Regulatory Keynote Address


YBhg Dato’ Zarinah Anwar, Chairman, Securities Commission Malaysia

at the

MIBA Regional Capital Markets Conference
27 February 2008, Shangri-la Hotel, Kuala Lumpur

Setting the framework for further development of Malaysia’s Capital Market: What has been done and what should be done? ‘

YBhg Tan Sri Azman Hashim

Distinguished guests, ladies and gentlemen

A very good morning.


1. First of all, let me thank the organizers, the Malaysian Investment Banking Association and Pinnacle Group International for inviting me to deliver this keynote address.
2. I would like to begin by noting that we are eight years into the implementation of the Capital Market Masterplan (CMP) and that it is testimony to the successful collaboration and extensive support from all stakeholders that 85% of the 152 recommendations are already completed. Indeed, the advantages of adopting a holistic approach to developing our capital market are paying dividends. We can now see how a deepening of regulatory and developmental reforms creates fertile ground for rapid growth. T he size of the Malaysian capital market has more than doubled to RM1.7 trilion during the first seven years of this decade or roughly eight times its size of RM200 billion in 1990. Our secondary markets have deepened with Bursa Malaysia’s turnover velocity rising from 36% in 2006 to 58% in 2007 while total turnover for the derivatives market rose by 49% in 2007.
3. It was also an outstanding year for the Malaysian bond market which is Asia’s 4th largest. We approved RM160.3 billion of RM-denominated bond issues in 2007, roughly double the previous year. The increasing sophistication of Malaysian issuers and investors is becoming more evident with a 58% jump in approvals of foreign-denominated bond issues to USD12.3 billion and a four-fold increase in approval of program issuance of structured products to RM94.2 billion in 2007.
4. Malaysia has sustained its position as the leading Islamic capital market centre – a position enhanced by the largest corporate sukuk of RM15.4 billion by Binariang and the launch by i-Valuecap Management of the world’s largest Islamic ETF. The Malaysian unit trust industry, the largest domestic unit trust industry in ASEAN, grew by 39% in 2007. There are now more than 500 unit trust funds with industry NAV standing at RM169 billion.

What has been done – Achieving optimal regulation: Strong investor protection and regulatory efficiency

Ladies and gentlemen.

5. As a regulator, we have sought to create a low “friction” and highly efficient environment to enable our capital market to be internationally competitive. This is being undertaken in tandem with efforts to achieve our regulatory objectives of protecting investors and ensuring a fair, orderly and sound market. We therefore made many important changes to the regulatory framework and, last year, introduced the Capital Markets and Services Act to streamline securities laws.

In seeking to optimize regulatory efficiency, we have expanded the role and accountability of directors and management at PLCs, intermediaries and that of professionals such as accountants, auditors, valuers and lawyers as it is best that the effort to maintain high standards of ethical conduct takes place through market and self discipline. Simultaneously, we have strengthened oversight – widening our financial reporting surveillance coverage – and will put in place more market-based mechanisms such as Self-Regulatory Organisations (SROs) and the auditing oversight board.

