Datuk Ranjit Ajit Singh
Chairman, Securities Commission Malaysia
Emerging Markets Programme
Global Financial Crisis and New Challenges to
30 October 2012
Securities Commission Malaysia, Kuala Lumpur
Ladies and Gentlemen,
Good morning and welcome to the 13th annual Emerging Markets Programme (EMP). To all our speakers and participants from abroad, I hope you had a pleasant journey to Malaysia and are enjoying your stay here so far.
Over the past decade, the EMP has been providing an annual platform for regulators from both developing and developed markets to meet, network and exchange views on common issues and concerns that impact our markets. I am encouraged that in its 13th year, the EMP continues to receive strong support from many regulators as well as industry participants who clearly see significant value in the programme and the deliberations.
Present with us to share their valuable expertise and insights at this year’s EMP are several experienced speakers and panelists from leading capital markets in the world. I would like to thank them for being here today and taking time from their very busy schedules to join the EMP. We are also delighted to have participants from 21 different countries, some of whom are participating for the first time in the EMP.
In line with the overall theme of the EMP on Strengthening Resilience of Emerging Markets, this year’s programme is intended to provide a platform to reflect on and discuss issues and challenges facing emerging markets, the development of strategies and opportunities to strengthen our markets, including enhancing investor protection and market stability. By analysing global regulatory responses on key areas relating to regulation, supervision and enforcement, we hope that you will be able to obtain some key insights and benefit from a lively exchange of ideas and experiences that typically characterise the EMP sessions.
Ladies and Gentlemen,
There are shifting sands and headwinds occurring in the global economic and financial landscape primarily due to weakening economic growth flowing from the unresolved Eurozone crisis, the US ‘fiscal cliffs’ and the ongoing socio-political and regulatory uncertainty. Earlier this month, the IMF lowered growth forecasts and warned that the risks for a serious global slowdown are soberingly high. The world economy is expected to expand just 3.3% this year and 3.6% in 2013, with emerging economies projected to grow at 5.3% this year and 5.6% next year . Economic uncertainty is expected to continue to weigh on output in both advanced and emerging markets.
Our role as securities regulators in emerging markets today is becoming undeniably more challenging as capital markets are also poised to take on a more significant role in financing economic growth, intermediating savings and acting as important shock absorbers in times of stress. As our capital markets continue to grow, become more sophisticated and internationalise, they will inevitably become more significant and interlinked within domestic and global financial systems. As such, the process of strengthening the resiliency of our capital markets must revolve around effective regulation and robust oversight, and mitigating the risks in the financial system.
Ladies and Gentlemen,
Many emerging markets are still relatively thin and illiquid, and a sudden withdrawal of investments triggered by a potential reversal in capital inflows can have a destabilising impact on the market. As evidenced by past crises, the withdrawal by foreign institutions from markets can lead to stresses through sharp and self-sustaining asset price declines, capital erosion due to lower valuations and contagion across other asset markets. Further, if external sources of funding became scarce due to the lack of alternative domestic sources of funding, the adjustment process and subsequent crisis will be transmitted to the real economy through the financial system.
It is therefore critical that emerging market regulators continue to develop deep and liquid domestic capital markets to make them more resilient to exogenous shocks, and as a hedge against capital flight. This includes broadening the investor base and deepening various segments of the capital market, including the bond market, derivatives market and investment management industry, to facilitate greater retention of funds in the domestic markets. The need to deepen the market at the longer end of the maturity spectrum is particularly critical for emerging markets given requirements for long-term investment spending, such as for infrastructure projects.
We have also this year observed a series of stock market glitches around the world which has prompted a review of regulations to limit the impact of trading interruptions caused by computer glitches. Several securities regulators have issued guidelines on algorithmic and high frequency trading to protect their markets. These rules range from placing the burden on intermediaries to ensure that pre-trade risk management controls and post-trade monitoring exist. Other requirements include having market participants build ‘kill switches’ into their systems (i.e. to enable immediate suspension of trading), have direct control over their filters (sponsored access is prohibited) and testing of algorithms. High frequency and algorithmic trading are a natural evolution of electronic trading, and as securities regulators we need to keep abreast of technological developments to be able to adopt the right tools and procedures for risk controls and surveillance of the markets. There is also a need to adopt a structured approach towards market intervention mechanisms, such as circuit breakers, trading halts, price and trading limits, as they may be used on a much wider basis as a means to mitigate potential systemic risk and maintain orderliness in the market.
