Introduction

2. It may be a cliché to say financial markets have been changing rapidly in recent years and have truly become a global marketplace. Nonetheless, it is true that innovation and internationalisation have wrecked the assumptions upon which the traditional system of regulation was based. Although the systems of regulating financial markets which evolved over time differed significantly from country to country, they were always based on three common assumptions:-

• Firstly, a closed market, that is, a market in which the number and operations of persons offering financial services were relatively constant, resulting in relatively little entry or exit. As a result, regulatory authorities knew a great deal about the participants operating in the financial markets and would develop a system to deal with a known quantity.
• Second, each market participant pursued a limited and constant range of activities.
• Thirdly, each market participant operated predominantly in one country.

3. Powerful developments worldwide have challenged and changed this traditional model for regulation. Indeed, the reality of globalisation is that it has brought about considerable change, intense confusion, tremendous complexity and fierce competition. What are some of these developments?

Advances in Technology

4. One such development is technological innovation which is the catalyst of rapid change and globalisation. It has been predicted that, in financial markets, the effect of the electronic revolution will exceed even the boldest prediction. Technology has increased in leaps and bounds the speed and consequently volume of transactions. The more far reaching implication, however, of technological innovation is that cyberspace is transcending geography. You can conduct e-commerce from the middle of Gobi Desert as long as you have a website. Your cost could be the lowest but you could nevertheless trade with anybody anywhere so long as he has an internet address.

Changing Structure of Intermediation

5. Globalisation also brings a blurring of traditional franchise. Whereas traditionally investors have had to trade on exchange markets, now they can trade via their computer screens but in a different market. If that market provides better service and lower costs, the franchise gets chipped away. Universal connectivity and virtually cost free exchange of information are driving new business models. Traditional integrated financial services business are being desegregated. In the securities industry, specialised players offering such services as research or low cost order routing and matching are competing with the bundled offerings of traditional full service brokerage houses.

Institutionalisation

6. The assets managed by institutional investors have grown significantly and this trend is continuing. The trading needs of institutional investors differ dramatically from those of retail investors, particularly in their preferences for anonymity and confidentiality. For example, institutional investors fear "tipping their hand" before executing large block trades and as a result receiving a poorer price than they might otherwise obtain. Another important difference between institutional and retail investors is that institutional investors require much greater liquidity to accommodate block trading and place far more emphasis on negotiating the lowest price. While issues of cost and liquidity are also important to retail investors, their concerns are more easily accommodated given the smaller size of their trades.

Capital Market Masterplan

7. The questions we in the Securities Commission ask ourselves in the light of all these developments are -

• What does this all tell us about how the Malaysian capital market should respond?
• To what extent is global integration required for Malaysia to achieve an efficient and competitive capital market?
• What conclusions should we draw about financial regulation as we move forward?

8. We expect that these and other questions are addressed in the formulation of the Malaysian Capital Market Masterplan. The SC is committed to the long term development of the Malaysian capital market and is in the process of developing a Capital Market Masterplan (CMP) in order to chart the future direction of the Malaysian capital market for the next ten years. In the formulation of the Capital Market Masterplan, industry consultation is made at every level in order to obtain broad consensus and "buying in". A Capital Market Strategic Committee (CMSC) headed by myself as Chairman of the SC and which has strong industry participation, was established in September last year. The Capital Market Strategic Committee is expected to present a report on its recommendations to the Government by June this year.

9. The SC has also just last week released a consultation document on the Framework for the Implementation of E-Commerce in the Malaysian Capital Market. It has been said that one must approach analysis of e-commerce questions not so much with an open mind as with an empty one. In e-commerce, it may be debatable whether the adoption of concepts inherited from earlier times is the best forward. Hence, the SC views the development of the E-Commerce framework as a collaborative effort between the public and private sectors in order to determine the optimal equilibrium between enterprise and regulation. The SC see its role as facilitating private sector's use of technology solutions and in removing regulatory and other impediments to e-commerce. We expect that once the e-commerce framework is finalised following the consultation period, it would be incorporated into the Capital Market Masterplan in June this year.

