28 OCTOBER 2002

Distinguished guests, ladies and gentlemen,

Selamat Datang. I would like to take this opportunity in extending a very warm welcome to the more than 70 distinguished representatives from securities commissions around the world. Malaysia is proud to be the host for the International Organisation of Securities Commissions (IOSCO) Emerging Markets Committee Meeting and Conference.

IOSCO is the leading international forum for securities regulators and provides a focal point for substantial cooperation and exchanges of views and ideas among regulators.

Organisations like IOSCO play a valuable role in bringing about harmonization through the development of broad principles for ethical and prudential norms. The growing impetus for international standards arises from the need to develop a common set of standards to facilitate sound regulatory supervision that is based on consistent treatment of cross-border markets and activities.

Investors, both local and foreign, will draw significant comfort from the fact that domestic regulators are developing their regulatory framework based on internationally benchmarked standards. The desire for convergence of regulatory standards is greater than ever. Convergence, which spells a high degree of complimentarity and cooperation, will greatly enhance the transparency of information to the market place and will reduce market uncertainty and raise the levels of integrity of markets worldwide.

Consistent standards, be they corporate governance or resilient enforcement regime, are needed to facilitate consistency in application and enforcement. Regulators play a key role in creating an environment where consistent interpretation and application of the laws can flourish. Of corse in the midst of this overzealous enforcement work as against realities of the market must be consistently guaged. After all we all are concomittantly in need of bouyancy in the market while at the ame time poised and committed against fraud and fraudsters.

Thus, there are many common challenges facing domestic regulators in promoting the growth of their capital market; key among them being the enhancement of the standards of corporate governance and disclosure – which I am glad to note is a major theme for discussion at today’s conference.

Corporate Governance – a pillar underpinning the development of efficient markets

Policymakers now generally recognize that sound and stable economic growth is fostered by investor confidence in the efficient functioning of markets. Indeed, throughout the recent market crises, one theme has persistently resonated. Markets cannot function properly without confidence and without trust. Corporate governance is an important pillar underpinning the development of efficient markets. A system that is doubted for being lame in terms of accountability and trasparency can regard itself as having its days numbered vis a vis the investing public, wherever that may persist.

Many of the recent market crises have been triggered by weaknesses or lapses either in accounting practices, ethical corporate behaviour and conflicts of interests. There are important questions as to why these lapses occurred despite checks and balances.

These issues have been and still are being discussed in Asia after the crisis in 1997/98. 1 am glad to note that we have some distinguished speakers from the US who can help us understand the events that are taking place there.

Malaysia, along with other countries, has made substantial strides in radically strengthening its corporate governance framework over the last couple of years. Malaysia’s approach to corporate governance is that it must be holistic. It is not possible for example to talk about disclosure standards without considering other elements that must partner such disclosure; namely sound regulation and enforcement, shareholder activism and professional and ethical management. Violation of an irregualrity may be pardoned via fines or even stern warnings but substantial inroads of illegality must necesarily end up with prosecutorial work. Again, supervision, a level playing field in terms of corporate governance must be the order of the day.

I must congratulate the Securities Commission of Malaysia for their efforts in raising the overall standards of disclosure, financial reporting and corporate governance over the past few years. Some aspects of the Malaysian corporate governance framework have been acknowledged to be ahead of some developed countries. The Malaysian Code on Corporate Governance was released two years ago. The Code has become our bedrock of value system.

Many of these initiatives were encapsulated in the Capital Market Masterplan which is the strategic blueprint for the development of Malaysia’s capital market over a 10 year period. This includes a phased shift towards a disclosure-based regime to ensure enhanced disclosure and accountability, the establishment of the Financial Reporting Foundation and the Malaysian AccountingStandards Board (the first statutory framework for accounting standard setting and compliance in the region).

But the key point is that corporate governance, an element that is just as highly desired in public governance, needs to be reinforced by effective enforcement work. I must effect a disclosure here – i.e. if the capital market of a system is to be respected and particiopated by domestic, regional a well as global players, the host country must also see to it that the national law enforcement network must not only be hard at work but also be seen to be hard at work and effective. Malaysia’s enforcement and corporate surveillance capabilities have been strengthened. The laws continue to be improved to enable effective enforcement and to tighten the rules. Legislation has been improved to assist enforcement on insider trading while civil enforcement powers for the SC and amendments to prohibit hiding behind nominees were introduced.

Since 1999, the SC Malaysia has initiated prosecution proceedings in over 40 cases, a doubling from the 20 cases initiated over the preceding six years. This includes the first insider trading conviction since amendments of the regulations in June last year.

