Keynote Address at Malaysian Capital Market Summit 2000
12 June 2000 |   By : Encik Ali Abdul Kadir, Chairman, Securities Commission
"The Malaysian Capital Market-The Way Forward"

Keynote address by

Encik Ali Abdul Kadir
Chairman, Securities Commission

Malaysian Capital Market Summit 2000
Mandarin Oriental Hotel, Kuala Lumpur
12 June 2000

YAB Dato' Seri Abdullah Haji Ahmad Badawi, Timbalan Perdana Menteri Malaysia; honoured guests; ladies and gentlemen:

Good morning. First of all, allow me to thank the organisers for extending me their kind invitation to address all of you today. I was honoured to have been asked to make some remarks at the capital market summit last year, and it is indeed my privilege to speak again at this year's conference. In my remarks a year ago, I spoke of the crucial need for a concerted effort by all to sustain the burgeoning recovery of our economy and of our capital market. Since then, we are making some very substantial progress in various areas. Allow me to review a few of these briefly.

As I am sure you are aware, corporate disclosure and transparency continues to be further enhanced, and we are effectively into the second phase of the shift towards a disclosure-based regulatory framework. Recent revisions to Issues Guidelines have focused on deregulating the requirements on securities pricing, asset valuation and the use of proceeds. Recent efforts to improve enforcement and supervision, which saw an improvement in regulation and enforcement against insider trading, as well as a strengthening of enforcement capacity, are beginning to pay off. And the introduction of a risk-based capital adequacy framework for stockbroking companies late last year serves not only to ensure stronger market intermediaries, but also brings prudential regulation more closely in line with international standards.

Global challenges

Twelve months hence, we continue to live in interesting-and challenging-times. Around the world, market institutions and intermediaries are jostling for position in an attempt to secure and increase market share. They are manoeuvring to establish closer linkages and to identify common standards. Adding to the competition is the presence of alternative trading platforms and new market entrants, who are elbowing their way into territory which, in the words of one commentator, was once the preserve of "cosy clubs run by elites of institutions for other institutional elites". Even among the emerging markets which were adversely effected by the recent crisis, many are already attempting to regain their previous initiatives and recover lost ground.

As a result, both cross-border as well as domestic markets are likely to witness significant changes going forward. Market institutions must increasingly be able to provide not only for capital formation but also for efficient international price-discovery and trade-execution. Technology is driving the rapid growth of cross-border trading, and many commentators are already foretelling the advent of a 24-hour global market in the world's 500 most liquid stocks. Moreover, increasing value will lie in lowering the costs and managing the complexity and risks associated with back-office processes, such as clearance and settlement.

A striking aspect of these developments is how quickly market institutions and intermediaries have unveiled their competitive plans. Just 12 months ago, many such plans were privately discussed but they tended to remain firmly pinned to the drawing board. Now, hardly a day goes by without the announcement of some form of strategic alliance or market "e-nitiative" somewhere in the world. Perhaps more startling is the speed at which these plans are expected to be implemented. Most appear likely to come on-line within the next six to 12 months.

Strategic issues for the Malaysian capital market

I am convinced, therefore, that amid the changes taking place around us, our top priority must lie in dealing with the strategic implications of these developments to our capital market.

Ladies and gentlemen:

No less than the following issues demand our attention: the challenge of keeping pace with developments in a manner that is appropriate to our circumstances; and the need to strike an appropriate balance between the pursuit of strategic regulation and allowing market forces to operate. Allow me to elaborate a little on these two points.

Why is it important that we do not ignore or lose sight of global developments and broader market trends? The risk is that if we were to do so, we are likely to end up marginalised-possibly even adversely affected-as the world moves on without us. That said, I am not advocating that we hop on the "Globalisation Express" regardless of where it is headed. In anticipating the challenges arising from global trends, we must do so in a manner appropriate to our particular circumstances. Otherwise, we also risk pursuing strategies that are irrelevant or, even worse, potentially detrimental to the progress we have achieved thus far.

What then of the respective role of regulation in driving market development? Impediments, such as narrow interests, business practices and even past initiatives, do arise and frustrate the progress of our capital market. That is when we must invoke pragmatic regulation, which strikes a balance between an explicit strategic direction and market forces.

Thrusts going forward

Our success in achieving this balance will depend on several factors, including having a clear and comprehensive plan for capital market development. In this regard, the Capital Market Master Plan (CMP), which the SC will release for consultation soon, addresses this need for a clear and comprehensive development strategy. In preparing the CMP, we are aware of the need to provide greater certainty to the market over the strategic direction and position of the capital market. For the purpose of my speech today, let me touch upon two areas, among several others, where I believe we ought to be directing our efforts.

