I would like to thank ASLI for organising this conference and for inviting me to give this keynote address.

For a whole week, from the Saturday before to last Saturday, the Securities Commission was engaged in a dialogue with market participants on the same topic before us today: The Malaysian Capital Market: Challenges and Opportunities. While the Commission has of course been involved in various consultations and discussions with industry since its establishment three years ago, it decided the time was right to institute an annual forum to discuss bigger and strategic issues, and the theme chosen was apposite, just as it is today.

I therefore welcome this opportunity to address the subject to a wider audience in public.

It is important to understand the challenges we face and the opportunities that beckon to gear ourselves up for the direction we have to take. Sometimes the challenges seem overwhelming and the opportunities are not seen. Sometimes the opportunities are seen but insufficient preparation is made to attain them in a meaningful and sustained way. All too often the need for change that is involved in the dynamic interplay between challenge and opportunity is not well understood, and indeed may be resisted. So let’s look at where we are, what we have to do to achieve our objectives, the challenges and opportunities along the way.

We have a good banking system, a developed Government bond market and a highly successful stock exchange. Indeed KLSE has been such a success story that the stock exchange is sometimes held to be indistinguishable from the capital market. Therefore there should be clear appreciation that the capital market is more than just the stock market, however successful, and however relatively more successful it would be than other markets as we develop them. At the same time, there must be qualitative and microstructure improvements in KLSE to enhance efficiency and to reduce cost.

What we still lack is a vibrant Ringgit Bond market. We must give serious attention to this and speed up the process of its development. Most of the structural issues standing in the way have been identified; now is the time to take steps to resolve them, steps which have been taken but perhaps not fast enough. Our market will not be complete without its development. Infrastructure project financing particularly would be hindered while investors, particularly institutional ones, with a predisposed risk-reward profile and certain investment needs, would be denied due opportunity. The Ringgit bond market, furthermore, could at certain times be an alternative to the stock market which would keep the investment within our shores.

Where we have moved along is in the introduction of an exchange-traded derivatives market, KLOFFE established in November last year and MME in May this year. While the two exchanges have to be given a bit more time to take off, with particular attention to be given to liquidity and product diversification, their establishment is a highly significant milestone in the development of the Malaysian capital market. We have moved in the direction of completeness of our capital market which afford risk management opportunities to the sophisticated and interested investor. We were the fourth to do so in Asia, after Japan, Hong Kong and Singapore, which about places us where we are in the league table of advancing capital market centres, although South Korea has since started trading a stock index futures contract, and Taiwan and Thailand are pretty advanced in plans to start their own derivatives exchanges. We are ahead, but must stay ahead.

Like KLSE. A big success story, in Asia just behind Japan and Hong Kong in terms of market capitalisation and in the world about thirteenth, well ahead of the medium-sized European stock exchanges. It has moved forward in parallel with the strong economic growth of the past decade as well as with the Government’s privatisation policy; but KLSE has also introduced numerous infrastructure enhancements over the years. With the commitment to a fully scripless environment at the end of the year, KLSE would be up there in the big league but it would also have gone full circle; it would have to compete on quality, cost and efficiency which would mean more microstructure improvements. There are already pressures to reduce the settlement cycle; it has already been asserted KLSE should be looking at T+2, even DVP (delivery-versus-payment), just as KLSE is looking at T+3. The KLSE has plans to attain world class status. The Securities Commission will support the exchange, and has additional ideas of its own. The Commission also wishes to see a further broadening and widening of the exchange, and hopes the Government will agree with its plans to allow the listing of foreign companies on the exchange, on a phased basis, beginning with the listing of foreign companies promoted and controlled by Malaysians. The Commission looks forward to initiatives from KLSE to propel the exchange further.

KLSE and all other market institutions such KLOFFE, MME, MDCH and MCD must also respond to the challenge of the shift in the direction of self-regulation or, as I would prefer to term it in the case of exchange companies, front-line regulation. The progress of the process towards front-line self-regulation, flagged in statutory provisions recently introduced through amendments to the Securities Commission Act, 1993, the Futures Industry Act 1993 and the Securities Industry Act, 1983 and the Securities Industry (Central Depositories) Act, 1991, depends on careful understanding and inculcation of its ethic and discipline. The process would involve some more legal, regulatory and institutional reform, and devolution of powers which would more properly reflect the SC’s overview and supervisory role, allowing for the development of truly front-line self-regulatory organisations. Even when well-ensconced, there will be an ebb and flow to self-regulation, which is policed by mandatory, prohibitive and public interest statutory provision. This means, as I said in the Chairman’s Statement in the Securities Commission Annual Report for 1995, there will be necessary tension between the supervisory regulator and the self regulator but, as I also noted, it is in the nature of the arrangement well compensated by its benefits.

