Launch of the Capital Market Masterplan
22 February 2001 |   By : Encik Ali Abdul Kadir, Chairman, Securities Commission, Malaysia

Encik Ali Abdul Kadir
Securities Commission, Malaysia

at the launch of the
Capital Market Masterplan

22 February 2001
Securities Commission

1. Thank you for making the time to be present here at this very auspicious occasion of the launch of the Masterplan. As you know, Yang Berhormat, Tun Daim Zainuddin, Menteri Kewangan Malaysia has just announced some of the measures that we are taking on board in the Masterplan. I would now like to present to you an overview of the plan itself and to explain to you some of the issues and implications that it will have for both the industry and overall capital market. I would like to stress at this point, though, that this is merely an overview. My colleagues, the various divisional heads of the Commission, will be presenting the individual recommendations in further detail later. I would also urge you to refer to the actual document of the Masterplan itself for a complete picture of its objectives and recommendations.

2. As you are aware, the Masterplan is meant to provide a roadmap for us throughout the next ten years. But I also want to emphasise that it is a dynamic document whereby as specific circumstances of the market change, additional measures will be added on as needed over the course of the Masterplan. However, the underlying vision, objectives and strategies of the plan will remain our guiding forces in developing the capital market.

The progress thus far

3. On that note, let me now turn to the context in which the Masterplan has been formulated. The Malaysian capital market has witnessed tremendous change and has undergone a significant amount of development over the last decade. For one, its importance in private-sector fund-raising has increased. During 1991-2000, some RM85 billion was raised through the equity market compared to just under RM20 billion in the 10 years before. Over the same period, the issuance of private debt securities saw about RM133 billion being raised, compared to only RM7 billion between 1981-90.

4. Today, we can be proud to say that we already have a market infrastructure that is efficient and technologically advanced. Our trading, clearance and settlement systems are closely benchmarked against international practices, and fundamental market practices such as our financial reporting standards and framework are already aligned with international standards.

5. Most importantly, underlying all this, the Malaysian capital market is supported by a sound regulatory structure. Over the years, we have made substantial efforts to streamline the regulatory framework, strengthen investor protection, enhance enforcement capacity and facilitate better corporate governance, among many other initiatives.

The changing market environment

6. However, the environment in which capital markets are now operating is changing significantly. It is becoming more dynamic and competitive as a result of several major global trends. The internationalisation of financial activity has of course seen rapid growth in cross-border investment activity, increased international fund-raising and more cross-border mergers and acquisitions.

7. These developments have been prompted to a large extent by financial market deregulation in capital markets worldwide. This includes the lowering of barriers to cross-border activity and the increasing integration of financial products and services. At the same time, rapid advances in information and communications technology have brought many changes to market structures and the way they operate.

8. As a regulator, the Commission must understand what drives market participants in this new environment. As far as investors are concerned, the ability to take on exposure across a wide variety of investment opportunities carries a large premium. They prefer to invest in markets where liquidity is high and transaction costs are low. They want to see greater recognition of their rights and interests, and wish to have confidence and certainty in the environment in which they invest.

9. Issuers, on the other hand, want low costs of raising capital and a breadth of financing options. They clearly want appropriate value recognition of their securities within a vibrant and liquid market. At the same time they are also looking for efficient capital-raising processes.

10. In response to a more competitive and changing environment, market intermediaries are looking to widen their scope of business opportunities. They are increasingly taking advantage of technology and innovation to stay ahead of the competition, and to provide value-added services and products to their customers. And like issuers and investors, they are also seeking vibrant markets that generate revenue.

11. Exchanges and clearing institutions are likewise taking active steps to offer all their stakeholders greater value. Many have responded by restructuring, forming strategic alliances and becoming more commercially focused. For instance, there are now many exchanges that are part of cross-border trading networks and alliances, in order to widen their market reach and enhance market access.

12. From the perspective of the domestic economy, the financing burden on the capital market is set to grow as the country moves towards achieving its national aspirations. Our projections suggest that total investment spending for the next 10 years may double to RM1.5 trillion. Even if the capital market continues to provide around 30% of those needs as it has done so in the past, nearly RM500 billion will have to be raised through bond and equity issuance over the next decade. However, the figure is likely to be higher as the capital market is expected to play an even greater role in financing growth, particularly for the high-growth and k-economy sectors, in moving forward.