10. In the aftermath of the financial crisis in 1997, we found that the reforms that were made to the regulatory framework for the Malaysian securities industry were generally in the right direction, but needed acceleration and stronger implementation in some cases, and adjustment in others. In the interest of time, today, I would only deal with four main areas.

Development of the Corporate Bond Market in Malaysia

11. First is the need to accelerate the development of the corporate bond market in Malaysia. As many of you are aware, the recent financial crisis has highlighted the fact that much of Malaysia's growth has been funded by the banking sector. Corporate borrowers relied heavily on short-term debt to fund their long-term needs, resulting in a funding mismatch that was aggravated when liquidity dried up in the marketplace. In addition, credit and investment risks were not adequately distributed among the investing community through the corporate bond market, resulting in a tremendous strain on the banking sector during the economic downturn.

12. The Government has recognised this, and has highlighted the further development of the corporate bond market as one of the central action steps in the National Economic Recovery Plan. It is to this end that the Government decided on 10 June 1999 that a National Bond Market Committee be established to lead bond market development efforts in Malaysia. The SC and Bank Negara Malaysia are members of the NBMC.

13. Successful creation of a corporate bond market requires the establishment of a range of specialist institutions, instruments and infrastructure. Of equal importance in the policy framework and financial system within which the market operates. If these are not conducive to bond issuance and trading, market developments will be impeded no matter how good the infrastructure and institutions are. It is for these reasons that one of the initial tasks of the NBMC is to see to the full rationalisation of the regulatory framework for the corporate bond market. Proposed amendments to the Companies Act 1989, securities and banking legislation are being finalised to effect the Government's decision for all approvals for debt issuance to be centralised at the SC. In addition, the framework within which corporate bond issuance is regulated would be facilitative, efficient and cost effective. These amendments are expected to be completed and come into effect in the second half of the year 2000.

14. In addition to the proposed amendments, the SC intends to accelerate its planned transition towards a disclosure-based regime via the bond market. The accelerated transition in this case is justified because of the extra protections that are inherent in the legal structure of bonds compared to the legal structure of equities. Hence, a shelf-registration system for corporate bonds will be introduced once the proposed legislative amendments come into force. Under such a scheme, a proposal may be made by an eligible corporation to make multiple issues of debt securities within a particular time frame. Once this proposal has been approved, a corporation will be permitted to make multiple issues of securities within this time period without securing the further approvals in relation to each issue in the series, subject to guidelines which will be issued by the Commission. I am informed that the shelf-registration system will help cut down the costs and time involved in obtaining regulatory approvals for bond issuance.

15. The NBMC is also actively addressing other critical issues for the development of the corporate bond market. Recently, the Ministry of Finance has announced its commitment to using the Malaysian Government Securities as the benchmark issue within a planned and transparent auction calendar. In addition, the NBMC is also reviewing appropriate market structures, including institutional arrangements that promote and attract active primary and secondary market activities. Such measures would involve widening the issuer and investor base, improving liquidity in the secondary market and facilitating the introduction of risk management instruments.

Towards a Disclosure-based System of Regulation for the Public Offering of Securities

16. The principal thrust of the regulatory framework for public offering of securities in 1993 when the SC was established was merit-based. Under that regime, the SC was inclined to be more conservative in its judgement and will generally not permit high risk or speculative securities offerings. At the same time, investors took for granted the merit assessment done by the SC and generally did not themselves evaluate the risk of investing in the offerings based on information disclosed to them.

Law reform

17. In 1995, the first of a series of law reforms was introduced to provide for a framework that would facilitate a gradual shift from a merit review to a disclosure-based system of regulation. The objectives of the shift are to increase efficiency and inculcate higher standards of disclosure, due diligence, corporate governance as well as accountability by issuers and their advisers to investors. Hence, the framework is premised on the need for issuers to provide sufficient and accurate disclosure of all material information to investors and their advisers to enable them to evaluate the risks and merits of their investments. The belief is that disclosure promotes accountability by obliging issuers to make their decisions and reasoning behind them known, and furthermore, to be answerable for such actions and decisions.