Another key area of focus for emerging markets is to raise the bar in corporate governance practices. Good governance practices will help create quality markets and a strong fundamental base that can cushion and protect financial markets from crises. Internalising a culture of good governance among market participants and requiring companies to govern themselves responsibly are areas which we at the Securities Commission have placed significant emphasis, particularly with the release of the Corporate Governance Blueprint in 2011 and the revised Code of Corporate Governance earlier this year.
Creating a deep and diverse pool of institutional investors can also contribute towards the overall governance of companies. Institutional investors are in a unique position to exercise influence over companies and hold them accountable for good governance. Given the typically significant stake they hold, they have the ability to demand meetings with senior management of companies, challenge them on issues of concern, discuss strategies for achieving the companies’ goals and objectives and be the leading voice of shareholders in demanding corrective action when wrongdoing occurs.
Ladies and Gentlemen,
A significant challenge facing policy makers and regulators in emerging markets is the manner in which capital market development takes place. In operating in a more deregulated and liberalised environment, a phased approach needs to be adopted having sufficient regard to the capacity of regulators to oversee risks emanating from new products, the preparedness of the industry to manage these risks, and a sufficiency of knowledge and sophistication within the investor community. A market or major product failure may lead to an escalation of risks in the system, which coupled with weak institutional structures and absence of risk management and risk mitigating controls, can create a downward spiral in the markets, impacting market intermediaries and affecting investor confidence.
In this regard, emerging markets can take various initiatives to strengthen the reliability of disclosures, encourage more responsible sales practices by market participants and improve financial literacy among investors to help enhance the quality of the domestic investment environment and develop a strong investment culture.
Ladies and Gentlemen,
Following the Global Financial Crisis, there are a slew of regulations and standards which have been introduced to address concerns relating to global financial stability. These reforms include among others Basel III, CPSS-IOSCO, US Dodd-Frank and European Market Infrastructure Regulation (EMIR). IOSCO, for example, is committed to setting high-level global standards and tackling emerging risks in a proactive and forward-looking manner. Its agenda is focused on several aspects, including shadow banking, OTC derivatives market reforms and financial market benchmarks.
Multiple dimensions of the impact of global financial regulation and reforms need to be carefully considered. For example, efforts to enhance market infrastructure for more effective supervision and crisis management of cross-border market activity is certainly critical to the stability of financial sectors worldwide. However, it is important that in doing so we avoid unintended consequences and minimise potential distortions that such measures can bring, especially in parts of the world where financial systems are less developed and smaller in size, and where a one size fits all approach is not appropriate.
There have also been some concerns expressed on the extraterritorial and cross-border effects of some of the national or regional regulatory reforms adopted in some of the major developed markets. The effects may be caused by spillovers (for example, through the activities of foreign financial institutions) or by the extraterritorial nature of some reforms (for example, because they directly affect the operations of domestic financial institutions with cross-border business). Capital market stakeholders have argued that inconsistent implementation of regulation can lead to fragmented capital markets and regulatory arbitrage. In particular, some of the concerns highlighted include duplicative requirements as well as incompatible or conflicting requirements, regulatory uncertainty and a disproportionate compliance burden. For example, due to the accumulation of rules from different jurisdictions, there may be an extra cost of compliance and increased complexity on the part of market participants in adhering to different regulatory regimes, including the need to revisit existing processes and business models.
Moving forward, it is critical that global impact assessments of proposed regulatory measures are built in at the outset, and that more avenues are available to ensure that emerging markets are appropriately consulted and their views adequately taken into account prior to the formulation of regulatory standards. Some of the reforms may also need to be phased in to avoid a disruptive impact on the domestic industry.
Ladies and Gentlemen,
From the perspective of securities regulators, what is clearly evident is that there is greater realisation of the magnitude of some of the regulatory tasks ahead. In the current context where risks and fragilities in the financial system are more likely to surface, the anticipation of emerging regulatory risks and transmission of these risks across the financial system and real economy become all the more critical.
We are indeed regulating in complex times. With large shifts in the economic and financial landscape, balancing the competing demands is a tremendous challenge for regulators and market participants. As domestic financial systems develop and become more sophisticated, so too must our regulatory frameworks, focusing on perhaps three major aspects – market structure, product regulation and enhanced disclosure requirements. More specifically, regulators must regularly review its regulatory perimeter, encourage greater market and self-discipline, while promoting competition and innovation in the market.
Let me thank you once again for being here. I hope you have valuable and active discussions over the next few days.
Thank you very much.