Why self-regulation? If I may be allowed to quote from the Chairman’s Statement in the Annual Report : "Self-regulation leaves those nearest to the business to conduct their activity in their common interest. Those in the business are best equipped to know what is best for their exchange or their professional activity. They are in it, at the front end, and they would know what would make their market or activity thrive. Of course, as is the case at any level, there will be those seeking short-cuts for selfish short-term interests, involving the violation of the common good; in such cases, if the common interest in ensuring a business place where fair treatment can be expected does not serve to bring detractors to heel, through business rules and codes of conduct, statutory provision will. On the other hand, where good sense prevails, in an environment of growth and expansion, innovation and adaptation are better facilitated to meet competitive opportunities and challenges."

I believe this is the way forward for the securities and futures industry towards the growth and expansion of increasingly sophisticated capital markets in Malaysia. I know they are those who are sceptical of the faith necessarily placed in industry participants in the philosophical predisposition for self-regulation. But I hold industry participants in Malaysia must be given the opportunity to forge their future path in a more robust fashion than has hitherto been the case particularly in the face of major challenges and opportunities for the Malaysian capital market. By not assuming ill of industry participants, it does not mean that good will easily emerge. There will be tugs and pulls. Nothing comes easily into the world; but it will not come if no effort is made. The pace of progress will depend on good sense in the common good. I would contend there is plenty of good sense about and a lot of common good around for us to reflect on and to want to expand. So let’s go for it.

An important aspect in all this is the inculcation of professionalism. It is indeed a critical determining factor of the progress in the direction of a full disclosure based regulation, another strategic shift which the Securities Commission has engineered.

A full disclosure based regime has important implications for every participant in the capital market issuers, advisers and intermediaries, and investors, not to forget the regulators themselves, be they front-line or supervisory regulators. These implications apply at both the primary and secondary market levels and, during the course of last week’s dialogue, we had enlarged on them.

The actual, pioneering step in the direction of a full disclosure-based environment was taken in December 1994 with the introduction of Guidelines on the Issue of Call Warrants, the first of which was issued the following May. At the next stage, the Guidelines for Public Offerings of Securities of Infrastructure Project Companies were introduced in September 1995. This was followed by the release in December of the Policies and Guidelines on Issue/Offer of Securities, which were underpinned by major amendments to the Securities Commission Act, 1993 which had come into force in November 1995.

In a modern, full-disclosure regulatory environment, the process of capital-raising is much facilitated and avowedly market driven, although we still have some way to go in this direction with many refinements still to be made, for example on different classes of investors and levels of disclosure, on shelf-registration and so on.

Our objective, in common with industry, is efficient, sophisticated and orderly markets, with investor protection. I wish to emphasise the regulator has not retreated from performing his protective role, but that he performs this role differently. The market is allowed to conduct its business with minimum interference, but not with impunity. There is clear legal provision against false and misleading information. Explicit tests of due diligence and reasonableness will be applied against incomplete and inaccurate information. In addition, as in all modern regulatory systems, our laws provide substantive regulation of unfair or fraudulent practices, in supplement to disclosure regulations.

The intention of the strategic regulatory shifts is to facilitate the growth and sophistication of the Malaysian capital market. In its Business Plan for 1995-1997, released in May 1995, the Securities Commission identified its objectives for the Malaysian capital market in conceptual terms, with specific identified programmes to achieve them. It was stated very clearly in that publication that capital markets first and foremost are a critical means of financing economic growth. While capital markets in some instances have become uncoupled from their real economy anchorage, the first priority in Malaysia remains using capital markets to mobilise savings to finance economic activity and expansion. In this regard, we have taken steps to facilitate the process of capital raising while diversifying the means of doing so. Of course more have to be done in both regard. The growth of the Malaysian economy has been truly remarkable, transforming the economic landscape and, with it, both requiring and leading to the growth and expansion of the capital market, especially the stock market. Even as the Malaysian economy has been transformed, we are already into the next round of change and transformation, to face up to new challenges and to seize new opportunities. Our desire to move up the economic ladder into the field of advanced technology means that ways must be found to increase the means by which such activities can be financed. The Securities Commission has submitted to the Ministry of Finance an outline proposal for the possible establishment of an Over-the-counter (OTC) market for high-tech companies. Many details are still to be worked out, but once approved we will get cracking on getting such a market going as soon as possible. Some of the issues that will be thrown up are related to market making, market infrastructure and liquidity. All these, of course, have to be carefully examined to ensure a successful market. This does not mean, however, that traditional bank financing and venture capital financing should not also grow in important.

