equity Index Series was elevated from Secondary Emerging Market to Advanced Emerging Market.


Though we have made considerable strides towards being a high-quality capital market, there are still participants that reminisce about the good old days – a more laissez-faire environment where the standard was caveat emptor or “buyer beware” and who regard proactive or pre-emptive supervisory measures undertaken by the regulators as “increasing regulatory burden” or regulators “not understanding the market”. Basically, there are still market participants who do not want the regulators to be around when the party is on, yet expect us to be there when the music suddenly stops.


I would like to take this opportunity to emphasise that regulatory restraints on free-flowing market behaviour is necessary because investors, the public and governments find that the costs of financial fraud and crises on society are too painful and too substantial to be tolerated. There are still investors who have lost a large part of their wealth during the Asian financial crisis who have shied away from the stock market today and have not returned. In fact a couple of cases that the SC pursued in the aftermath of the Asian crisis are still on-going today.


It has been repeatedly demonstrated throughout financial crises, whether in Malaysia, or elsewhere in the world, that short-term self-interests, if left unchecked, are likely to lead participants to engage in callous and reckless conduct that poses risks to the well-being of investors and the safety of the financial system.


Ultimately, the sustainable growth of the capital market is dependent on confidence in the behaviour and conduct of its participants. And this confidence will be built by the practice of good behaviour rather than solely through rules mandating good conduct. Towards this end, it is important that market participants recognise the importance of integrity and also the responsibility to be fair to clients, minority investors and other stakeholders. There are always consequences to actions and it is important that we all care about the outcomes.

Ladies and gentlemen

Investor Protection in CMP2


In tandem with national plans to transform the Malaysian economy, we anticipate that the capital market will grow in sophistication to support capital formation over the next decade. It is therefore imperative that we study and draw lessons from the recent global financial crisis to ensure that the investor protection framework will be sufficiently robust to withstand the risks posed by highly innovative financial products and services. Let me highlight some of the areas of concern that emerged during the global financial crisis.


First, financial innovation has led to the creation of highly complex products. These products were originally aimed only at sophisticated investors but had increasingly made their way into the retail markets. The challenge is how to protect retail investors from buying complex products such as the “Lehman minibonds”. In fact, regulators in Singapore and Hong Kong intervened to help investors recover their capital after they had been sold these bonds by intermediaries. In another instance, there is an on-going case in the Hong Kong District Court where a bank manager is accused of “recklessly inducing” several people, among them a part-time security guard, to buy the structured product by representing to them that the product was safe.


In hindsight, it also appears that even sophisticated investors as well as financial intermediaries did not understand the risks inherent in the new products they were selling. Regulators around the world are now reviewing how to strengthen investor protection frameworks including increasing the level of disclosure, ensuring intermediaries retain some portion of the products that they originate and in some cases, even thinking about requiring investors to sit for examinations to be allowed to buy sophisticated products.


Second, on the basis of what i have said, it is evident that reliance on disclosures alone will not be sufficient to protect investors. Quite clearly, the push to sell dubious products arises from conflicts of interest in that the pressure to generate revenue and increase profits can cause intermediaries to neglect their fiduciary duty to their clients.

Where self discipline falters, regulators need to step in to fill the gap. In this regard, the SC will take all steps to ensure that the necessary levels of disclosure, due diligence and standards of due care are not compromised. We will continue to expand our scope of regulatory actions against misconduct and fraud and will extend these to more stringent safeguards against insider trading, conflicts of interest and to ensure greater efforts by intermediaries to detect unethical behaviour among their representatives or employees.


Third, one of the concerns during the financial crisis was the lack of alignment between the financial sector with the rest of the economy and society. In the reckless pursuit of profits, global financial intermediaries promoted high-risk products to generate high profits and compensation for themselves. Despite the ensuing losses that eventually required a bail-out from public funds, financial intermediaries did not appear to have displayed any remorse and continued to pay themselves substantial bonuses and salaries that were not reflective of their financial predicament. There is a US survey that apparently shows that while profits for about 30 financial intermediaries are still 20% lower than 1996 levels, compensation has grown by 23%. The misaligned incentives are now a target of regulatory reform in developed markets.


Overall, it is evident that there is a need to broaden the range of regulatory levers and tools and to step up surveillance, supervisory and enforcement efforts to ensure that the investor protection framework remains robust in the face of the growing sophistication of the Malaysian capital market. In tandem with this, market participants can also anticipate that the standards required for intermediation and advisory activities are likely to rise further in the years to come.

Ladies and gentlemen

Growing significance of systemic stability as a goal of securities regulation


Stability has traditionally been the domain of prudential regulators (focusing on liquidity and solvency of institutions) while securities regulators focused on markets, disclosure and business conduct.

Today however there is increasingly a need to develop macro-prudential policies with broadened focus on risks emanating from market sources.


