INTRODUCTION
I am grateful for this opportunity to share with you on a subject dear to my heart: the role that we, regulators, play in growing and nurturing our securities markets to become fair, efficient, liquid and transparent markets. I hope you will permit me to use the example of Malaysia. In so doing, I am not in any way suggesting that our experiences are particularly relevant as a model for any country. Rather, it is with the recognition that we all face similar challenges, and that an exchange of views and experiences would be mutually beneficial. Thus, it is on this basis that I will make references to my own country.

THE MALAYSIAN CAPITAL MARKET TODAY
By way of background, let me give you a brief sketch of the Malaysian capital market.

Today, the Kuala Lumpur Stock Exchange is the largest bourse in the ASEAN region and is the fifth largest in the Asia Pacific region after Tokyo, Osaka, Hong Kong and Australia. It has a total of 621 companies, 413 listed on the main board and 208 listed on the second board, with a total market capitalisation of RM806.8 billion (US$318.8 billion) as at 31 December 1996. The number of IPOs and funds raised have surged from 4 and RM0.6 billion (US$0.2 billion) in 1985 to 92 and RM20.8 billion (US$8.2 billion) in 1996. Market capitalisation is 323% of nominal GDP, and the market turnover 58% of its capitalisation by way of trading volume.

What, you might ask, has been the moving force behind this rapid growth and development? Is this merely a natural and necessary by-product of the nine years of back-to-back growth in excess of 8%? Or, is it a development that was carefully planned and implemented, hand-in-hand with industry? Before I attempt to answer these questions, let me quickly walk you through a brief history of the Malaysian capital market.

THE RECENT PAST
While I cannot, within the time that I have, trace every development of the Malaysian capital market, I will try to look at what I regard as the three significant stages of its development.

The first stage is the pre-1980s. I regard this as the early growth years of the capital market. The stockmarket was not regarded as an important avenue for capital raising. The local corporate scene was dominated by companies that were either family-owned domestic companies or subsidiaries of foreign multi-nationals. Both types of companies did not regard the stock exchange as an important avenue for raising capital for fear that their hold and control over these companies may be diluted. Bank financing and internal borrowing were therefore the preferred means of raising funds. The public sector which was then the transducer of economic growth, obtained cheap funding by developing a captive Malaysian Government Securities (MGS) market. Regulated institutions such as insurance companies and pension and provident funds were required to maintain MGS as part of their statutory reserves. Securities regulation, though in existence, was rudimentary. The existing Companies Act was introduced in 1965 and the first Securities Industry Act, in 1973. The Capital Issues Committee, a government committee under the auspices of the Ministry of Finance was established in 1968 to approve proposals relating to capital raising by corporations. The development of the capital market until the 1980s, was basically organic growth with little external impetus to either fast-track, systematise or schematise its development.

Things however changed in the mid '80s. The winds of privatisation which came with the Thatcher government in the UK were quickly felt in Malaysia. The severe recession in Malaysia in 1985/86 made the government realise the need to rightsize the public sector and public sector spending. The private sector was entrusted with greater responsibility in taking economic initiatives. To strengthen the capital market so as to enable it to play a pivotal role in economic development, several radical government-initiated reforms were introduced to the capital market. It was against this sombre backdrop that the second stage of development began. Through Permodalan Nasional Berhad (PNB) or the national equity corporation, the government launched the Amanah Saham Nasional (ASN), a unit trust scheme that was intended to educate the Malay and indigenous community on investments in the capital market. The phenomenal success of ASN in achieving this objective can be seen in the fact that within 10 years the number of unit holders exploded from 841,200 in December 1981 to 2,460,977 by December 1991. A policy that required stockbroking firms to be corporatised was introduced in 1986. Additionally, to strengthen these companies, financially and professionally, financial institutions and foreign broking houses were allowed to take up to 30% equity in stockbroking companies. This was followed in 1991 by the introduction of the requirement that these companies must have at least RM20 million in paid-up capital.

Meanwhile, KLSE itself took major strides by improving its trading and clearing system and by allowing new instruments to be traded. In 1989, the Second Board, was introduced on the KLSE to provide small companies with an avenue to raise capital through listing on the KLSE. The Fixed Delivery and Settlement System (FDSS) was introduced in 1990. Electronic price dissemination, and then electronic trading were introduced. Listed property trusts were introduced in 1989. Major government-own corporations were privatised, starting with the Malaysian International Shipping Corporation in 1989, followed soon after by the national airlines, and then the telecommunications and power corporations. These listings lead to a wider span of activities covered by the market, and increased market capitalisation significantly.