13. This means that the mobilisation and allocation of funds within the economy will have to be more effective than before. In particular, the role of the capital market will need to increase in meeting the nation's overall financing needs. It will be necessary to unlock funds by further diversifying holdings of assets within the financial system and enhancing the process of capital market intermediation.

Vision for the Malaysian Capital Market

14. The role of the Capital Market Masterplan going forward will be very important in achieving these aims. The Masterplan charts the strategic position and future direction of the capital market. In doing so, it aims to develop a capital market that has a strong ability to withstand competitive pressures and to tap value-added opportunities that exist.

15. The vision for the Malaysian capital market is that it should be:
Internationally competitive in all core areas necessary to support Malaysia's basic capital and investment needs, as well as its longer-term economic objectives
A highly efficient conduit for the mobilisation and allocation of funds
Supported by a strong and facilitative regulatory framework that enables the capital market to perform its functions effectively and provides a high degree of confidence to its users
Objectives for the Malaysian Capital Market

16.The vision has six specific objectives:
To be the preferred fund-raising centre for Malaysian companies

To promote an effective investment management industry and a more conducive environment for investors

To enhance the competitive position and efficiency of market institutions

To develop a strong and competitive environment for intermediation services

To ensure a stronger and more facilitative regulatory regime

To establish Malaysia as an international Islamic capital market centre
17. These objectives are linked to 24 strategic initiatives and 152 recommendations in the areas of market institutions, the stockbroking industry, the derivatives market, investment management, the equity and bond markets, the Islamic capital market, technology & e-commerce, training & education, corporate governance, and the regulatory framework.

18. In order to ensure that the Malaysian capital market remains by choice the preferred fund-raising centre for Malaysian companies, we will take comprehensive steps to ensure that issuers are able to raise funds at competitive cost. This will entail, among other things, lowering the regulatory costs of fund-raising by streamlining and expediting the issuance and approval process, and promoting further competition for corporate advisory services. We will also take steps to facilitate more efficient and innovative methods of fund-raising, such as through shelf-registration schemes and via electronic means, where the necessary requirements have been met.

19. We will also promote a greater breadth of products so that the market is better able to effectively meet the different needs of issuers. The corporate bond market is one particular area where we are taking comprehensive measures for its further development. To foster greater liquidity in the bond market, we are recommending greater market access to the bond trading infrastructure and processes. At the same time, other essential components of the overall bond market should be developed further, including the benchmark yield curve and asset securitisation market. For one, a set of guidelines on the issuance of asset-backed securities will be issued to facilitate the more effective use of capital in this manner. Other measures to develop the corporate bond market, such as the promotion of bond derivatives and bond funds, and allowing the regulated short-selling of MGS and corporate bonds, are also proposed.

20. The development of the venture capital (VC) industry is also critical if the capital market is to support the mobilisation of risk capital. That is why we will be taking steps to enhance the market for high-growth companies and to promote the participation of local institutional investors in venture capital funds. In addition, venture capital companies will be granted exempt dealer status under the Securities Industry Act 1983, while venture capital trusts will be allowed to invest fully in unquoted companies. I am also pleased to note that the plan's recommendation to centrally-co-ordinate the promotion and development of the VC industry was accepted by the government and announced in the recent Budget 2001.

21. The Masterplan also seeks to promote an effective investment management industry and create a more conducive environment for investors. The Malaysian capital market must have the capacity to meet the changing needs of investors. To foster a vibrant and competitive investment management industry, a major aim of the plan is to increase the amount of funds available for management, and to enlarge the number and diversity of players with access to those funds. Among other things, the plan recommends that institutions such as EPF should further outsource the management of their funds. At the same time, the Masterplan recommends that measures be pursued to facilitate the development of the private pension fund industry.

