Keynote address
The 12th Emerging Markets Programme
“Sustaining Market Integrity in a Changing Landscape”
Y Bhg Tan Sri Zarinah Anwar
Chairman, Securities Commission Malaysia
Wednesday, 2 November 2011

Distinguished speakers, ladies and gentlemen


Good morning and welcome to the 12th Emerging Markets Programme. I am delighted to see so many of you today, many of whom I know have travelled from afar. The success of the EMP over the years owes much to the lively exchange of ideas and experiences among speakers and participants. Given the diversity of the jurisdictions present today, I have no doubt that this year’s programme will carry on in that tradition.


The first EMP, held in 2001, asked how emerging markets should be “Responding to the Challenges of the New Economy” arising from deregulation and rapid advances in communications technology. A decade later, the risks associated with those challenges have crystallised and we are asking ourselves how we should sustain market integrity amid a continuing change in the market landscape. Indeed, the issue of integrity is now at the heart of a global debate about the culture of governance in finance, in fact, the culture of finance itself.


It has been argued that the rise of a speculative, short-term, transactional trading culture that rewards individuals with enormous bonuses has replaced the relational, long term, investment culture aimed at economic growth for many stakeholders – corporations, employees and the nation as a whole1.


Much of this debate centres on ethics, values and trust, and how these may have contributed to the behaviours and judgements that resulted in the events that have occurred in financial markets since 2007. At the same time, new technologies are reshaping trading practices and market structures, leading to growing concerns not only about the impact that such developments may have on volatility and systemic risk, but also on whether they can be exploited through unethical behaviour. These are important issues which need attention, not least by emerging markets. If past financial crises have taught us anything, it is that growth is sustainable only if strong regulation is underpinned by a culture of accountability and propriety. Integrity is therefore the hallmark of the markets we must aspire to build.

Loss of trust in the global financial system


Let me turn first to the issue of ethics and values. While there appears to be growing consensus that the culture of finance needs to be improved, the roots of the problem are still being deliberated upon. One thing is clear: there has been a significant loss of trust in the global finance system. The outbreak of global demonstrations in recent weeks reflect public frustration over economic hardship, and a sense of inequity that has boiled over.


What is of greater concern however, is that there has also been a loss of trust by the global financial community in itself. A recent global survey among investment professionals found that nearly two-thirds of respondents felt that the integrity of financial markets would be the same or worse in 2011 than 2010.2 They highlighted the following “ethical issues” in particular:

  • Mis-selling of financial products

  • Market fraud

  • Dishonest or untrustworthy financial reporting; and

  • Poor disclosure and misuse of derivatives

This comes on top of more apparent ones (at least to the general public) such as the collapse and rescue of financial institutions which knowingly took on risks far greater than their balance sheets could afford.


These findings are troubling for they do not arise from market “externalities”. The survey results speak directly to a lack of probity within the financial services industry itself. Thus the need for the global regulatory reforms that are being put in place today to address the erosion of trust and confidence because these are the basis of properly-functioning markets.

Risks arising from changes in the market landscape


Let me now turn to the issue of technological advances and the reshaping of trading practices and market structures. In this regard, I refer to advancements in information technology as well as financial technology that has resulted in innovation in financial instruments and transactions that have given markets new ways in which to package, deconstruct and trade risks.


The phenomenon of high-frequency trading, or HFT for short, is an example where both information and financial technology have converged to give traders the ability to act on market prices at mind-boggling speed. On the NASDAQ market, for instance, trades reportedly can be made in 250 micro seconds – that is, one four-thousandths of a second.


Such speeds do not just boggle the mind. The “flash crash” of May 6th 2010 also boggled the market, sending the Dow Jones Industrial Average stock index down more than 1,000 points, or about 9%; only to recover within minutes.


To put this into perspective, the incident saw the second largest point swing (1,010.14 points) and the biggest intraday point decline (998.5 points) in the history of the Dow.


In addition to the impact that HFT can have on volatility, in the absence of appropriate controls anda strong culture of integrity among participants, such technology can make it easier to undermine market fairness and efficiency. One criticism levelled at HFT is that it can interfere with price-discovery. By acting on prices almost instantaneously, high-frequency traders are accused of making it more difficult for the rest of the market to observe prices at which their trades will be executed.3


Regulators acknowledge these issues and have been working to address them. One outcome of this work, is a set of recommendations released by IOSCO last month giving regulatory guidance on managing risks associated with HFT and other similar technologies.4 These recommendations are meant to help securities regulators assess the impact that such technological developments have on markets, and promote a globally-consistent approach to address the risks they may pose to market integrity and efficiency.


