Asia Pacific Economic Summit 2000
11 September 2000 |   By : Ali Abdul Kadir, Chairman, Securities Commission, Malaysia
"Financial Markets : Change and The Internet Effect"

Ali Abdul Kadir
Chairman, Securities Commission, Malaysia

Asia Pacific Economic Summit 2000

11 - 13 September 2000
Melbourne, Australia

Ladies and gentlemen, before I begin I'd like to first of all thank the conference organisers for inviting me to address all of you on this panel alongside these very distinguished speakers. I know we have a full schedule for the next hour, so in the interest of time, let me simply make the following points on the "Internet effect" and its implications for financial markets in general and the Asia Pacific markets in particular.

We are all aware that financial markets are undergoing some rapid changes, driven largely by the advent of more powerful and integrated networks-the Internet of course being the prime example. Trends include a higher rate of cross-border transactions; greater disintermediation of market institutions and intermediaries; revisions to capital market structures; and the blurring of traditional product classifications. Above all, we are witnessing the increasing empowerment of financial-service consumers. This is in turn is putting greater pressure on financial-service providers not just to compete, but also to survive.

These developments pose significant challenges for financial market regulators. Clearly, innovation cannot be stifled lest we deprive consumers of potential welfare-improving benefits, such as lower costs and a wider range of fund-raising and investment opportunities. At the same time, innovation can bring with it increased risks, including market failures1 and the scope for greater fraud and misconduct.

So how should regulators respond to these challenges? To me, the regulator's role is clear: we must ensure that the environment is such that innovation continues to thrive, along with a high degree of confidence among market participants that the advent of new technology in no way compromises the existence of fair, efficient, transparent and robust financial markets. This therefore requires at least two things of what I call the New Economy regulator:
The need to maintain a regulatory framework that is facilitative of market innovation
The need to develop appropriate regulatory capacity to deal with the new challenges that arise as a result of market innovation
For the regulatory framework to facilitate innovation, it must allow for the "upgrading" of standard activities and processes through the adoption of technology, such as the move by many exchanges from open-outcry towards screen-based trading. At the same time, regulation must also be open to new solutions that technology has to offer. Who would have imagined a few years ago that retail investors would be able to receive real-time price and other market information, conduct state-of-the-art investment analysis, manage their portfolios, diversify internationally and communicate with each other all from the comfort of their own home?

To accommodate such developments, the burden of regulation ought to reflect the risks rather than the form of market activity. For this to happen, the regulatory structure must be seamless with respect to the conduct of market activity. This requires a strong set of underlying regulatory objectives and principles. In Malaysia, our proposed framework for e-commerce in the capital market adopts this spirit of "seamless regulation" by making reference to,
Applying fundamental principles of regulation of the capital market regardless of the operating medium
Providing transparency and consistency regarding how the regulatory framework applies in an electronic environment
Regulating and facilitating capital formation without undue impediments
Co-operating and sharing information with other capital market regulators, particularly in the areas of surveillance and training
Ensuring that investors without access to electronic information are not unduly disadvantaged
The Securities Commission taking the lead in promoting and facilitating the adoption of electronic transactions in the capital market
With regard to the last point, I should like to highlight that it has been recognised, not only by the SC but also by our counterparts in several other jurisdictions, that it may be necessary to facilitate innovation further by leading the establishment of appropriate regulatory and physical infrastructures. These include enabling technology to support technology-based capital market activities, and clear and proper policies and regulations to allow the conduct of such activities.

Turning now to the issue of regulatory capacity, the main point I would like to make here is that within the current dynamic environment regulators can no longer expect traditional approaches to market regulation and supervision to carry them through. I firmly believe that it is absolutely crucial for us to equip ourselves with the appropriate skills, powers and resources to discharge our functions effectively and pro-actively. A particular case in point concerns the monitoring and surveillance of market activity. A wide range of activities are being conducted through an ever-increasing variety of media, and regulators must have the ability to check the rising incidence and complexity of computer-related crimes if we are to ensure that consumers of financial services are not taken for a ride. But regulators will have no hope in pursuing successful enforcement action if they are not sufficiently familiar with the environment and technology through which such transgressions are conducted.

For a start, regulators must themselves be as net-savvy and excited about new technology as the e-scammers out there. Successful action against the e-mail-based 'pump and dump' manipulation scheme against Emulex Corporation in the United States recently was made possible because regulators were aware of the context in which the incident took place, and knew where to look and how to find the information they required. But more than that, regulators must be able to anticipate the critical issues that will undoubtedly arise as the landscape continues to change-for it is far from likely that we have seen the definitive shape of things to come. We have seen recently the incidence of web-sites being vandalised en masse and viruses being spread. These have yet to take place within the context of financial markets, but we must have the capacity to anticipate and respond to such events if and when they arise.

Ladies and gentlemen, new technology is resulting in a shifting balance of power, in which the rise of more empowered consumers of financial services is prompting a more fevered pace of innovation by market institutions and intermediaries to secure and expand their respective market shares. The dynamics of the new economy will mean that, as a result, more activity takes place across borders and across asset markets. As regulators, we should not stand in the way of such developments in as much as they bring with them greater benefits. But we must also be aware that they carry significant risks and must attempt to manage them effectively. Above all, regulators must adopt a flexible mind set that simultaneously appreciates and is responsive to the changes that are afoot, and yet is appropriately wary of the risks they may entail. This, then, is what I believe characterises the New Economy regulator.

It is therefore critical that financial market regulators have explicit arrangements with each other to undertake explicit international co-operation in supervision and monitoring, and the effective co-ordination of regulatory policies. There are opportunities to exploit new technology even here: I am aware that my counterparts here in Australia have launched Global Enforce.Net, a discussion forum for regulators around the world to discuss matters relating to enforcement in an electronic environment. I am encouraged by such initiatives and will be actively promoting others through the IOSCO's Asia-Pacific Regional Committee, which I have the honour of chairing. I do not anticipate a switch to a veritable supra-national regulatory framework-replete with global capital market enforcers-anytime soon, which makes the pursuit of these goals all the more vital in ensuring that markets remain fair, efficient, liquid, transparent-and robust.

1 Take the case of electronic communication networks. On the one hand, the presence of ECNs can raise the competitiveness of markets in exchange-traded securities. On the other hand, there is a danger that they fragment liquidity to such an extent that price-discovery is hindered.
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