Enforcement for corporate transgressions is not just the purview of the SC. It involves other regulatory agencies. This is where inter-agency co-operation and co-ordination is vital. The different regulatory agencies like the police, the Companies Commission and the central bank are working closely together as a coordinated enforcement mechanism will increase the effectiveness and credibility of any regulatory regime.

Correcting Global Imbalances

Ladies and Gentlemen,

Markets remain the most reliable mechanism to enable the efficient allocation of resources. Yet, after decades of experience with market systems, global imbalances in wealth remain unresolved. It should concern market regulators that markets may have not functioned to reduce disparities in wealth but may have inadvertently increased it.

It is in the nature of market mechanisms to operate on a survivalof-the-fittest basis; through a process of elimination to reward the most efficient at the expense of the inefficient. As a result, market mechanisms sometimes serve to aggravate global imbalances in the distribution of income.

Since we are also familiar with the weaknesses of market mechanisms, there is a need to temper the Darwinian nature of markets through regulatory intervention to ensure a fairer distribution of wealth to build a thriving and stable global community.

Regulators should use the knowledge they have accumulated on the inner workings of a market to think about harnessing the strengths of market mechanisms to create wealth even in the poorest of regions on a sustainable basis. There is a need to create opportunities for poor countries to help them move forward.

In this respect, there may be a need for the international community to consider special rules for nascent and developing economies to participate in the global economy and in the world capital markets. This should be an item on the agenda of international policymakers as much as it should be on everyone’s conscience.

The challenge for emerging markets

In the recent Asian crisis, policymakers learnt that financial liberalization and unfettered global capital flows are de-stablising to small and open economies. The high levels of volatility in asset prices, triggered by substantial movement of capital, within short periods of time had harmful effects on economy activity.

Even before we have fully recovered from the crisis, new threats are emerging in the form of network effects arising from advances in technology which have enabled instantaneous and seamless access into diverse capital markets.

In addition, specialist financial institutions are transforming into financial conglomerates with cross-border presence. This has redefined traditional notions of market boundaries and the consequent growth in cross-border transactions is posing considerable challenges to national regulators.

Hence, the challenges facing emerging markets are considerable. The query is how do we move forward and manage our relationship with global capital flows in a way that is profitable to the local economy and the foreign investor? In this respect, there have been concerns over global competition for shrinking pools of liquidity. Can these flows be managed so that the benefits are shared more equally around the world?

Emerging markets have also come under considerable pressure to open up their borders. Increasingly we are being transformed into a global community and there may be no room to retreat.

Regulators, of developed and emerging markets alike, have a heavy responsibility to come out with innovative ideas and solutions to deal with the challenges of an increasingly integrated world and craft fair and equitable solutions.

Malaysia, as you may well be aware, is one of the proponents for restructuring the global financial system. There should be fair rules. Equal and open access may not work where there is disparity between participants in a global community. This should be recognized.
Another issue to address is the extension of the principles of transparency disclosure and corporate governance such that it is applied consistently across all trades, all global financial instruments and all markets.

There is little doubt that the new financial landscape has thrown up new challenges. Perhaps it is also creating new opportunities for everyone in the process. It is always a time of change and renewal as traditional approaches come under scrutiny as markets continue to innovate.
In Malaysia, we believe in fair and equitable approach as a means of solving problems. We would be happy to work in smart partnership with other countries. A bilateral approach would help in that customized solutions could be crafted aligned to the needs of both countries. This would contribute overall to a stronger global community.

Finally, it may be unrealistic if I do not put a stressful note on recent developments affecting countries that have been affected directly or indirectly by the impact of acts of terrorism. The performance indices of securities in America after September 11 last year and in Indonesia after the Bali attack on 12 October have both done harm. Elements of uncertainty if not outright fear have had their tolls. The uncertainty and fear have combined to lash at and compromised continued confidence.

It is only fair that we support the widespread messaage: laws on securities the world over and good governance can only entail the positive results they are supposed to breed if at the same time laws on anti-terrorism concomittantly remain forceful and effective. You may ask: What nexus does laws on securities have to do with laws on security of the state? I say the nexus is thick and real. I say the two have much to do with the well being of the investor and the world economy. Whilst it is not the purview of this forum to delve much on instruments of state such as the Save America Act 2001 or the UK legislation on anti-terrorism or Malaysia’s and Singapore’s very own Internal Security Act, it is perhaps soothing to note that without the latter we in this part of the world might have been overtaken by events. We may as well accept the relevance that tough laws on state security will indeed save the day for the rules and regulations pertaining to securities.

With that note I conclude. I wish every delegate all the success and fruitful deliberation.