The other great development waiting to happen is the institutionalisation of the market. This does not mean the demise of the retail market, but the growing relative importance of collective investment schemes.

With rising income levels as the economy grows, the demand will increase for greater variety of investment products, for a greater rate of return than that available from traditional bank savings accounts, perhaps from that offered by the EPF, with increasing emphasis on efficiency, cost and return for these products as well as for existing ones. New and different risk-reward profiles will unravel. With increasing prosperity the demand for money managers will grow. The unit trust industry has been growing rapidly in Malaysia, although there is still some way to go in its development. The Securities Commission has been encouraging the growth of the fund and asset management industry as well as other schemes of collective investment. However, there are growing pains, particularly with resource constraints. These will have to be addressed, but there is little doubt that the fund management industry will grow, what more with over RM90 billion in EPF funds and efforts to attract foreign fund management companies to operate out of Kuala Lumpur. By my reckoning there would be well over RM250 billion in the EPF by the end of this century, a handsome sum many countries would dearly love to have to propel their capital market into the big league. It is the view of the Securities Commission that the EPF funds represent a unique opportunity to jump start a modern, diverse, institutionalised and liquid capital market, although I must hasten to add this view has not been fully accepted by the Government.

Whatever, the growth of fund management institutions will reduce price volatility while increasing the pressure on execution cost and the settlement cycle. There is also little doubt that with globalisation and the intention to develop Kuala Lumpur into a regional financial centre, there will be increasing competitive pressures on market intermediaries and institutions. We have to look into ways and means of strengthening the stockbroking industry, for instance.

The challenge to all capital market participants is one of deregulation, competition, efficiency and professionalism. The competition is increasing. Almost every country wishes to develop its capital markets, with some looking beyond national horizons. In any case, with transglobal capital flows, the relative attractiveness of markets and economies will already come into play; where a country has the ambition to become a more than purely national capital market centre, all of its substructure, infrastructure and superstructure will come under test and scrutiny: What are the securities laws and regulatory regime like? What are disclosure and accounting standards like? How is the investor protected? How is market integrity maintained? Are the markets efficient, both in the wider economic sense and in the more specific sense of cost of doing business? What is the size of the domestic investor base, and how do savings become investments? What is the level of professionalism of market participants, including regulators?

I have in our 1995 Annual Report specifically addressed the subject of positioning Kuala Lumpur as a regional capital market centre, and I do not wish to rehearse the arguments once again here. Suffice to say, such an objective is no mere pretension. It is realisable. We have the requisite political and economic stability. We have a high savings rate and I believe institutional investment and fund management will grow dramatically in the next five years. Our capital markets are beginning to be well diversified. Market microstructures are good and improving all the time. We are fashioning a modern regulatory framework to facilitate market growth and activity. Really it depends on our professional response to a great set of circumstances.

The demand on human resource and the use of technology is the greatest challenge. We should have an open policy about seeking expertise from anywhere to work to our benefit. However, we should also be committed to training, expertise and professional advancement. The Securities Commission is committed to training and development. That is why it established the Securities Industry Development Centre (SIDC) as early as 1994, barely a year after its establishment. The SIDC not only organises conferences, seminars and workshops, it also organises professional and technical courses. In 1995 it was able to attract over 2,000 participants to its events, with most of its activities concentrated in the area of risk management, as a precursor to the start-up of the derivatives exchanges. Attention has also been focussed on achieving a fair representation of Bumiputras in the financial services sector, especially the more sophisticated fields like financial derivatives. With the transfer of licensing authority to the Commission, in November 1995 with respect to the futures industry and in March this year for the securities industry, SIDC has been busy structuring the examination syllabus with the respective exchanges. SIDC is also conducting training-the-trainers programmes in the futures industry, courses in derivatives for interested graduating university students and developing teaching modules to be incorporated in the ITM Advanced Diploma in Finance course to prepare interested students to the financial services industry. We do hold that the injection of practical and professional elements into academic courses would be of great help in preparing human resources for the financial services industry.

But there is so much more to be done. The Securities Commission intends for SIDC to play the central role in training and development in the capital market, although this does not absolve or exclude others from making their contribution. About 40% of the building that will house the SC permanent office is dedicated to SIDC purposes, with some really exciting plans, although we will have to wait until well into 1998 for it.

There can never be enough of training and education and exposure to technology in meeting the great challenges and fulfilling the promise of the Malaysian capital market. From philosophical and conceptual foundation, to legal and regulatory framework, to market institutions and infrastructure, to financial products, investment and trading - whatever the facilitation, there is always and finally a call on human resource of high order. This is the ultimate challenge: To harness human resources of high integrity, human resources that are able to separate the wheat from the chaff, that can ride and rise above the competition, that will take up the challenges and seize the opportunities.