7. In recent times, regulation has emerged as a competitive tool in determining the international competitiveness of a capital market. The challenge is not whether there is too much or too little regulation but rather one of ensuring efficient processes and scoping appropriate and adequate accountabilities and legal liabilities on capital market participants to ensure high standards of corporate governance and investor protection.
8. In the primary market, Malaysia has made considerable strides progressing from a merit-based assessment for corporate proposals. The benefits of a market-based approach as amplified by a disclosure-based regime (DBR) are now evident in terms of time savings and information dissemination. Most notably, I am proud to say that our standards of disclosure and processing timelines are now mostly comparable with developed jurisdictions.
9. There is still considerable debate over whether, in having moved to DBR, we should undertake any merit assessment of corporate proposals. Our conclusions are that a rigourous assessment to ensure high standards of corporate governance and investor protection still appears necessary. At this stage of development, we believe that strict gate-keeping sustains a high level of confidence in investing in Malaysia and that a “caveat emptor” philosophy, usually adopted in international financial centres, may not yet be appropriate.
10. We also face the challenge that capital market transactions and products have become increasingly complex – usually extending across a broad range of hitherto stand-alone activities. Intermediaries are increasingly integrating a broad range of financial activities. This may involve, for example, focusing on a core competence such as acting primarily as a distribution channel for products from other suppliers while outsourcing back-office services. In response to an environment requiring more frequent business re-configurations, we have provided our intermediaries greater flexibilities to re-engineer their business models to lower their costs and increase their efficiencies.
11. In tandem with this, we introduced a principles-based approach to supervising our intermediaries and Exchange. Pursuant to this approach, we have removed prescriptive rules but increase the requirement for them to take on greater accountability to ensure fair and responsible treatment of investors and maintenance of high standards of professional and ethical conduct. We have then strengthened our oversight over the way intermediaries monitor their business conduct and risks. Our market surveillance activities and examination visits of the various intermediaries have been stepped up and firms have been taken to task when we found aspects of their operations not up to expected standards.
12. Overall, even as we search for greater regulatory efficiency, I will emphasise that the Malaysian capital market must continue to be underpinned by a strong investor protection regime. A capital market can only support continued and sustained expansion of the size of market transactions if investors have confidence that they can rely on the good faith of the intermediaries, the PLCs, the professionals and, when that fails, the regulator to enforce its rules. In our view, the recent rapid growth of Malaysia’s capital market attests to the clear benefits of a strong regulatory framework, active surveillance and supervision and effective enforcement.
13. The SC will therefore always place priority on maintaining a strong investor protection regime and be committed to tackling incidents of market abuse and corporate misconduct. We have invested significant efforts and resources to strengthen our enforcement capabilities and capacity. We continue to search for more effective strategies to enforce our rules with a focus on pre-emptive measures such as freezing assets, swift and effective resolution through civil and administrative approaches to disgorge ill-gotten gains and to achieve restitution for investors. As the market-place becomes increasingly international, we have strengthened our ability to pursue enforcement action against cross-border crimes and have strengthened our collaboration with our fellow regulators.
14. All in all, I want to say that Malaysia has gained tremendous respect for our efforts in combating breaches of securities laws and that our investor protection regime is highly regarded internationally. We can all share in the pride that Malaysia was ranked 4th for investor protection by the World Bank in its “Doing Business” survey for the second consecutive year.

What has been done – Achieving an internationally competitive capital market

Ladies and Gentlemen,

15. A strong and efficient regulatory framework provides the foundation on which to achieve our vision for Malaysia to be an internationally competitive capital market. The Capital Market Masterplan (CMP), launched in 2001, set in motion many of the developmental or “change” initiatives that have transformed the Malaysian capital market from a narrow equity base to a broad and vibrant market-place.
16. A fragmented intermediation industry has been transformed into a landscape with a listed exchange and a core of strong domestic intermediaries with integrated capabilities, the ability to leverage on economies of scale and possessing balance sheets backstopped by high levels of capital.
17. Distribution inefficiencies and bottlenecks in the intermediation industry have been addressed through deregulation by reducing transaction costs and facilitating the emergence of new distribution channels. Deregulation is a critical factor in providing a sufficiently competitive environment that motivates intermediaries to create a broad menu of differentiated products and services and to launch promotional activities to attract more customers to the Malaysian capital market.
18. An internationally competitive capital market also requires much higher levels of active participation by international investors, issuers and players. Several market segments have been fully liberalized – the most recent and extensive being the Islamic Capital Market in alignment with the CMP strategic objective of establishing Malaysia as an international Islamic capital market centre. We have permitted foreign stockbrokers and fund managers to establish operations in Malaysia and are seeing increasing interest from many other global players to seek out opportunities to collaborate with domestic players. The outcome from the rising international participation has been increased trading activities in the equities and futures markets and rapid growth in the bond market in terms of foreign issuance and investment.
19. Malaysian investors themselves have been purchasing foreign assets to diversify their portfolios and increase their risk-adjusted returns. The capital exports have also opened a new business avenue for Malaysian intermediaries through the intermediation of global products in the onshore market or through their ability to expand abroad on the back of demand by Malaysian investors for international assets.
20. The SC continues to play an active role in either initiating or facilitating product innovation in the various market segments such as the Islamic Capital Market or in the investment management industry. The capacity for product innovation is another critical element of Malaysia sustaining its international competitiveness as it is the ability to design products that facilitate greater matching of the needs of investors and issuers that lead to an increase in market activities.
21. We also continue to place great importance on ensuring the sustainance of high growth in the investment management industry. Malaysia has the advantage of high domestic savings. The efficient intermediation of these savings provides the feedstock that is combusting the growth of the entire capital market. The recent high growth rates in various activities of the investment management industry is indicative of its increasing efficiency and competitiveness arising from developmental initiatives to strengthen disclosure and pricing transparency, to facilitate product innovation and to widen distribution channels.

