Speech by

YBhg Tan Sri Zarinah Anwar
Chairman, Securities Commission Malaysia

at the

Launch of Capital Market Masterplan 2
12 April 2011
Shangri-La Hotel, Kuala Lumpur

Ladies and Gentlemen,

The launch of CMP2 is a significant milestone in the development of the capital market of Malaysia. It marks the successful implementation of the first Capital Market Masterplan where 95% of the 152 recommendations were completed. CMP1 has been a remarkably prescient document that continues to retain relevance even after a decade and has been used by many countries as a model plan for the development of their own capital markets.

CMP2 will continue in the tradition of the previous Capital Market Masterplan in representing the SC’s commitment to expanding the role of the capital market in financing the growth of the economy. It is also intended to provide market participants clarity and certainty on the direction of our long-term strategies for the development of the capital market in a very dynamic and changing environment.

In the next 15 minutes or so, I would like to elaborate on the outline that has been provided by the Honorable Prime Minister this morning in his speech and share with you some insights and perspectives into the thinking and approach behind CMP2 as well as some of the major thrusts and recommendations.

Growth with governance

The theme for CMP2 is “Growth with Governance”. This came about from our assessment of the major challenges for our capital market in terms of expanding its role in driving growth and innovation and to address concerns about the efficacy of markets in the aftermath of the global financial crisis.

We believe that the pursuit of growth requires us to be open to all kinds of opportunities. CMP2 therefore outlines the strategies to unleash the competitive dynamics that would enable our markets to work better at utilising our savings for capital formation and for fostering entrepreneurship and innovation.

The growth process also requires that we have greater awareness and understanding of the risks associated with investing and that we build the capacity to manage these risks appropriately. In this regard, we must learn from the lessons of past financial crises that growth is only sustainable if it is underpinned by a proper system of accountabilities and governance. Therefore, the hallmark of the market that we aspire to build is one that will be distinguished by the quality of its governance.

Markets promote risk-taking, by spreading the 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. Therefore, growth with governance is aimed at getting markets to work better for everyone.

From foundation-building to transforming competitive dynamics

CMP1 built a strong foundation with the development of core market segments such as the bond market, investment management industry and ICM to complement the equity market. The challenge in CMP2 now is to move the Malaysian capital market to the next level. This will require different strategies and approaches to take into account four major structural changes:

  • First, Malaysia’s capital market is now sizeable at more than RM2 trillion and future growth will require greater reliance on exploiting economies of scale and efficiencies and the use of volume-based strategies
  • Second, the building blocks are already in place. Malaysia’s market is broad and the core segments are regional leaders. At this stage of growth, further gains will come from higher connectivity between the equities, debt and derivatives markets and with other international markets. In addition, we need to identify new growth opportunities to leverage off Malaysia’s very broad economic base.
  • Third, our institutional funds have grown significantly. Adding just the EPF and the fund management industry, institutional funds grew from 60% of GDP in 2000 to 102% of GDP in 2010 and this is projected to rise further in 2020. It is evident that these institutional funds will play a key role in shaping the future intermediation landscape.
  • Fourth, further growth will come from internationalisation. In this regard, international participation in terms of foreign players, issuances and investments were already largely liberalized in CMP1. In CMP2, intermediaries and PLCs must now seek growth opportunities with a global mindset.

The evolving regulatory landscape

Malaysia has an internationally benchmarked regulatory framework. This is a framework that has provided high levels of investor confidence and regulatory facilitation. This has also underpinned resilience during the global financial crisis while facilitating industry growth and expansion.

In CMP2, we will facilitate a more open intermediation environment that will enable intermediaries to explore business opportunities in a wide range of asset class and market venues. This will require the following to be done:

  • First, our domestic intermediaries must be able to operate to global standards. This is important as it will facilitate their expansion into other markets and ensure that we are attractive to international investors
  • Second, we have to strengthen our supervisory oversight and regulatory capacity to manage risks.
  • Third, we have to ensure efficient rules and processes that are fit for purpose and that can facilitate the emergence of new business models.

CMP2 strategies

As required for a 10-year period of development, the Capital Market Masterplan needs to be comprehensive in coverage and to be forward-looking. A capital market has many moving parts and it is important to adopt a system-wide view due to the many inter-linkages between the different parts such as between equities, debt, derivatives and investment management.

The CMP2 growth strategies prioritise key areas such as promoting capital formation, expanding intermediation efficiency and scope, deepening liquidity and risk intermediation, expanding growth boundaries through internationalisation, and building capacity and strengthening the infrastructure to meet future requirements.

The governance strategies on the other hand are aimed at fostering an enabling environment for expansion and innovation. In tandem with this, the regulatory framework and oversight of products, intermediaries and markets will be strengthened to manage the risks that are associated with further innovation. In addition, the strategies are also aimed at further raising corporate governance standards and broadening stakeholder participation in governance.

Given the short space of time, let me just highlight a few of the strategies that may be of interest to you.

Promote capital formation to support economic transformation

The most important priority in CMP2 is to strengthen the core economic function of the capital market in promoting capital formation as this assists economic growth as well as expands the supply of quality assets for domestic investors.

In this regard, it is worth noting that the equity market has played a major role over the past decade in promoting the growth of companies. It is significant that one quarter of PLCs listed on the exchange has grown their market capitalisation by more than 10% annually, in comparison to annual GDP growth of 4.6%.