First, I believe it is crucial that we do not necessarily limit ourselves to strategic opportunities within our national borders. In a world in which it is increasingly risky for market institutions and intermediaries to take their national status as given, we must be prepared to look beyond our boundaries if necessary to secure a competitive position. Therefore, overtures to tap possible synergies and competitive advantages must be properly assessed, and not dismissed simply on the basis of being too premature. In this regard, our market players and operators must consider adopting an explicit commercial focus. Responsiveness to investors' demands will be a key issue. So will the need to manage effectively the risks that are part and parcel of such commercial ventures.

Second, if we are to seek out opportunities at the international level, it will be critical for our markets to strive towards attaining international standards of integrity and efficiency. Rules will continue to change and boundaries re-drawn to suit the changing circumstances within which markets participants operate. But the achievement of standards of best practice will ensure that our market can withstand the test of time and establish a strong basis for achieving sustainable growth and development. And, by allowing our market to keep pace with other markets, meeting international benchmarks in areas such as clearance and settlement and prudential regulation can contribute to our long-term global competitiveness.

I have already mentioned at the beginning of my speech the very real progress that we are making in various areas. There is tremendous scope for further progress in other areas as well. For instance, as systems develop and settlement cycles shorten, we must look earnestly at technological solutions to provide us with a means of assimilating our capital market within the broader domestic financial system, and later within the wider cross-border trading environment. Indeed, our ability to achieve many of the global standards we have set out to attain hinge on the extent to which we can achieve save on costs, increase efficiency and increase processing accuracy.

Earlier, I stressed the importance of keeping pace with developments in global markets. While the CMP will play an important role in ensuring that our market does, it is also necessary to ensure the timely implementation of several measures and to allow the market sufficient time to prepare given certain timeframes that have already been stipulated. Hence, while they will be presented as part of a full set of recommendations in the CMP, some these measures have been announced ahead of the report's release.

One set of measures involves transaction costs and the need to consolidate of the stockbroking industry. Costs of transactions done on the Kuala Lumpur Stock Exchange (KLSE) need to be reduced if we are to create a more competitive capital market. Therefore, as announced in April, brokerage commission rates, which are the main component of these transaction costs, will be liberalised in two stages, while other fees and levies will be reduced concurrently. The timing of this move ensures that we are in line with that of other markets in the region, who are also looking to deregulate and lower transaction costs in their respective markets.

Aside from transaction costs, there is obviously a need to strengthen the stockbroking industry, by forming a group of well-capitalised domestic stockbroking companies which can provide efficient and cost-effective intermediation for investors, be robust enough to withstand the pressures from risks inherent in the stockbroking business and which are well-prepared to face the challenges of liberalisation and globalisation.

In the area of bond markets, the National Bond Market Committee is conducting on-going work in the area of legal and regulatory reform, product and institutional development and the improvement of market infrastructure and operations. In light of the timeframe required for the implementation of some necessary measures, it has been announced, among other things, that the SC will assume overall responsibility for the regulation of the corporate bond market, effective the second half of this year. In order to facilitate the issuance of private debt securities, shelf-registration will be introduced later this year, while investment rating requirements are due to be relaxed. The SC is also working on formulating guidelines for the issuance of asset-backed securities.

The SC views technology application as a major strategy for capital market development, and is keen to address the issue proactively with the market. In broad terms, our current strategy is to facilitate innovation by removing undue impediments, optimise technology infrastructure, and encourage private and public sector collaboration. But the pace of technological innovation, with its potential for tremendous implications for the economics of markets and for business strategies, are rapid. Therefore, in order to anticipate these issues as early as possible, the SC released a consultative paper entitled "Framework for the Implementation of Electronic Commerce in the Capital Market" in March this year. Feedback on the paper so far is encouraging and we hope to make significant progress on finalising the framework in the weeks to come.


Ladies and gentlemen:

There is much we have achieved. But it has been said that if anything is certain, it is that change is certain. The world for which we are planning today will not exist in this form tomorrow. It is within this context, then, that our capital market faces the challenges of an increasingly globalised and competitive world. Time, tide and the pace of technological innovation, with its potential for tremendous implications for the economics of markets and for business strategies, wait for no market. Therefore, when we look to the future, we must think in terms of the way forward and not that of the present.

Thank you for your attention.
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