I believe that technological developments do hold the potential for better-functioning markets-markets that allow the spreading of gains and losses among market participants who may have differing risk-return profiles. But it is important that everyone trusts that the risks and rewards will be distributed fairly. If rewards are retained by a few while the risks are to be borne by many, this will erode confidence in the integrity of markets.

The importance of maintaining confidence in emerging markets


On that note, allow me to spend a few minutes on why I believe the issue of integrity, and therefore confidence, is an especially important one for emerging markets to consider and address. The significance of emerging economies to the world economy cannot be understated. They have substantial weight on many measures. For instance:

  • The combined output of developing and emerging economies has doubled since 1990, and as of 2010 accounted for nearly two-fifths of world GDP.

  • They account for more than half of the world’s exports, while taking in 47% of world imports.

  • Over half of global capital spending is by emerging economies, and by some estimates, they hold around a quarter of global financial assets, doubling their share in just 10 years.5


In short, emerging economies today drive global growth, account for a rising share of capital spending and hold an increasing proportion of global financial assets. This makes the ability of our domestic financial markets to support economic growth even more crucial. A priority for us therefore must be to strengthen the economic function of our capital markets in promoting capital formation and to expand the supply of quality assets for our investors.


But the capital market plays a role beyond just that of assisting growth. It also facilitates privately-driven social safety nets that emerging economies will increasingly need as our demographic profiles change. As seen in developed economies as well as some of the more advanced emerging economies, like Chile, a private pension system owes as much to efforts to deepen and broaden the capital market as it does to bold reforms for improving social security. Moreover, as in the case of Chile, the reforms themselves have benefited the country’s capital market, by inter alia, developing its institutional investor base.


Malaysia has also recognised the benefits of a more active private pension fund industry. In October last year, the government announced plans to liberalise the pension industry and encourage the growth of wealth management. These plans include relevant tax incentives as well as incentives to channel funds in public pension schemes to professional wealth managers.6


The success of these efforts, however, are premised on the existence of well-functioning capital markets. While specific initiatives targeted at broadening and deepening our markets are necessary for developing them, they must be complemented by steps to shore-up integrity if we are truly to achieve fair and efficient markets.


From our experience of the recent global financial crisis, it is tempting to conclude that the kinds of problems that arose in crisis-afflicted economies did not occur in many of our markets. In most cases, so the argument goes, we simply do not operate in the same space as them.


However, such thinking would be a fallacy. An IOSCO report on the impact of the 2007-08 global financial crisis on emerging markets found that emerging markets have become integrated with the rest of the global financial systemand are increasingly exposed to systemic risk. During the crisis they too were subjected to extreme price volatility and shock transmissions, and like their developed-market counterparts, emerging market regulators reported that systemic risk was a key issue even for them. In addition, as the crisis wore on, regulatory focus increasingly turned towards the business conduct of market participants, arising from concerns of impropriety following the contagion effect of the global crisis.7


In other words, poor market integrity need not only be associated with sophisticated trading strategies or structured products. Indeed, more often than not, they relate to fundamental aspects of financial activity, such as financial soundness, business conduct, market conduct and disclosures.


Even so, we should not ignore issues concerning more complex activities either. There is no escaping the fact that innovations like electronic trading platforms and derivatives are now integral features of modern financial systems. Our markets are developing fast and such technological innovations are becoming relevant to us. But they too carry risks that can easily crystallise with poor controls and a weak governance culture. Electronic trading, for example is key to achieving economies of scale and reducing friction costs. But risks from practices such as dark pools and high-frequency trading cannot be over emphasised.


Emerging markets are also beginning to recognise the importance of derivatives in giving traders the ability to hedge and arbitrage, and intermediaries to build risk management capabilities. Nevertheless, poor disclosure or misuse of derivatives will continue to be a serious issue facing global markets if not addressed.

The role of regulators in sustaining market integrity


What can we, as regulators, do to address such risks and improve confidence in our markets? I believe there are three broad areas that need continued attention.


First, regulation. Markets are evolving rapidly and it is important that regulators bring unregulated or poorly-regulated activities within the perimeter of regulation. This involves striking the right balance in optimising regulatory coverage while minimising the burden of regulation on the market. It requires us to reduce opportunities for regulatory arbitrage; while at the same time ensure the proportionality of regulation, and that it is consistent and fit-for-purpose.


In Malaysia, we continue to take stock of changing conditions in the global and domestic capital market landscape, and have tried to achieve that balance over time through continuous regulatory review and reform. Amendments to our securities laws in the last couple of years now allow us to better promote transparency, address systemic risks, improve regulatory efficiency and enable market development.8 They include for example, provisions that strengthen the definition of derivatives to improve the regulatory coverage of over-the-counter (OTC) and standardised contracts and provide the SC powers to obtain information and issue directions to market intermediaries to take appropriate measures to monitor, mitigate and manage systemic risks.