CMP2 has identified strategies to meet the financing requirements of companies in different stages of growth:

  • For start-ups and growth firms, the further development of the VC and PE industry is important. In this regard, the restructuring of government funding for the VC industry is already in motion. The SC will focus on building private sector participation, which is at the moment is quite small, so we can enhance commercial orientation and promote greater risk taking. We have identified several strategies in this regard, ranging from regulation to the introduction of measures to attract more institutional and high net-worth participation in this part of the market; including facilitating venues for the trading of unlisted companies among sophisticated investors. The SC will work with intermediaries to evolve business models to promote the growth of small and mid-cap companies e.g. in relation to distribution, research and market-making.
  • The bond market meets the financing needs for large-sized projects and corporate restructuring and accounts for a substantial proportion of fund-raising activities. Malaysia’s corporate bond market is already considered one of the most successful in the region. CMP2 has identified strategies targeted at addressing areas that require improvement such as broadening the credit risk spectrum and deepening secondary market liquidity. In this regard, to enhance the quality of credit ratings, the SC has recently released the revised CRA guidelines to converge with new international standards.
  • One area that we feel requires greater emphasis is the promotion of socially responsible financing and investment. Social and environmental issues need to be given greater prominence by intermediaries and by PLCs. This is potentially a high-growth area – given the growing interest among institutional investors in particular to invest in companies that integrate sustainability and corporate responsibility elements into their business operations.

Facilitate efficient intermediation and deepen liquidity

Over this decade, the investment management industry is projected to grow quite robustly by 15.6% annually from RM377 billion in 2010 to RM1.6 trillion in 2020. The rapid growth will be driven by Malaysia’s high savings, an increase in foreign mandates, the expansion of specialised services as well as the private retirement scheme industry.

We have large savings that can meet our financing needs. We will therefore work closely with the GLICs and investment management industry to ensure more efficient intermediation of savings to promote capital formation, to increase private sector participation in business, to deepen market liquidity, facilitate risk-taking and product diversity.

In addition, the expansion of the derivatives market will be critical to provide instruments for traders to hedge and arbitrage between markets as well as to allow our intermediaries to build their risk management capabilities.

We will also facilitate greater de-coupling and outsourcing of functionalities to enable industry to evolve new business models, including those focused on attracting greater retail participation.

As I highlighted earlier, our market is now sizeable and will become increasingly dependent on scale-driven business strategies to grow. This requires strengthening the infrastructure to support technology-driven innovation in services and to target further reductions in friction costs.

Maximize growth opportunities

Based on historical trends, we estimate that the capital market will more than double from RM2 trillion to RM4.5 trillion in 2020. If we are able to tap these growth opportunities, we estimate that potentially the Malaysian capital market could grow to RM5.8 trillion in 2020.

The CMP2 strategies are aimed at maximizing growth opportunities through enabling domestic players to achieve scale, capture deal-flows and liquidity from expanding their presence in international markets as well as to attract more international participation in the domestic market.

The regional market is highly competitive but we believe that Malaysia has the strength to evolve as a regional hub such as for middle and back-office as well as for education and training in capital market related activities.

The strengthening of our position in the global Islamic capital market remains a key priority for us. We have a broad range of strategies that are aimed at strengthening the service infrastructure to facilitate our intermediaries to market their products internationally. We will also nurture the growth of high value-add segments and will develop a seeding strategy to attract the right participants and talents to build the Islamic fund management industry.

Strengthen governance

In CMP2, we aim for regulation to be effective and relevant. We will identify rule and process changes in the areas relating to intermediation, fund-raising, product offerings and licensing to ensure they are targeted, fit for purpose, streamlined, rationalized. Overall, the objective is to create a more conducive environment for product innovation and to widen the scope of intermediation.

In tandem with this, we will ensure that investors benefit from consistent investor protection across all capital market products and services. There should not be any gaps in the fiduciary duties, disclosure or other obligations and we need to ensure that intermediaries place priority on clients’ interests and treat them fairly.

As intermediaries take on more sophisticated activities, we will require that they strengthen their internal controls to manage conduct and operational risks.
Capital markets are now very sizeable and highly connected, and risk can easily cascade between both public and private markets and products. At the global level, increasingly capital market regulators are involved in managing risks to systemic stability. It is our job to be vigilant and monitor potential channels for transmission of systemic risks through markets and products.

Lastly, governance is enriched by extensive participation and engagement to ensure that the rights and interests of stakeholders are properly safeguarded. In this regard, a new CG blueprint will be launched. In addition, we will continue to broaden the scope of investor education and encourage capital market participants to be more involved in governance issues. It is only through good governance that we can build a sustainable and inclusive economy that generates long-term wealth.

Landscape in 2020

In conclusion, we envisage that over this decade, the capital market will play an important role in financing Malaysia’s transformation journey. Our capital market will naturally develop with the economy to become a fully developed capital market.

In 2020, we foresee that Malaysia’s capital market will be broad and deep. The capital market will provide innovative solutions to issuers and investors and primary transactions will be supported by liquid secondary markets.

The environment we foresee will be highly electronic and efficient, and characterised by the ability to transact across asset classes and product types across venues. In 2020, new segments will have emerged to complement the existing competitive strengths. Most importantly, Malaysia’s capital market will be characterised by strong and responsible intermediaries and by high standards of governance.

Thank you.