1. Now that the 31 December 2000 deadline has been removed, does the Securities Commission have a tentative timeframe in mind for the consolidation to take effect? What is the scenario that the Securities Commission expects to see at the end of the consolidation exercise?

While there is no fixed time frame for the consolidation exercise, the Securities Commission does not expect stockbroking companies to be complacent in consolidating. The removal of the 31 December 2000 deadline does not remove the urgency for consolidation as stockbroking companies would otherwise be unprepared to withstand the challenges of a changing environment which among others include the lowering of commission rates, the gradual liberalisation of the branching policy, the advent of e-commerce and the overall liberalisation of the market.

The Securities Commission will monitor and oversee the progress of market-driven consolidation efforts and will actively review the progress achieved.

The Association of Stockbroking Companies Malaysia (ASCM), which also includes representatives from the bank-backed stockbroking companies, has given the commitment that the stockbroking companies will merge with at least one other stockbroking company (two-way merger) by the end of the year. Hence, based on consultations with ASCM, the Securities Commission expects around five groups of Universal Brokers by the end of this year or early next year, and eight to ten Universal Brokers by the end of the year 2001.

2. Do the initial qualifying criteria for Universal Brokers still apply? In particular, is the Securities Commission still requiring four stockbroking companies to merge under each Universal Broker? Will the same criteria be applied to bank-backed stockbroking companies who, as a group, are already able to provide similar services?

The initial qualifying criteria for Universal Brokers as outlined in the Securities Commission's press statement of 21 April 2000 still apply. Stockbroking companies that wish to enjoy the benefits that will be accorded to Universal Brokers are still required to merge with at least three other stockbroking companies and satisfy the necessary qualifying criteria as follows :

Have a minimum paid up capital of RM250 million, a core capital of at least RM250 million and a capital adequacy ratio of at least 1.50 times;

Satisfy the quantitative and qualitative criteria, which would include good governance standards and management capabilities; and

Satisfy the necessary fit and proper criteria of the Securities Commission.

The criteria mentioned above apply consistently to both bank-backed and non-bank backed stockbroking companies.

In this regard, the Securities Commission's Guidelines for a Universal Broker have been formulated, in close consultation with the relevant industry participants, including ASCM. These guidelines are available on the Securities Commission's website.

3. What are the incentives under the policy framework for Universal Brokers?

As previously announced by the Securities Commission, Universal Brokers will be allowed to undertake the full range of capital market services, including new products and services as and when they are introduced. Universal Brokers will also be given the latitude to open branches and benefit from the tax incentives as announced in the Year 2000 Budget on 29 October 1999.

To further encourage the formation of a larger number of Universal Brokers, stockbroking companies that enter into firm merger agreements to become Universal Brokers by 31 December 2000 will be granted the right to open an additional branch for every licence it surrenders to the Securities Commission (i.e. one additional new branch for every licence surrendered). For example, a Universal Broker which is the resultant merger of four stockbroking companies, can now have six branches (not counting the Principal Office). In addition to the above, to encourage the formation of well-capitalised Universal Brokers, stockbroking companies that enter into firm merger agreements to become Universal Brokers by 31 December 2000, with a core capital of at least RM500 million, will be granted an additional bonus branch immediately upon fulfilling this condition.

Thereafter, from 1 January 2002, Universal Brokers will be given the latitude to open branches throughout the country, subject to the Securities Commission's approval.

On this front, the Securities Commission's Guidelines on the Establishment and Location of a Branch Office by a Universal Broker and a Non-Universal Broker have been formulated, in close consultation with the relevant industry participants, including ASCM. These guidelines are available on the Securities Commission's website.

4. Are stockbroking companies allowed to merge with less than three stockbroking companies under the modified policy framework that was announced on 12 June 2000? What will happen to stockbroking companies that do not qualify as or do not intend to become Universal Brokers? Will the Securities Commission allow stand-alone stockbroking companies to continue operating?

Under the modified policy framework, a stockbroking company is allowed to merge with less than three parties but, in this case, it is not entitled to the status of Universal Broker. These entities that do not qualify as or do not intend to become Universal Brokers can continue to serve their respective niche markets. ASCM as well as representatives of bank-backed stockbroking companies have given their commitment to merge with at least one other stockbroking company by the end of this year.

