Special address


YBhg Dato’ Sri Zarinah Anwar, Chairman, Securities Commission Malaysia

at the

The 13th Malaysian Capital Market Summit 2008
“Coping with the Global Financial Turmoil, Restoring Investor Confidence”
4 December 2008, The Prince Hotel & Residence, Kuala Lumpur



Yang Amat Berhomat Dato’ Sri Mohd Najib bin Tun Abdul Razak
Deputy Prime Minister and Minister of Finance Malaysia

Yang Amat Berbahagia Tun Mohamed Dzaiddin bin Haji Abdullah
Chairman of Bursa Malaysia

Yang Berbahagia Dato Michael Yeoh, CEO ASLI

Distinguished guests
Ladies and gentlemen


I am grateful to ASLI for inviting me to address you this morning. I believe the timing of this capital market summit could not have been more prescient. The global financial turmoil has been ongoing for more than a year. Although many would have noted the imbalances and strains that were beginning to appear in the global financial markets, stemming from the downturn in the US housing market, very few could have anticipated the extent and severity of the financial storm that has enveloped markets and economies around the world. And in spite of unprecedented policy intervention measures worldwide, global systemic pressures have yet to abate.


Confidence in the financial markets has yet to return amid a continuing wariness over counterparty risk. Bond markets are being weighed down by the prospect of large budget deficits and rising default rates. An increasing number of stocks in developed and emerging markets are being offered at fire-sale prices, trading at steep discounts to their book value. This reflects a combination of an overhang in the supply of assets, the grim economic outlook and an absence of near-term purchasing power on account of tighter balance sheets. The liquidity crunch, accompanied by unprecedented levels of risk aversion, has created a situation where market corrections have been extreme. As a result, financial markets are now undergoing very sharp declines in valuation.


There are undoubtedly going to be many forums that will discuss the causes and effects of the crisis with many different rationalisations. From the structured products that underpin many of the so-called toxic assets that litter balance sheets of once illustrious names, to the trading strategies used by highly leveraged players that have changed the complexion of financial markets.


I believe the way in which the industry is regulated will ultimately play a key role in instilling confidence amongst the investing public. Regulators and policy makers must take on public interest concerns that have been expressed and ensure the right degree of prudence to moderate the excesses that to a large extent has been incentivised by the financial institutions themselves. Highest on the list of concerns is the way in which risk-taking has been allowed to expand relative to capital. The degree of leveraging that has occurred is difficult to rationalise, but the consequences of the spectacular unwinding of these positions and their impact on financial and systemic stability are obvious.


In Malaysia, the experiences we went through and the lessons learnt from the Asian financial crisis have resulted in significant efforts over the last 10 years to promote stability by strengthening the regulatory and supervisory framework. This has enabled our financial system to operate with relative stability over the last decade, enabling us thus far, to be spared the kinds of imbalances and extreme adjustment processes that have emerged in other markets.


The structure of our capital market today is more robust than it was during the previous crisis, with the market as a whole being more balanced. We have developed a relatively deep bond market that has become a competitive source of financing. From Jan to Oct this year, the value of corporate bonds issued in our market amounted to RM49.2 billion, compared with RM45.2 billion issued during same period in 2007. There is likely to be some uncertainty with new issues over timing, but these reflect market risks rather than any structural defects. The stock market has also seen sustained fundraising interest, with the SC approving 30 initial public offerings in 2008 compared with 26 in 2007. Although actual listings this year at 23, was less than the 28 listings in 2007, the amount raised from the listing was significantly higher.


Today, we have a more diverse set of participants in our market. The growth of our investment management industry has contributed strongly to the institutionalisation of Malaysia’s domestic investor base. Assets under management have risen five-fold during 2000-2008 from RM46 billion to RM236 billion. The penetration rate—that is, net asset value as a proportion of stock market capitalization—has jumped from 10% in 2000 to 19% this year. The last few years have seen many foreign intermediaries establishing an active presence here; and in spite of global market environment, there continues to be strong interest among leading foreign firms to establish operations and be involved in Malaysia’s capital market.