22. To facilitate growth of the industry, the Commission will streamline the process of introducing new investment management products as well as the licensing framework for investment management. In addition, we also recognise that the presence of a large pool of highly skilled professionals and access to sources of significant liquidity are critical for fostering innovation and competition. Therefore, we will look at further liberalising current restrictions on the management of funds by Foreign Fund Management companies, and allow foreign majority ownership of unit trust management companies from 2003.

23. To develop a more conducive environment for investors, we will sustain and build on the momentum of efforts to strengthen the framework for corporate governance and shareholder value recognition through the timely and comprehensive implementation of the recommendations in the Finance Committee's Corporate Governance Report. Shareholder activism will be further promoted by improving avenues for minority shareholders to exercise and enforce their rights. In addition, a set of principles, best practices and standards will be developed to encourage more institutional investor activism.

24. However, better corporate governance alone cannot sustain a growing capital market. The core segments of the market must be supported by the availability of sufficiently diverse and liquid instruments that can effectively meet investors' collective demands and needs. The derivatives market, for one, needs to be vigorously developed given the current fledgling status of the industry and the need for building critical mass without undue delay. Therefore, we will be implementing a range of measures to accelerate development in the derivatives industry. This will include, among other things, promoting wider participation in the market by allowing a limited number of foreign-owned International Members and Foreign Direct Clearing Members in the derivatives market. It is hoped that the liquidity contributed by such institutions will help generate further business and activity amongst local derivatives market participants as well.

25. More generally, we want to see the introduction of a broad and diverse range of products so that investors can deploy their funds into investments that best suit their individual profiles. To this end, the Commission will be further enhancing and streamlining the approval process for new capital market products to facilitate product origination. We will also be addressing existing limitations on the ability of Malaysian investors to access a broader range of investment instruments both locally and internationally.

26. Amidst all this, the role and position of Malaysia's market institutions within the increasingly challenging environment is not overlooked. Being a national market clearly no longer guarantees an implicit franchise over Malaysian listings and order-flows. There is now aggressive competition for a share of global investment activity. As a result, we must have market institutions that are internationally competitive. Malaysia's market institutions must present investors with a liquid, efficient, secure and transparent trading environment if they are to be widely recognised as providing value to all stakeholders. There must be no doubt that Malaysian market institutions represent the foremost venue for the listing, trading, clearance and settlement of Malaysian-exchange traded securities and futures.

27. To achieve this, the Masterplan recommends, among other things, that market institutions consolidate and adopt a more commercial-focus to their activities. A single Malaysian exchange should be established through the merger of all existing changes. The consolidated exchange should demutualise and operate as a for-profit entity to ensure that it has an appropriate governance framework to drive the future development of the exchange. It is also proposed that the demutualised entity be listed on the stock market.

28. In addition, we would like to ensure a more cohesive and cost-effective secondary market environment. As such, it is recommended that a common trading platform and an integrated clearance and settlement system for all exchange-traded products be established following exchange consolidation. To facilitate this, the plan also recommends the creation of a single clearance and settlement institution for all exchange-traded products.

29. Market institutions must also continue to meet international best practices and offer globally competitive cost-structures. Of course, the Masterplan's recommendations to liberalise and reduce fixed transaction costs and move to a T+3 settlement cycle have already been implemented last year, as you are all aware. In addition, we will be pursuing further measures to reduce costs, including a further reduction in SCORE and SCANS fees, as well as a lowering of the SC levy. In particular, the plan recommends that stamp duty should be capped at RM200 per contract for all trades on the KLSE. In addition, it is our assessment that the application of stamp duty should be further reviewed with a view to its eventual removal altogether, in light of international practices in other jurisdictions.

30. Another objective is to have strong and competitive intermediation services in our capital market. There is no point developing all the other aspects of our capital market to be internationally competitive if those serving the consumers do not meet these same standards. Our intermediaries-by this I mean the stockbrokers, futures brokers and all those who act as middlemen in the capital market-must be in a position to respond quickly to the needs of issuers and investors.