In the area of supervision, the implications of technological innovation and changing market structures are that such developments place a high premium on the ability of regulators to detect novel forms of market abuse. Recognising that markets and participants are more interconnected than before, we must also be able to identify concentrations or systemically-important sources of risk amid increasingly dispersed and fragmented markets.


I would like to take a moment here to stress the importance of data. There has not been enough emphasis among securities regulators on developing a culture of data collection, analysis and dissemination. This applies as much, I feel, to developed markets as it does to emerging markets. The quality of our monitoring and assessment of risk relies heavily on the availability of relevant market information. Unfortunately, we often depend on legacy data largely received through submissions by industry. This model needs to change urgently. I am glad to note that securities regulators globally now agree that they must be pro-active in identifying, collecting and analysing information relevant to the issues at hand.


But this is far from straight forward. First, there is the challenge of sourcing and managing vast quantities of data, much of which relates to activities on the periphery of markets or from other jurisdictions. Second, many of us face capacity constraints with regard to analysing such data even if we are able to get hold of them. Indeed, these challenges are faced by regulators in practically all jurisdictions. But I believe this is an important area for work on regulatory capacity-building.


Lastly, in addition to improvements in regulation and supervision, the ability to take enforcement action within the domestic market and across borders is also key to improving and sustaining market integrity. In this regard, multilateral arrangements such as the IOSCO Multilateral Memorandum of Understanding (MMoU)is a critical mechanism to facilitate cooperation among capital market regulators onthe enforcement of securities laws. Indeed, many regulators have attributed the success of their enforcement efforts to the investigative information obtained from foreign regulators via the MMoU. It is imperative therefore that the nearly 50% of emerging market jurisdictions which are not full signatories to the IOSCO MMoU take the necessary steps to fully comply with the MMoU requirements.

The importance of self-discipline and the role of the capital market industry

Ladies and gentlemen


Thus far I have spoken about the role of regulators. But enhancing confidence in the capital market cannot be seen purely as a regulator’s responsibility. Confidence in the markets can only be achieved if the interests of investors are adequately safeguarded, especially when they are unable to assess risks themselves. Self-regulatory organisations, capital market intermediaries and public-listed companies have a critical role to play in this regard.


This duty is even heavier today with the heightened expectations on governance. And the key to this has to be the management and boards of firms themselves. Board and management of companies and intermediaries must “walk the talk” of good behaviour and high standards of governance. They must provide clear frameworks and sufficient guidance and training in good business conduct, including strong risk management. Such frameworks should also incentivise good behaviour while deterring unacceptable behaviour.


In order to discharge their roles and responsibilities properly, it is imperative for boards to have a comprehensive understanding of their roles and to possess the necessary competence to discharge their responsibilities effectively – engaging management, asking questions and demanding answers, and not signing off until they are satisfied.


It is also necessary for investors to be much more aware of their rights and to be empowered to exercise those rights effectively. Shareholders must be more assertive in demanding greater corporate accountability. This includes the need for institutional investors to play a greater leadership role in exercising their rights as share owners and to be the leading voice of shareholders in demanding corrective action.


In conclusion, our belief is that what investors and the public need most today, is assurance and accountability in the broadest sense. Over and above compliance with the rules and regulations, this requires conduct which embraces moral and ethical considerations, understanding and management of risks, and the creation of sustainable value.


In other words, investor and public confidence are premised on the integrity of markets and their participants. This can only be built on a culture that focuses on the long-term and the economic wellbeing of all stakeholders. Only by demonstrating this culture, through taking appropriate decisions and achieving positive outcomes, will trust in finance eventually be restored.

Thank you for your attention.


‘The Culture of Finance’ – Why Financial Innovation Failed by: Bruce Nussbaum – January 13, 2010


Survey of 5,735 CFA holders. See Financial Market Integrity Outlook: 2011, CFA Institute.


“The Race to Zero.”Speech by Andrew Haldane, executive director of financial stability, Bank of England, to the International Economic Association Congress, Beijing, July 2011.


Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency. Technical Committee of the International Organisation of Securities Commissions. FR08/11. October 20th 2011.


See for data and other information.


“SC explains private pension framework.” Press release. Securities Commission Malaysia. Oct 25th 2010.


Impact On and Responses of Emerging Markets to the Financial Crisis.Final report of the Emerging Markets Committee, IOSCO. September 2009.


For further details, see “Significant amendments to securities laws to strengthen capital market”, press release, Securities Commission Malaysia, Oct 5th 2011 (, as well as other amendments listed in the SC website (