18. The SC's planned move from a merit-based to a disclosure based regulation spans over a period of five years from 1996 to 2001 and I am glad to say that we are now in the tail end of implementation. The 1997 financial crisis had accelerated the adoption of some measures such as dispensation of profitforecast and projection in corporate proposals (other than initial public offering and reverse take-over/back door listing exercises). That is, to replace the last 3 words of the para "public flotation exercises" with "corporate proposals (other than initial public offering and reverse take-over/back door listing exercises)."

19. The move towards a disclosure-based regime will be further strengthened through the amendments which would be made to the Securities Commission Act 1993 this year. These amendments would centralise the regulation of prospectuses in the Securities Commission. The rationalised framework will be effective in the second half of this year after Parliament considers and approves the law reform in its current session. We hope that the law reform will provide a regulatory framework for fundraising in Malaysia that is consistent, facilitative and efficient.

20. We believe that these new set of amendments would significantly modernise the regulation of fund raising activities in Malaysia and would be in step with commercial reality and international standards. Various enabling provisions in the law would encourage more creative forms of accessing the capital market. One such example is the facility of shelf prospectuses for corporate bonds which would provide the flexibility to issuers in timing an issue in order to take advantage of market and interest rate fluctuations. The issuing of "red herring" prospectuses which hitherto is prohibited would facilitate the book building process, a cornerstone in a disclosure based environment where issuers and their underwriters determine the price of a public offering. A wider range of enforcement actions would be available including civil enforcement powers by the SC and investors to institute action for damages as a result of misleading or false statements made by issuers and advisers in a prospectus.

Improved Financial reporting

21. Another strategy in SC's move towards a disclosure-based regime is improved financial reporting. In order for capital to be channeled to investment in listed companies, adequate disclosure in accordance with established accounting standards is crucial. Credible information relating to a corporation's financial performance enables investors to assess the merits of investing in any enterprise. Since the coming into force of the Securities Industry (Compliance with Approved Accounting Standards) Regulations 1999 in June last year, listed corporations are required to ensure that their financial statements comply with the accounting standards issued by the Malaysian Accounting Standards Board. Under these regulations, every listed corporation, its directors and chief executive officers are required to prepare and present the corporation's financial statements in accordance with approved accounting standards. Failure to comply with these regulations is an offence under the Act. In line with these amendments, the SC has stepped up initiatives in improving the quality of financial reporting by listed corporations. The Financial Reporting Surveillance and Compliance Department of the SC has been entrusted with the task of ensuring that the preparation and presentation of financial statements of listed corporations comply with accounting standards set out by the Malaysian Accounting Standards Board.

More stringent share ownership reporting

22. Measures have also been adopted in 1998 to achieve greater transparency of share ownership. Reporting obligations have become more stringent, from 5% to 2% so that controlling owners may be more readily identified. Legislation now prohibits persons from hiding behind nominees. Securities accounts can only be opened in the name of beneficial owners or authorised nominees.

Corporate Governance

23. Ladies and gentlemen, there is no doubt that the 1997 financial crisis has generated and propelled debates on corporate governance in emerging markets to the forefront. In Malaysia, the formation of the Finance Committee on Corporate Governance in March 1998 was a watershed. It brought together illustrious members of the Government, the corporate sector, industry organizations and regulatory agencies to undertake a comprehensive review of corporate governance in Malaysia. While this comprehensive reform exercise in Malaysia was influenced by the events in the crisis, I would like to stress that it was primarily motivated by the belief that good corporate governance is essential for the promotion of the roles of companies in creation of wealth and development of the Malaysian economy.

24. The Finance Committee Report, released in March 1999, has been well received domestically and internationally. It has been described as the most comprehensive corporate governance review and reform exercise in Malaysia, and indeed in this region. The Report contains 70 recommendations covering areas ranging from legal reform, developing a Code of Corporate Governance, enforcement and education and training. Today, I am glad to say that many of these recommendations have already been implemented, and some are in various stages of implementation.

