“Smart Partnerships in Capital Market Development”

YBhg Datuk Ali Abdul Kadir
Chairman, Securities Commission, Malaysia

at the
Non-Aligned Movement’s Business Forum on South-South Cooperation
“Smart Partnerships in Key Sectors – Trends and Prospects”
Workshop IV – Capital Markets & Finance

24 February 2003
Sunway Lagoon Resort Hotel

Ladies and gentlemen, it is a pleasure to be here today.

I would like to speak to you on the subject of “Smart partnerships in capital market development.

This seems to me a particularly fitting initiative for us today, as we navigate our way in the challenging global environment. Never before has the divide between the First and Third Worlds been so clearly evident. But at the same time, we also now have unprecedented opportunities to engage together more closely than ever before, in bridging this gap.

The modernisation of capital markets

Ladies and gentlemen,

In this age of global integration and of knowledge economies, modernisation is something that is expected of our markets and institutions, not merely hoped for. This stands true whether we are a transition economy or a developed nation, and whether we are a major global financial services provider or a local standalone brokerage.

But the challenges we face in the modernisation process are not minor ones. Even while we plan the development of our respective markets, they continue to be faced with the pressures of unremitting competition. Of late, this has been compounded by the marked increase in global uncertainty.

Emerging markets in particular, and the institutions operating within these markets, face additional challenges. Even as we strive for a more level global playing field, we may find that the goalposts have moved!

The ability to draw and maintain order-flow, for example, is a significant challenge for emerging markets. As of May 2002, emerging markets accounted for just 3.7% of the widely-followed MSCI All-Country World (Free) Index. Equally glaring is the fact that, while NAM member countries make up 50% of total world population, they account for only 3.5% of global stock market capitalisation. In comparison, the US accounts for 5% of world population, yet constitutes 49% of world stock market capitalisation.

The lack of sufficient depth presents structural barriers to portfolio investment in many emerging markets. Without resolute action to address this trend, smaller markets face the real possibility of finding themselves gradually migrating to the outer fringes of global radar screens.

Therefore, in facing the challenges of global competition and managing capital market volatility, it is important that smart partnerships be considered to develop our capital markets to ensure that they keep up with our country’s funding needs. So the question is: how best should we go about this?

Building smart partnerships = building markets

Let me outline some thoughts on the areas that, I think, may prove potentially significant sources of competitive leverage for markets such as ours in today’s challenging environment.

Overall, we should look at actively energising public-private sector collaboration in fostering market development.

In Malaysia, the concepts of partnership and cooperation have been the basis of the relationship between the government, investing public and corporate world in the course of developing the capital market since at least as far back as the early 1980s, if not before.

But as our markets have evolved, the dynamics of this partnership have evolved over time as well.

Today, the focus is not merely setting up our markets, or building up more companies and institutions, and making sure everything runs fine. It is an issue of greater competition, an increasing number of complex instruments, sophisticated technology, and high-speed transactions. It is also an issue of getting noticed (for the right reasons!) on global and regional radar screens; and this means maintaining good communication channels and keeping a close ear to the ground. As markets grow more complex, we also need to build incentives into our regulatory and operational frameworks to reward desired outcomes.

This calls for even closer interaction between market participants and the authorities, to identify and address relevant issues in a timely fashion. It also underscores the need for sound cooperative mechanisms in building up our markets.

Therefore, we need to invest in collaborative initiatives in various ways. Today I’d like to focus on three: “Smart Partnerships”, knowledge-sharing and strategic alliances.

1 Smart Partnerships

Smart Partnerships are crucial to incorporating effective dialogue among stakeholders, including investors, issuers and intermediaries into our development agendas. They build on and complement existing institutions by providing mechanisms for formulating and implementing development plans that are more flexible and pragmatic.

Let me illustrate how we have pursued Smart Partnerships here in Malaysia. The aim of such partnerships is to develop public and private sector synergy through mutual support and cooperation in achieving Malaysia’s national objectives.

A good example of this is the National Economic Consultative Council (NECC). The second NECC was formed in 1999 to examine and evaluate the country’s past performance and to make strategic recommendations to Malaysia’s Third Outline Perspective Plan for 2001–2010. Through seven working committees comprising 155 members drawn up from a wide spectrum of groups, NECC II provided an effective platform for communication with government. Not only did it allow for often quite candid feedback on a wide range of issues-including government policies, global markets and the general assessment of the health of the domestic economy-NECC II also facilitated the resolution of problems and bottlenecks by bringing all interested parties together at once.

Another example of Smart Partnership, this time in an area especially close to my heart, is the Securities Commission’s Capital Market Advisory Council (CMAC). The CMAC was appointed by the commission to advise and to provide independent views on issues relating to the implementation of capital market development strategies. These include developments in global and domestic capital markets and their potential implications for Malaysia. The strength of CMAC lies in its fifteen members, drawn from the capital market industry, comprising senior domestic and foreign capital market participants and specialists providing representation over a spectrum of capital market activities.

The Smart Partnership approach therefore takes consulting a step further by making industry and stakeholders partners at all levels of the planning process and in going forward with implementation of strategic initiatives. Hence, major players, particularly private sector investors, including foreign investors, are explicitly involved in formulating national objectives.