31. First and foremost, we want to have intermediaries that can offer a wide range of products and services at competitive prices. To achieve this, we will be gradually deregulating the scope of services and products that Malaysian intermediaries can offer in the capital market. This will include the liberalisation of restrictions in specific areas of the market to allow local intermediaries to offer a wider range of products and services. We are also looking at facilitating online broking as well as online trading of unit trust funds, to keep in step with ongoing market development. A regulatory framework for the implementation of e-commerce in the capital market is being developed to make sure there is public clarity on the regulatory issues relating to these measures and other related issues.

32. At the same time, our intermediaries must be financially and operationally strong in order for them to be able to take on a wider range of financial services. This will become particularly important as they face the progressive liberalisation of fixed commission rates so that investors can benefit from the more competitive pricing of services. This is why the Masterplan has advocated the market-driven consolidation of stockbroking companies through the Universal Broker programme.

As you are aware, this programme was announced earlier to give the industry more time to prepare and plan their business strategies accordingly. Thanks to this, we can expect the first announcement on Universal Broker licenses to be made very soon. As more Universal Brokers emerge, each will be able to take on a wider range of activities and establish their own branch networks throughout the country. They will also be better placed to benefit from the gradual removal of segmentation of services within the capital market.

33. It is envisaged that Universal Brokers will play an increasingly important role in providing integrated financial services as the market eventually becomes more liberalised. This is part of the Masterplan's overall agenda for deregulation and liberalisation, which includes strategic liberalisation where higher expertise is needed to upgrade efficiency, and where such expertise is not available locally. Also, restrictions will be removed where the nature of business requires global linkages and international exposure, or where foreign participation is needed to promote the development of emerging or value-added industries. Nevertheless, we will continuously ensure that suitable safeguards are in place so that the liberalisation process is orderly and does not result in unnecessarily severe adjustment costs for the market as a whole.

34. Underlying all these initiatives will be our commitment to ensuring a strong and facilitative regulatory regime as we carry out our duties in regulating the capital market. We know that as the market changes, so too must our regulatory approach. This is required so as to ensure continued effective regulation of the capital market while facilitating greater competition and innovation.

35. Therefore, the Commission will be enacting a gradual shift in its regulatory approach by adopting a market-based system of regulation for all capital market activities. This means that we will be gradually moving towards the greater use of market disciplines and processes to achieve regulatory objectives.

36. Generally speaking, our long-term goal is to have no more regulation than necessary to achieve the public policy objectives of consumer protection, and financial soundness and integrity. Practically speaking, this means that you will be seeing a gradual shift away from merit-based approval processes to disclosure-based regulation across all fund-raising activities in the capital market (which we have started to implement in varying degrees in the equity and bond issuance processes). It also means enhanced risk-based supervision and the use of appropriate incentives to promote a high level of regulatory compliance. This will be supported by improved mechanisms for self-regulation and front-line regulation by industry participants and exchanges, so that those who are actually at the front-line of market activity will have a greater role to play in promoting regulatory compliance among their peers and constituents.

37. To make sure that there is a level playing field for all participants in the capital market, we will also be pursuing full functional regulation of the capital market. This will help ensure that the regulatory framework is "seamless" and reduce the scope for regulatory arbitrage. The regulatory framework will also be strengthened through enhanced enforcement and supervision capacity, as well as the formulation of a framework for maintaining overall systemic and financial stability in the capital market.

38. This brings me to the final objective, which is the development of Malaysia as an international centre for Islamic capital market activities. The Islamic equity and bond markets in Malaysia have seen significant development and expansion over recent years. There has been quite a bit of innovation in Islamic project financing, and at present about three-quarters of our listed counters are already Syariah-compliant. We have earned a reputation for being one of the pioneers in Islamic capital market-related research and development. In addition, we have an increasingly affluent population with a high level of savings, as well as a significant concentration of potential consumers of Islamic financial products and services not only within the country, but also in the Asian and international context. Given these inherent advantages and the relatively underdeveloped stage of global Islamic capital markets at present despite the availability of large pools of Islamic funds, Malaysia is well placed to be a key international provider of Islamic capital market services and products.