The Securities Commission would like to remind the industry, however, that these Non-Universal Brokers may be unable to survive and compete in a liberalised environment. Natural attrition may result in the demise of such stockbroking companies. We may also see these Non-Universal brokers eventually being forced to merge with or acquired by the Universal Brokers. Therefore, in the interest of these companies and the industry as a whole, the Securities Commission would encourage the formation of a sufficient number of well-capitalised, full-service Universal Brokers. The consolidation of stockbroking companies into Universal Brokers will provide the size for the attainment of economies of scale and a pooling of resources and capabilities to allow for the nurturing of competitive intermediaries.

5. What is the Securities Commission's policy on e-commerce for stockbroking companies under this consolidation framework?

The consolidation framework was developed after taking into account the need for the orderly and effective implementation of e-commerce in the capital market. The Securities Commission's policy for the development of e-commerce in respect of stockbroking companies continues to apply within the consolidation framework.

In this regard, the Securities Commission is currently working with the market institutions and securities industry participants to implement measures to further facilitate online trading activities by stockbroking companies.

In respect of the setting up of Internet kiosks, stockbroking companies will at an appropriate time be allowed to operate Internet kiosks to provide online trading facilities and market information, subject to meeting all the necessary requirements that are currently being formulated by the Securities Commission and the stock exchanges, in consultation with the securities industry participants. The Securities Commission will announce these requirements before the end of this year.

6. When the Securities Commission first announced the policy framework for consolidation of stockbroking companies on 21 April 2000, it said that "all stockbroking companies which have executed firm merger agreements for the merger of at least four stockbroking companies by 31 December 2000 will be granted tax credits for accumulated losses carried forward, and stamp duty and real property gains tax exemptions as announced in the Year 2000 Budget on 29 October 1999". What is the government's stand now that it is not compulsory for mergers to be among four stockbroking companies?

The objectives of the tax incentives are to encourage early consolidation and to promote the formation of Universal Brokers. With this in mind, the tax incentives as announced in the Year 2000 Budget Speech will be accorded to stockbroking companies that enter into firm merger agreements to become Universal Brokers by 31 December 2000. Universal Brokers that are formed between 1 January 2001 and 31 December 2001 will continue to be accorded similar tax incentives, albeit to a lesser degree. The details are as follows:

Stockbroking companies that enter into firm merger agreements to become Universal Brokers by 31 December 2000.

The tax incentives as announced in the Year 2000 Budget Speech are offered to stockbroking companies that enter into firm merger agreements to become Universal Brokers by 31 December 2000. These incentives comprise the utilisation of 50% of the tax losses of the acquired stockbroking company as tax credit to the acquiring entity to be utilised within two years, and Stamp Duty and Real Property Gains Tax exemptions to stockbroking companies that enter into firm merger agreements to become Universal Brokers from 30 October 1999 to 31 December 2000.

Stockbroking companies that enter into firm merger agreements to become Universal Brokers from 1 January 2001 to 31 December 2001.

Stockbroking companies that enter into firm merger agreements to become Universal Brokers from 1 January 2001 to 31 December 2001 will still be entitled to similar tax incentives, but to a lesser degree. These incentives comprise the utilisation of 50% of the tax losses of the acquired stockbroking company as tax credit to the acquiring entity to be utilised within one year, and Stamp Duty exemptions of 100% and Real Property Gains Tax exemptions of 100%.

7. What is the rationale for the ownership of stockbroking companies to exclude groups that have interest in the property and construction sectors? What is the meaning of "property or construction activities" in the context of the stockbroking consolidation policy?

Given the cyclical nature of these businesses, there is a need to insulate stockbroking companies from the potential contagion risks which may be brought about by the property or construction business. Property and construction businesses may not bring any synergy to the broking business. In addition, investments in the property or construction business involve considerable capital and could cause financial strain on the stockbroking business within the group.

In this regard, the Securities Commission, in consultation with industry participants (including ASCM and representatives from property or construction-related public-listed companies), has formulated Guidelines on the Involvement of Stockbroking Groups in the Property or Construction Business. These guidelines are available on the Securities Commission's website.

Essentially, the Securities Commission's Guidelines on the Involvement of Stockbroking Groups in the Property or Construction Business comprise the following :

For public-listed companies (PLCs) with an interest in a stockbroking company, the separation of ownership of a stockbroking business from that of the property or construction businesses shall be limited to the immediate holding company that is listed (immediate PLC) and all its subsidiaries and associate companies.

For non-PLCs with an interest in a stockbroking company, the separation of ownership of a stockbroking business from that of the property or construction businesses shall be limited to the immediate holding company and all its subsidiaries and associate companies.