We are seeing a strengthening in industry self-discipline. In particular, market participants appear to be managing their risks better. The broking industry overall remains well-capitalised and maintains an average capital adequacy ratio of 11 compared to the minimum requirement of one. The industry’s net exposure to losses from trading, contra and margin accounts are extremely manegeable and well covered by total shareholders’ funds. In the investment management industry, fund managers appear to have well – anticipated market trends, resulting in the total net asset value of unit trusts declining significantly less than the fall in stock market capitalisation. Overall, redemptions remain within normal ranges, and the industry continues to record net sales of nearly RM18 billion up to October this year.

Ladies and gentlemen


Our market has certainly experienced the impact of global contagion along with other markets around the world. What is important is that the capital market adjusts in an orderly manner through self-corrective mechanisms that prevent specific dislocations from growing into system-wide problems.


In the last 10 years, we have taken strong steps to enhance this resilience through measures that promote capital market stability and development. I have already mentioned efforts to diversify funding sources, investment channels and our investor base. Other measures have included changes to the law to strengthen enforcement and oversight powers, with the aim of enhancing investor protection and regulatory supervision, as well as industry restructuring and strengthening through consolidation of domestic market intermediaries and exchange demutualisation.


More importantly, we have put in place safety nets and rules that promote market transparency, facilitate proper oversight and encourage greater self and market discipline in the conduct of business and market activities. These have included risk-based prudential rules, a registration framework for credit-rating agencies, explicit and transparent rules governing market-wide and stock-specific trading halts as well as rules to govern stock lending and short-selling. The proposal to establish an independent auditor oversight board under the auspices of the SC announced by YAB the Prime Minister during his Budget 2008 speech, is well underway. The Board once established will enhance the integrity of the audit process through stronger independent oversight of auditors.

Ladies and gentlemen


Capital markets are there to serve the purpose of not only capital formation but they also play a key role as a market for managing and transferring risk. But this must be done in a fair and transparent manner without compromising the underlying stability of the system. The regulatory approach that governs capital markets therefore espouses these principles and focuses on disclosure, transparency and investor protection. In Malaysia, we have invested significant efforts to strengthen the regulatory and supervisory framework, and I am pleased to note that these efforts have been recognised by our international peers.


In August this year, the SC voluntarily underwent an independent assessment to benchmark our compliance with international standards for securities regulation. The assessment was based on the 30 core principles developed by the International Organisation of Securities Commissions (IOSCO), the leading international policy forum for securities regulators. A rigorous and intensive assessment by a team of independent international experts, confirmed that the Malaysian capital market regulatory framework achieved an extremely high degree of compliance, scoring top marks in almost all of the areas assessed. I am especially encouraged by feedback from the IOSCO assessors, who have indicated that Malaysia’s performance is at the top end of global assessments.


Nonetheless, we will continue to enhance our regulatory framework, processes and protocols to ensure that the capital market remains stable. Our priority is highest in ensuring the integrity of the capital market’s infrastructure, particularly the trading, clearing and settlement systems; the financial soundness of market intermediaries; ensuring good market and business conduct, safeguarding governance and compliance; maintaining market stability and sustaining investor confidence.


These efforts are being undertaken to ensure the capital market continues to play its role in promoting and facilitating the economy’s long-term growth by allocating resources, managing risks and absorbing shocks. In this regard, we must be holistic in our efforts while enhancing the market’s efficiency and competitiveness. Therefore, while we address the immediate issues arising from the global financial turmoil, we must not lose sight of the longer term objectives: for when recovery eventually takes place, Malaysia must be appropriately positioned to capitalise on the opportunities that it presents.


I believe there are some key areas that we need to address. Market liquidity must be deepened, for instance, through market-making schemes that improve trading immediacy, as well as through better linkages and e-trading. On this point I am happy to note the successful launch of Bursa Malaysia’s trading system; although long overdue, it is an important step towards opening up growth opportunities for the Exchange. The new trading platform provides significant efficiency and capacity enhancements. The intended introduction of direct market access will allow greater access for a new class of investors to trade in our markets, particularly given the large growth in algorithmic trading that we have observed around the world. The challenge for the industry now is to leverage on the benefits of this new platform—such as multicurrency flexibilities, algorithmic trading, price latency and transparency as well as greater integrity—to take our stock market to the next level.