25. One recommendation of interest to many of you here is in the area of related party transactions. As some of you may be aware, in response to a couple of high profile transactions where related-party and interested party transactions were undertaken in 1997 and early 1998 without due regard for the interests of minority shareholders, the KLSE rules relating to such transactions were reviewed and strengthened in July 1998. The new Rule 118 requires appointment of independent advisers to advise minority shareholders and prohibit directors and substantial shareholders or interested parties from voting on the transaction. While amendments to the Listing Rules addressed immediate concerns regarding related party transactions, I must point out that the Finance Committee Report also recognised that the changes to the listing rules of KLSE must be supplemented by changes to the law and indeed, has recommended that the relevant provisions in the Malaysian Companies Act be amended.

26. Significantly, the report also includes a Malaysian Code of Corporate Governance of which I am proud to say I was one of its architects as Chairman of the MACPA. The significance of the Code is that it allows for a more constructive and flexible response to raising standards in corporate governance as opposed to the black and white approach of statutes. In tailoring the measures to suit the Malaysian environment, the Code contemplates a prescriptive approach of the type recommended by the Hampel Committee in the UK. The Code sets out principles and best practices for good governance directed principally at boards of listed companies. They are aimed at improved board composition to ensure that there are effective independent members on the board and that the decision making process of the board is not only independent but seen to be independent. The SC expects that the Code of Corporate Governance would be adopted for all public listed companies in the revamped KLSE listing rules this year.

27. In a post crisis environment such as ours, I believe we need to see to shareholder value creation as part of the decision-making process of Malaysian corporations in order to lay a firm and sound foundation for robust growth of the Malaysian capital market. At this stage, the SC is focusing on promoting greater awareness of the importance of good shareholder value management by local firms through its ongoing education efforts. We are also looking to encourage enhanced corporate accountability to investors as part of our regulatory efforts.

Review of Takeover and Mergers Code

28. Yet another area in improving corporate governance is the review of the Takeover Code. The new Code on Take-overs and Mergers came into effect on 1 January 1999 and has statutory force unlike the old Code which was modeled after the London City Code. It imposes higher duties on directors to make full and honest disclosure to shareholders before they vote on a resolution. The Code seeks to ensure that relevant information is available to minority shareholders in order for them to make an informed judgement on the merits of accepting a take over offer. This is particularly in the area of granting of waivers from mandatory offer obligations.

Promotion of Market Integrity

29. In order to maintain a high level of investor participation and confidence, securities markets must be fair and efficient, with prohibitions against fraud and manipulation. While the securities regulatory framework in 1993 contains provisions prohibiting insider trading and manipulation, there were obvious deficiencies. Radical amendments were made to the Security Industry Act 1983 in 1997 based on a revaluation of the policy objective of insider trading regulation with the focus on the need to protect the integrity of the securities market. The assumption is that it is vital to have timely dissemination of material information to the market and insiders who know the price sensitive information should not be able to benefit from it. At the same time, an enforcement regime is constructed for SC and investors to resort to civil remedies as a means of enforcement. However, where violations of the law relating to insider trading and manipulation are serious enough, enforcement may be undertaken by the Commission by way of criminal prosecution.

30. I need not say more about the SC's commitment to fair and effective enforcement against infractions and contraventions of the securities laws, with the number of prosecutions and administrative actions that the SC has instituted. Suffice to say that the entire enforcement department was restructured and its resources beefed up, with my Deputy Chief Executive, Dato' Ainum, heading it. Senior officials from the Attorney-General's Chambers have also been seconded to the SC to assist in SC's enforcement efforts.

Conclusion

31. Ladies and gentlemen, in the face of such rapid changes in the markets that we regulate, I believe that the SC cannot expect to remain complacent. We need to rise to the challenges ahead. We need to equip ourselves with the right tools. The key, I believe, lies in regularly reassessing our regulatory approach and position. Only then can we hope to forge ahead instead of lagging behind the learning curve.

32. I hope the securities industry will meet this challenge in partnership with the SC.

Thank you.