Despite these significant developments there was one major snag in the system. There existed a cumbersome and multi-tiered regulatory structure for the capital market. Furthermore, no one authority was entrusted with the responsibility of pro-actively and systematically developing the capital market. Supervisory powers were shared between industry organisations like the stock exchange and government institutions that do not have the regulation and development of the capital market as their sole or even primary role, such as the Registrar of Companies, Central Bank and the Ministry of Finance via the Capital Issues Committee.

This brings us to the third stage of the development of the capital market. This is the phase that saw the conception and birth of the Securities Commission (SC) in 1993, whose main objective is not merely to regulate, but just as importantly, to develop the capital market. Thus, regulation and development are the twin pillars upon which the SC is built.

THE SC AS FACILITATOR AND REGULATOR
The recognition of the need for a single regulatory body to promote and propel the development of the capital market was indeed a portentous event in ensuring the orderly yet explosive growth of the capital market over the past few years. It is a clear and consistent signal from the government that it is extremely conscious of the increasingly important role the capital market has in the economic development of the nation.

By way of elaboration, the SC is a self-funding statutory body established under the Securities Commission Act 1993. It has investigative and enforcement powers. It reports to the Minister of Finance and its accounts are tabled in Parliament annually. Apart from its regulatory functions over capital market institutions, intermediaries and activities, the SC is statutorily obliged "to encourage and promote the development of the securities and futures market in Malaysia". This is well encapsulated in the SC's mission statement, viz.:-

"To promote and maintain fair, efficient, secure and transparent securities and futures market and to facilitate the orderly development of an innovative and competitive capital market."

Ladies and gentlemen,

The mere recognition of the need for a single authority to develop and regulate the market is in itself only one of several catalysts to the orderly development of the capital market. Of even greater importance is the government's commitment and belief that the development of the capital is an indispensable agenda in the economic development of the nation as a whole.

So, what has been the SC's track record in facilitating the development of the capital market?

Over the past four years, numerous measures have been introduced to further deepen and broaden the capital market. These include the introduction of call warrants, the introduction of close-end funds and the listing of infrastructure project companies. Stock borrowing and lending and regulated shortselling were implemented last year. Market micro-structures too have been developed in parallel with these developments. Electronic balloting for IPOs have been introduced by issuing houses and it is expected that electronic share application through the ATM machines of banks will be introduced very soon. The central depository has immobilised all equity instruments by the end of the last year, and is expected to go completely scripless by the middle of this year. At which time, the Exchange will move to a T+5 settlement cycle , with Delivery-versus-Payment, or DvP, in the third quarter of this year.

We have since 1995 started the Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) which is the second futures market in ASEAN after SIMEX and indeed, the first to trade futures on a domestic index. Another futures exchange, the Malaysia Monetary Exchange (MME) went live in April 1996 and trades a short interest contract, the Kuala Lumpur Inter-Bank Offered Rate (KLIBOR) Futures Contract. Plans are now afoot to introduce a new exchange that will cater to the listing of technology based, high growth potential companies. MESDAQ, as this exchange is named, is expected to begin operations before the year end. And at the beginning of this month, the SC announced a phased approach to the listing of foreign companies on the KLSE.

Economic studies have shown the importance of the depth and liquidity of capital markets as one of the most significant touchstones of sustained economic development. It is not difficult to see why this is so. Efficient capital markets reduce the cost of capital to companies that seek the financial resources to fuel their growth and expansion. The growing wealth of citizens must be invested in financial instruments that allow for capital appreciation. This in turn encourages higher levels of savings, which allows for more investment to be funded out of the domestic resources of an economy. I will aver that a fair, efficient, liquid and transparent capital market is a necessary condition for sustainable development of an economy, and therefore a worthy objective to achieve.

THE THREE DEVELOPMENTS

So, how do we get there? To my mind, there are three key aspects to development:

• Market development
• Institutional development
• Regulatory development

I call these the three developments. Let me touch on each area briefly.

Market Development
First, market development.

The deepening and broadening of the capital market is critical in ensuring greater inflow of funds both domestic and foreign, and in catering to the growing importance of the capital market for capital raising activities. The government has been conscious of the role of the capital market in economic development for financing corporate growth, for financing infrastructure projects and for encouraging savings and investment. This entails numerous aspects of market development such as the development of the derivatives market, development of the debt market, facilitating the introduction of new instruments on the equity market such as listing of call warrants and infrastructure project companies and developing the asset and fund management industry. It is noteworthy that each of these aspects of market development is at various stages of implementation in the Malaysian capital market.