2 Knowledge-sharing

Let me now turn to knowledge-sharing, where countries assist each other on the path to development. For many of us, professionals from our markets are typically sent to training programmes. But to me knowledge-sharing is more than a simple transferral of technical skills. It must ensure that stakeholders in Smart Partnerships are able to share fully their experiences with each other so that mistakes are less likely to be repeated.

From the perspective of securities regulators, one example of this kind of knowledge-sharing is practised by the International Organisation of Securities Commissions’ (IOSCO) Asia-Pacific Regional Committee (APRC), which I chair. The region’s growth and attraction with regards to its capital market activities is very much dependent on the credibility of its regulators and our ability to work together towards common goals, objectives and regulatory standards.

Members of APRC recognise that a key to enhancing regulatory cooperation is in the better sharing of our collective wisdom. For instance:

· In terms of co-operation to counter cross-border cold calling and boiler room schemes operating in the region, the APRC is formulating a regional approach to deal with the problem. To the extent permissible under local laws, the names of unlicensed operators operating within APRC members’ jurisdictions would be published. This strategy has proven very useful in warning investors about known cold calling organisations.

· Mutual assistance among APRC members have resulted in successful enforcement actions in several countries namely Thailand, Singapore, the Philippines, Indonesia, Australia and Hong Kong. Some members such as New Zealand and Malaysia have issued investor alerts to prevent the investing public from falling prey to these scams.

· APRC members have agreed to share information on the regulation of remote access terminals in the region, and investor recourse and safeguards. (Remote access terminals are trading terminals, which are placed by exchange or markets outside their own countries to provide overseas investors with direct access to their systems.)

NAM member countries in particular can benefit by this kind of cooperation in a broad range of ways to generate greater cross-fertilisation of ideas, and sharing of practical experiences. We are often attempting to learn from developed economies. While it is important for us to keep up to date with the latest international best practices and standards, and to strive ultimately towards achieving them, we must nevertheless be aware that these markets tend to be very different from ours in terms of complexity and types of issues faced. What is therefore important is to ensure that the knowledge we pursue is also relevant and best suited to our contexts and particular circumstances.

3 Strategic alliances

Lastly, I wish to highlight the potential for strategic alliances to tap the synergy of markets. Strategic alliances have clearly become an important commercial strategy for many business, including exchanges and other market institutions. Smaller exchanges, in particular, are in some cases are entering into alliances with one another-as well as with larger hubs-to achieve better value recognition.

More than ever before, technology now facilitates such groupings, whose “network effects” we ought to be exploiting. The alternative would be a slow singular trudge in trying to achieve critical mass, waiting for the spark that will ultimately cause our individual markets to take off. But why wait (and alone at that)? Collectively our markets should be looking to achieve bigger self-reinforcing networks of listing and trading activities, common clearing arrangements and remote-access facilities across different jurisdictions and time zones.

Markets wishing to exploit regional or demographical similarities or niche opportunities have an additional incentive to collaborate. Alliances can work in many ways to attract companies and investors seeking greater access to diversified markets. They can also help generate wider international interest and recognition of the markets or areas involved in the partnership.

The potential is clearly there, and I am pleased to note that in several areas, it has been recognised and acted upon. The Asian bond market initiative, for instance, is developing significant momentum and should boost significantly the development of corporate bond financing within the region. The Islamic capital market is another area where the tremendous potential for strategic alliances is being increasingly explored. The development of Islamic accounting principles, for example, is one area where Malaysian accounting standard-setters in particular are working very closely with counterparts in other markets to support the growth of Islamic capital markets.

While on the subject, let me note that developing professional or institutional networks to encourage best practice and harmonised approaches in areas such as accountancy and law is especially relevant to the development of global niche markets, which may subsequently enjoy increased mainstream recognition through such initiatives.

This also highlights the importance of appropriate initial conditions-including sound market structures and foundations, such as consistent accounting and financial reporting standards-in ensuring the robust networks of markets formed through strategic alliances have a strong base on which to grow and develop further. It goes without saying that such endeavours must also display a high level of investor protection and ensure market soundness, transparency, efficiency and fairness to all market participants.

To summarise, while each of us have national interests that we would like to advance, we must also recognise that by undertaking development in isolation, countries lose out potential gains that can be reaped through international partnerships. Individually we would have to battle harder to meet the challenges of global competition for market share, liquidity and value recognition.


Ladies and gentlemen, let me conclude.

We are living in leaner and tougher times. The nature of global markets today is such that there is often a fine line that separates the path of continued expansion and that of grappling for survival in an increasingly competitive world.

Smart partnerships are essential for exploiting economic opportunities in today’s fast-changing environment. Catalysing private capital is necessary to develop the capital market, and public-private sector collaboration is clearly important towards this end.

Other approaches such as the tapping the power of international networks through the formation of strategic alliances and through the sharing of knowledge and experience are also important avenues that have the potential to offer tremendous gains for our markets. Together we should explore and develop these possibilities further.

So as we forge ahead, I look forward to further building on this partnership under the auspices of the Non-Aligned Movement’s business forum.

Thank you for your kind attention.