Advances in technology and finance have created growing inter-connectedness of markets and facilitated the rapid transmission of contagion from one market to another across borders and product segments. Market activities are no longer confined to jurisdictional or national boundaries and inevitably all regulators find themselves being drawn together to coordinate surveillance and enforcement actions both in the domestic and international spheres.


In addition, the advent of highly automated trading based on algorithms and high frequency trading have also given rise to new risks to market stability. The speed of these transactions can trigger extreme price movements in thin markets and cause problems for stability – in that the large losses experienced by some participants during sudden price swings can have knock-on effects on other participants as well as pose risks to clearing houses. In one such incident, the “Flash Crash” in the US on May 6 this year was caused by a large sell order in the S&P 500 futures which then brought a confluence of events and high-speed automated momentum trading caused prices in the futures and equity markets to ripple downwards in a matter of minutes to ridiculously low levels before buyers could react in a meaningful way. Quite clearly, markets are highly inter-related with many types of feedback mechanisms where the actions of one participant can trigger the actions of another and easily cause panic unless adequate safeguards are in place.


Last year, Malaysia and Chile co- chaired a Task Force of the IOSCO Emerging Markets Committee (EMC) on the “Impact on and Responses of Emerging Markets to the Financial Crisis”. Amongst others, the report that was produced observed that many markets have put in place tools ranging from trading halts, circuit breakers and market closures to reduce instability in their markets during a crisis as well as to reduce the risk of sudden disruptions and erroneous trades.

The report highlighted the need for greater transparency of market interventions to be guided by clear criteria within a framework that provides for greater coordination and communication between exchanges and regulators.


While Malaysia has been able to deepen our capital markets to absorb potential shocks, nonetheless there is a need to remain vigilant and maintain robust surveillance of markets and to ensure that capital market activities continue to operate within a well-regulated environment. Quite clearly, given past events in both the domestic and international markets, there is a need for greater thought about how regulators and industry manage risks and to ensure that Boards and senior management of capital market intermediaries take the lead in ensuring that risk issues are actively highlighted and knowledgeably discussed.


Another area of concern for stability relates to the ability of unregulated entities and markets to affect regulated entities and activities in the capital market. The lax lending standards and fraudulent practices in the mortgage loan market and the subsequent securitisation of these flawed products and defaults by institutions providing credit protection through credit derivative swaps were clear causes of the global financial crisis. The increasingly seamless nature of markets require an extension of regulatory coverage and coordination to ensure that prudential safeguards are not by-passed and to ensure that an increasing amount of OTC transactions are traded in transparent venues or at least cleared through central clearing houses. This again is an area that is receiving attention at the international regulatory level.

Ladies and gentlemen

Growing significance of social goals


It is not only financial crises that catch the eye but also environmental disasters. Events such as the recent Gulf of Mexico oil spill disaster have also focused greater attention on corporate accountability for safety, environmental and social issues.

In this era of transparency and accountability, it is increasingly becoming difficult for business to flourish without the confidence, support and participation of the public at large. Increasingly in the future, there will be pressures for corporations to expand their agenda beyond profits.


In this context, I want to highlight the role that is increasingly being played by the investment management industry in shaping the norms amongst listed companies through creating more funds that focus on Socially Responsible Investment practices. It is estimated that the investors that have signed the United Nations’ Principles of Responsible Investments have US$25 trillion (RM78.85 trillion) of assets under management. This is a positive development that suggests companies that are able to successfully integrate environmental, social and governance aspects into their strategies and operations will be actively sought after by investors.

Ladies and gentlemen



I hope my speech today has given you a brief preview of some of the issues actively being considered for purposes of formulating our CMP2. The timing for a new Capital Market Masterplan is perhaps fortuitous as we are entering into an environment with much uncertainty and change. The global financial crisis is prompting substantial regulatory review and reform that is likely to translate into higher standards and requirements for participants. The global economy lacks clear visibility on future prospects while Malaysia itself is undergoing transformation to put us on a high growth and high income path.


In formulating the CMP2, it is evident that we are facing very different challenges from 10 years ago when the priority was then to address the obvious gaps in our regulatory and market infrastructure. Most of what needs to be built has already been built, but we need to learn how to make the different components of our capital market work better and in better alignment with the needs of our economy and society.

Most importantly, we need to learn the necessary lessons, from both our own shortcomings and from the global financial crisis. We believe therefore that there is now more than ever a need for a holistic plan that provides guidance in an environment of uncertainty and change.


Overall, it is important that we are ready to march into this new decade, well-prepared for greater challenges and to set high aspirations in tandem with our nation’s plans for economic transformation. We believe the main task is to create an enabling environment for the private sector to lead the growth of the capital market and to ensure that regulatory arrangements are sufficiently robust to meet the challenges of the next decade.

Thank you.