"an interest in a stockbroking company" means having a stockbroking subsidiary, either directly or indirectly.

At the date of the issuance of these guidelines, where a group's core business activity (contributing at least 20% of the group's average audited profit before taxation over the last five years, or assets employed based on the latest audited accounts) is property or construction, or the listing status of its holding company is affected, these parties shall be "grandfathered" provided that adequate and effective firewalls are introduced between the stockbroking business of the group and its property or construction activities.

Where a group's investment or holdings in property or construction are free from gearing, these holdings shall also be "grandfathered" provided that adequate and effective firewalls are introduced to insulate the stockbroking business. If the property of the group is encumbered, there shall be policies in place to prevent the risk of default by the holding company and related companies from affecting the financial position of the stockbroking company.

Subject to the above, affected parties are required to restructure their property or construction interests within three years from the effective date of these Guidelines, during which time the group shall be subject to effective firewalls as aforementioned. In addition, the affected groups are prohibited from entering into new business activities relating to property or construction.

Any group that currently has a stockbroking interest and that is currently not involved in the property or construction sectors is prohibited from venturing into or being involved in property or construction activities in the future.

8. Now that the segregation of stockbroking business from financial institutions is not required, what are the measures that will be taken to deal with issues of conflicts of interest in relation to bank-backed stockbroking companies as well as other activities undertaken by stockbrokers that may potentially give rise to conflict of interest situations?

In addition to the firewall measures recommended pertaining to the property or construction activities of companies related to stockbroking companies, the Securities Commission has also formulated firewall policies to contain the inherent risks of credit and/or leasing companies and banking institutions related to stockbroking companies. On this front, the Securities Commission's Guidelines on Firewalls - Measures to Contain Risks and to Manage Issues Of Conflict Of Interest Between A Stockbroker And Its Related Companies have been formulated, in close consultation with the relevant industry participants, including ASCM and representatives from the bank-backed stockbroking companies. These guidelines are available on the Securities Commission's website.

9. Is the Securities Commission's policy in relation to the lowering of transaction costs affected by the Modification of the Policy Framework on Stockbroking Industry Consolidation?

The Securities Commission's policy in relation to the reduction of transaction costs remains unchanged as follows :

In Stage 1, which takes effect from 1 September 2000, commission rates for all trades above RM100,000 will be fully negotiable. Trades with contract values of RM100,000 and below will be subject to a fixed rate of 0.75%.

In Stage 2, which takes effect from 1 July 2001, commission rates will be fully negotiable for all trades, subject to a cap of 0.70%. However, the Securities Commission will review the situation before implementing this second stage.

The SCANS clearing fee, the SCORE fee and the Securities Commission levy will also be reduced as follows:

The SCANS clearing fee will be reduced from 0.05% to 0.04% with effect from 1 July 2001, subject to a maximum of RM200 per contract.

The SCORE fee will be reduced in two stages to 0.005% and 0.0025% with effect from 1 September 2000 and 1 July 2001, respectively.

The Securities Commission levy will be reduced to 0.015% from the present 0.02% with effect from 1 July 2001.

The Stage 1 reduction in commission rates and SCORE fees have already been incorporated in both the Business Rules of KLSE and MESDAQ. In addition, the following matters are prescribed :

For trades with a contract value of RM100,000 and below, the brokerage shall be the minimum currently prescribed (i.e. RM2.00 for loan transactions and RM5.00 for any other transactions) or such brokerage calculated at 0.75% of contract value, whichever is the higher. For trades with a contract value of above RM100,000, the brokerage shall be fully negotiable.

For the purposes of other instruments traded on KLSE, i.e. Government bonds, Municipal debentures, Asian Dollar bonds, other non-convertible debentures, as well as overseas options, the brokerage shall be on a fully negotiable basis.

Rebates on brokerage shall be on a fully negotiable basis.

The brokerage chargeable in respect of inter-broker transactions shall be as follows:

For stocks, ordinary shares, preference shares and other listed securities

For trades with a contract value of RM100,000 and below, the higher of the minimum currently prescribed (i.e. RM2.00 for loan transactions and RM5.00 for any other transactions) or such brokerage calculated at 0.75% of the contract value.

Trades with a contract value of more than RM100,000 will be fully negotiable.

For other instruments traded on KLSE

Fully negotiable basis.

For Direct Business Transactions

Fully negotiable basis, as currently the case.