39. Therefore, the Masterplan has identified a whole range of areas where we will be focusing efforts to develop greater variety and liquidity in Islamic securities instruments and services. We particularly want to see the development of more Islamic investment products, such as Islamic collective investment schemes and corporate debt instruments. A mature Islamic capital market will provide domestic Islamic financial institutions and investors with more opportunities to invest their funds efficiently. To support this, the Commission will work closely with the relevant agencies to ensure that there is a suitable accounting, tax and regulatory framework to facilitate the Islamic capital market's long-term development. We are already in discussions with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain and the Malaysian Accounting Standards Board (MASB) to assist in the formulation of consistent and accepted accounting principles for Islamic securities dealings. Moving forward, we will also work towards enhancing expertise in Islamic securities directly through our training and education arm, the Securities Industry Development Centre (SIDC), and indirectly through collaborative efforts with relevant partner institutions in the private sector.

40. Over the course of the Masterplan, of course, we will also be looking towards other areas where we can capitalise on our comparative advantage as the market develops further. We want to do this so as to ensure a diversified market base, and to position the Malaysian capital market to take advantage of opportunities where untapped sources of value can be developed further. From a broader perspective, these efforts will build on the country's strengths, and contribute to the overall growth of the financial services industry.


41. Of course, successfully realising the Masterplan will depend a great deal on effective implementation. This will involve,
prescribing a mechanism for co-ordinating implementation

highlighting skills, capacity and resources

establishing guidelines for monitoring and reporting and

formulating a communication programme

through an explicit implementation framework.
42. The Masterplan itself will be implemented through three phases. In Phase 1, which will last from 2001 to 2003, the focus will be to strengthen domestic capacity and develop strategic and nascent sectors. In Phase 2, during 2004 and 2005, efforts will concentrate more on strengthening key sectors and gradually liberalising market access where necessary. Finally, in Phase 3, from 2006 onwards, the Masterplan will look to the further expansion and strengthening of market processes and infrastructure towards becoming a fully-developed capital market. It will also focus on enhancing the market's international positioning in areas of comparative and competitive advantage.

43. As you can see from the flow-chart being displayed, the framework for implementation will involve an explicit process, which will be closely monitored by the Commission for the timely implementation of recommendations. Progress will be benchmarked against predetermined performance measures, but will also be subject to regular review and updating where necessary to ensure that the recommendations remain relevant as circumstances change.

44. The structure of implementation involves various parties responsible for or involved with the plan's implementation. These will include an Implementation Task Force that the Commission will establish to facilitate a consistent approach to implementation, reduce duplication of resources and allow communication and PR efforts to be synchronised. Various working committees will also be set up with responsibility for operational implementation of various recommendations. These will comprise representatives from relevant industry associations and other market participants from the private sector.

45. As part of this structure, the Commission will be appointing a Capital Market Advisory Council to provide advice on developments in the global and regional capital markets, and their potential implications for Malaysia. The council will also be expected to provide independent external views on how implementation is being undertaken, as well as the promotion and facilitation of its smooth progress. The council will be composed of leading domestic and foreign financial market participants and experts, with substantial expertise and experience in the capital markets. They will be drawn from a wide spectrum of backgrounds to ensure appropriate representation of all key areas of capital market activities.

46. I would like to end here and allow you to digest the important issues I have just raised. Have no doubt that the Capital Market Masterplan is a very substantial document. In formulating the plan, the experiences and strategic initiatives of a wide variety of other jurisdictions were analysed, including the work conducted in Australia, Canada, the United States, United Kingdom, Japan, Korea, Singapore and other countries. Importantly, the Masterplan received significant input from local industry participants themselves, as well as the views and feedback of independent consultants, and local and foreign experts and market players. Thus, even though the Masterplan's context is local, its frame of reference is global.

47. The main purpose of this presentation, as well as the following presentations by some of the Commission's divisional heads, is to ensure that you, as participants in the capital market, are fully-informed of the role of the Masterplan in the work of the Commission in going forward. Therefore, when you receive the plan, I urge you to read it thoroughly and to fully understand the vision, objectives and recommendations it contains. Please do not hesitate to contact us if you require any further details or clarifications. The Commission will be very happy to assist where it can. I look forward to your full support in the implementation of the Masterplan and towards the further advancement of the Malaysian capital market.

Thank you.
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