What should be done – Thriving in a challenging environment

Ladies and Gentlemen

22. The CMP provides us a broad strategic direction but we constantly need to respond to an increasingly changing environment and circumstances. At the SC, we rely on a dynamic planning process that integrates our strategic and risk analysis of landscape and environmental changes to ensure that the emerging challenges and risks are adequately addressed. This forward-looking approach is necessary to ensure that plans remain relevant and can be implemented in a robust manner.
23. Arising from this, it is clear that the most important structural change that will impact on the future of the Malaysian capital market is the rapid growth of the Asian capital markets underpinned by their highly dynamic economies. Regional markets such as China, India, Korea, Dubai and Vietnam are displaying a new-found sense of confidence and are liberalising access to their markets to attract global investors and players.
24. The emergence of these growth markets in Asia will intensify the regional competition for order-flows and corporate finance transactions. Our assessment is that Malaysia is well positioned to compete in areas where we have a competitive advantage. Malaysia’s capital market has an attractive value proposition in terms of market breadth and depth, investor protection, the broad offerings of small and mid-cap companies and the potential and capacity to generate corporate transactions.
25. Our core competence is, of course, in the Islamic capital market. Malaysia has significant global strength in Islamic finance through our comprehensive regulatory and Shariah framework and market for Islamic products as well as a proven track record for innovation and commercialisation of products. We are well positioned to intermediate transactions between the Middle East and the Far East. We are leveraging on these strengths through the recent budget initiatives to liberalize and attract international participation in our Islamic capital market; and we will continue to strengthen the nation’s position as an international centre of origination and trading for Islamic instruments and for wealth management services.
26. Clearly, this is also a period of unprecedented opportunity with Asia now becoming the world’s growth locomotive. Asia has accumulated huge surpluses and savings that need to be invested into a diversified basket of assets. This presents a window of opportunity for our capital market intermediaries to expand into new markets and to profile and brand Malaysia’s capital market. In tandem with this, Malaysia must continue liberalising our market to attract more international participation and to promote more cross-border transactions and linkages. We must also stay on track to promote greater linkages between capital markets in the region in line with the commitment of the ASEAN leaders to build a regional economic community by 2015.
27. Arising from our strategic and risk assessments of the changing landscape, it is therefore increasingly evident how critical it is for Malaysian intermediaries and PLCs to build their capacity and capabilities for competition. Malaysian intermediaries need to increase their visibility abroad and increase collaboration with foreign intermediaries in other markets. They must expand their intermediation capacity and capabilities to handle large-sized regional and complex transactions as a bigger pipeline for debt and equity flows is required to further broaden and deepen the Malaysian capital market.
28. Similarly, if we are to be recognised as one of the more dynamic capital markets in Asia, then our intermediaries and PLCs must do their part in enhancing their value propositions and projecting a positive image of the private sector in Malaysia. A recent survey specifically highlighted that the practice of corporate governance is not sufficiently ingrained in Malaysian PLCs. Similarly, Malaysian PLCs trade at a wide range of “price-earnings” multiples. Some Malaysian PLCs are recognized for their earnings prospects, franchise value and respected for their corporate governance and typically trade at a premium. But it also depicts that there are issues in relation to the PLCs trading at the lower end of the valuation range. These companies will need to reflect on what needs to be done in terms of their corporate governance practices, investor relations efforts, public float size and other factors that may have an impact on valuation. It is encouraging to us that our valuation range is not too different from other regional markets but the Malaysian equity market would clearly benefit if the pricing of all PLCs are reflective of their underlying valuations.
29. The private sector, in my view, needs to be more pro-active in practising good corporate governance, in meeting analysts and being responsive to the needs of the investing community. Premium valuations are hard to earn but there are more than enough examples of Malaysian companies that have earned the trust of investors and that reflect their inherent valuations. It has now become increasingly important for the private sector to demonstrate their pro-active leadership in projecting a positive impact of the Malaysian capital market to the investing public.