By way of illustration, the role that SC plays in facilitating market development can be clearly appreciated in the introduction of the exchange traded financial derivatives to Malaysia. While the Kuala Lumpur Commodity Exchange (KLCE) introduced commodity futures to Malaysia in 1980, the idea of exchange-traded financial derivatives was only first mooted in the mid 80's. In 1990, the government gave the green-light for the establishment of a financial futures market in Malaysia. The Futures Industry Act 1993 was passed simultaneously with the Securities Commission Act 1993. As soon as the SC was established, it reviewed the proposals for the setting up of 2 exchanges to trade in financial futures. The Commission reviewed the FIA and recommended wide-ranging amendments prior to the start of the market. The SC also worked very closely with the exchanges in respect of areas such as business rules, membership structure, clearing house, trading and surveillance system, contract designation etc. These collaborative developmental efforts have resulted in the start of trading on KLOFFE and soon after, on MME and to the establishment of the Malaysian Derivatives Clearing House (MDCH) which clears all financial futures and options contracts.

Institutional development
Next, institutional development.

The maintenance of an efficient, transparent and secure market makes it vital that the development of the market be supported by development of institutions and intermediaries within the market. Institutions and intermediaries that play pivotal roles in the development of the market must themselves be conscious of the need to constantly enhance skills and professionalism as well as operational, financial and other capabilities. It is only in this way that a market can continue to remain competitive and cost-efficient in the face of increasing competition. Hence while new products are being introduced into the market, it is equally important that the capacity, efficiency and professionalism of institutions, intermediaries and infrastructure that support the market be continuously reviewed. This includes among others improving clearing and settlement systems, strengthening the capital adequacy standards, strengthening of accounting and disclosure standards and improving risk management systems to ensure safety, transparency, efficiency and lower costs to all capital market participants. In this respect, the SC works very closely with the exchanges, the clearing houses, the issuing houses and the central depository. Similarly, consultations and discussions are regularly held with the Stockbrokers Association, the Association of Merchant Banks, the Federation of Unit Trust Managers and other industry organisations in order to jointly explore ways to improve the institutional infrastructure of the market.

Regulatory Development
Last, but not least, regulatory development.

The realities of modern day finance is such that the exceptional demands placed on the capital market will also impose exceptional challenges to the regulatory infrastructure. Given the rapid pace of development in the capital market the law cannot lag too far behind economic development, instead laws should anticipate such development if it is to continue to remain a relevant component of the capital market. This is because the maintenance of an orderly market in an environment where technology has reduced, if not eliminated, the significance of time and geographical barriers, in an environment where funds can be moved from one corner of the globe to another by the mere push of a button and where cross-jurisdictional deals are de rigueur, will not be possible if it is not supported by a robust regulatory framework. Securities laws that create commercial and legal certainty whilst allowing for the flexibility that is a precious hallmark for all capital markets, is absolutely necessary. Greater inflow of funds, exponential growth of capital raising activities, the new and creative use of capital market instruments must necessarily be underpinned by a regulatory framework that upholds market integrity, enhances market transparency and promotes operational efficiency whilst ensuing adequate investor protection. These efforts have resulted in significant amendments and improvements to the legal and regulatory framework of the country's capital markets.

CONCLUSION
Let me close by presenting you a paradox. You may ask if the two roles of regulator and facilitator are not conflicting? Is it possible to play referee and coach at the same time?

As with many things in life, this apparent conundrum cannot be solved by adopting an either/or mentality. Put it another way: if the effort of a regulator in a developing market is all regulation, there will soon be no market for him to regulate. If it is all development, with no regulatory foundations, there will be no integrity in the capital market, wherewith liquidity will dry up. Either way, the market will disappear, and there will therefore be no need for regulation.

You have an apt term for this, which emanates from the practice of Zen Buddhism in the Tang Dynasty. If you will excuse my almost non-existent grasp of the Chinese language, it is "wu wei" This does not mean there is no way to achieve a balance. What is does mean is the need to grasp the holistic reality of the situation - there must simultaneously be development and regulation.

A programme to implement the three developments must take into account the break-neck speed at which capital markets all over the world innovate and develop. With globalisation, institutionalisation and advances in information and telecommunication technology, capital markets are increasingly correlated thus making volatility transmission easier. These are forces that are sweeping across all capital markets, albeit at varying degrees. The pace of convergence is increasing, not decreasing.

The programme must also strive to attain the universal values that are shared by markets all over the world. The challenge to us, as securities regulators in developing economies, is to attain these goals whilst taking into account our country's unique cultural, philosophical and historical features, as well as its stage of economic development.

Thank you.