The experience that we observed for the warrants market in Malayisa demonstrated that well thought out product designs, insightful research on customer demand and marketing efforts go a long way towards successful product launches. These efforts are essential if success is to go well beyond just the launching of new products.

Ladies and gentlemen


In our view, focus must also be channelled towards the demand side of the equation or the buy-side as it is commonly referred to. We have very high savings but our challenge – and I do mean everyone who is a stakeholder in our capital market – is to find ways in which there is greater intermediation of these savings through the capital market. The key to the future growth of our capital market will be to build our investment management industry – whether it is fund management, unit trusts or other institutional vehicles.


The Private Pension fund industry is one segment that remains conspicuously underdeveloped in our overall landscape. In order to enhance the choices available for savers to manage and supplement their retirement savings and provide more choice in savings and retirement plans, I believe it is timely for us to work with industry to put private pension fund reform on the agenda.


Strong efforts are also needed, with leadership from the industry, to create a more vibrant marketplace. Investor interest has to be generated by: expanding the range of products available; facilitating dual and foreign listings; and promoting mergers and acquisitions, and other corporate exercises. At the same time, the market must also be cost-attractive with costs of trading and market access minimised to attract higher levels of participation by both issuers and investors

Ladies and gentlemen


In looking beyond the current global financial situation, Islamic finance is clearly an important area of focus. This is one area where Malaysia has a global positioning and is recognised as a leader, with a well-regulated, well-positioned and innovative market. The challenge we face is to maintain and enhance this position in the face of competitors jostling for a share in this fast-growing segment.


This will require extensive efforts to drive innovation in our markets, strengthen the architecture of Islamic Finance and continue with extensive marketing and promotion efforts to ensure Malaysia is seen as the natural choice for Islamic finance participants. The SC, for instance has been able to achieve this for the Islamic Fund Management area where we have with the support of the government been able to provide a liberalised and attractive environment for Islamic Fund management. As a result we have had strong demand from leading fund management companies from the US, UK, Gulf, this region and even India to establish their global or regional Islamic Fund Management hubs in Malaysia.


The development of Islamic finance in general is also important from the perspective of financial stability. I have highlighted before the tendency for sound financial conduct to share common characteristics with Shariah principles. The Shariah-based approach contains in-built checks and balances through risk- and profit-sharing structures. More critically, it demands a high level of disclosure and transparency in the financial system which is consistent with the principles of sound securities regulation as well as in compliance with Shariah requirements. This is not to say that Islamic asset markets have not been affected by the current turmoil. Indeed it has, and the value of Shariah compliant equities has declined in tandem with that of global equities. But it has been shown that Islamic finance in various segments of the market has been able to weather the storm relatively better than its conventional counterpart.


Next we need to truly internationalise the Malaysian Islamic capital market. This can be done, for instance, by promoting more cross-border activities, such as the issuance, listing and trading of international sukuk and other products. In this regard, I am pleased to note that Bursa Malaysia has amended its rules to allow for the listings of sukuk and debt securities under an exempt regime.



Ladies and gentlemen, Malaysia’s financial landscape has changed, with markets for funding and investment more disintermediated, larger and more complex firms conducting a broad range of financial services, and institutional investors among its key elements.


Greater financial diversity comes with a host of economic benefits that includes more fundraising choices and a wider range of investment opportunities. But it also carries new attendant risks. Such risks should not be necessarily avoided, but properly managed and capitalised upon for the potential opportunities they present. Learning from our past experiences, the SC has taken a pragmatic approach, seeking to strike the right balance between effective regulation and appropriate liberalisation.


In this regard, striking the right balance requires all stakeholders to play their part in striving toward a shared vision. Drawing on the lessons that have arisen in the current global financial crisis, an efficient, internationally competitive and systemically resilient market can only be sustained if stakeholders take shared responsibility in exercising strong and effective self, market and regulatory discipline at all times.

Thank you.