High on our agenda is to work closely with industry to educate investors and to improve their knowledge of products so that they will be better able to manage the risks associated with sophisticated investments. We will be adopting a two-pronged approach towards developing knowledgeable and vigilant investors. The first involves a long-term strategy for promoting nationwide financial literacy and the second is to enhance industry role and responsibility in educating their customers. In this regard, the intermediaries must build the necessary capacity to ensure investors understand their choices and the risks associated with various investment strategies and products. There will be no better advertisement for Malaysian intermediaries, professionals and PLCs than the dedication to building a relationship of trust with their customers.

31. There are also several on-going initiatives to enhance industry and market structures to create a suitable architecture for an internationally competitive and advanced capital market in Malaysia. Bursa Malaysia is in the midst of implementing a new trading platform and this would be followed by improvements to the clearing and settlement infrastructure. The SC would continue to make regulatory changes that would widen our ability to access regional and global investors and issuers as well as increase our connectivity to other markets.
32. Last but not least, we need to take cognizance of the current volatile global market conditions. Growing concerns over credit quality in the US sub-prime mortgage market has prompted a re-appraisal of risk across financial markets. The recent event involving a rogue trader also revealed lapses in operational controls resulting in massive losses for the bank involved. There is a need to be concerned as the recent events has exposed vulnerabilities in jurisdictions where regulatory oversight is tight and where the biggest banks and financial institutions have a reputation for strong governance and internal controls.
33. Malaysia has successful addressed its financial stability challenges through strengthening its prudential regimes and diversifying the sources of financing. However, we are operating in an increasingly complex and internationalised environment and need to increase our awareness of risk issues and strengthen our capabilities and coverage of all aspects of risks ranging from operational controls to assessing our resilience to global financial instability. This is clearly an area that now requires increased regulatory and industry attention.

Concluding remarks

Ladies and Gentlemen,

34. The critical building blocks are all in place to build an internationally competitive capital market. Malaysia has a strong investor protection regime and many thriving market segments – including a leading Islamic capital market. The government has played its part by increasing efficiency, reducing friction and creating a business-friendly environment that has attracted many multinationals. It has also oriented the GLCs towards shareholder value creation and has provided many opportunities to the private sector through launching growth corridors as well as through pro-active marketing to profile Malaysia’s brand internationally.
35. It is now up to the private sector to take the Malaysian capital market up to the next level. The growth of the Malaysian capital market, in terms of activities and vibrancy, will be driven by the ability of the private sector to generate value for the investors that we are seeking to attract to our shores. Our corporate leaders and captains of our intermediation industry must provide the visionary leadership to develop a compelling growth story for our country.
36. On that note, I wish you a very successful conference ahead. Thank you.