Speech at MOU Signing in connection with the merger of MDCH and MFCC
19 May 1996 |   By : Dato' Dr. Mohd. Munir Majid, Chairman of the Securities Commission

Signing of MOU in connection with the merger of MDCH and MFCC

Speech by
Y Bhg Dato' Dr Mohd Munir Abdul Majid,
Chairman, Securities Commission, Malaysia

Good morning ladies and gentlemen

I am honoured to have this opportunity to speak on this momentous occasion. It has been approximately three years since the Securities Commission first announced the government's decision to pursue the establishment of one clearing house under the Futures Industry Act 1993. Since that day, we have seen the emergence of two new futures exchanges and a new clearing house in Malaysia, the merger of the sc and the ctc; and today we are about to witness the signing of a memorandum of understanding involving all Malaysian futures exchanges and clearing houses to form a single clearing house for exchange-traded derivatives markets in Malaysia.

While the world of derivatives is abuzz with terms like "common clearing" between the cbot and cme, "unified clearing" in alignment with European unification, "multilateral netting" by "echo" (short for Exchange Clearing House which provides a multilateral netting and settlement service to international financial institutions), I am gratified to see that action is actually being taken in our own backyard to consolidate and unify the clearing activity within the Malaysian derivatives market.

As a regulator and an avid believer in the strength and potential of the Malaysian capital markets, I have been assailed by various parties expressing doubt over and implying folly on the part of the Malaysian government in allowing the establishment of three futures exchanges in a country already beset by an enormous challenge of building a derivatives market amidst a highly competitive global environment. My response has always been, and still is, that since the exchanges have been funded by private investors and were able to demonstrate the necessary capabilities to provide fair and transparent trading facilities, it is not for the regulator to prohibit the establishment of new markets, but more on this point in a moment.

The policies with respect to the establishment of a common clearing houses is a different matter. A common clearing house does not only make good business sense in maximising economies of scale for clearing members and the industry, it is also beneficial from a risk management perspective in allowing for centralised management of counterparty risk and multilateral netting of margin and settlement obligations.

Since the merger of the sc and the ctc has now made the merger of the two derivatives clearing houses currently operating in Malaysia viable from a jurisdictional perspective, I would like to congratulate the exchanges and the two clearing houses concerned in taking this swift and decisive action to bring about the merger, which of itself signifies the industry's agreement and acknowledgement of the benefits associated with the government policy which I have earlier stated concerning the establishment of a common clearing house under the fia. Of course, I would also like to believe that this industry decision had nothing whatsoever to do with the rm8 million grant which the Commission has agreed to provide to the new clearing entity resulting from the merger of the two existing clearing houses.

Returning to my earlier reference to the number of exchanges operating in Malaysia, I maintain my stance that the Commission would not restrict the setting up of new markets if regulatory concerns have been fully addressed. This, however, is not saying that I support or indeed would promote the establishment and the existence of multiple derivatives exchanges in Malaysia. With the current state of affairs, there is duplication, and in some cases, triplication, of resources, effort and cost; and at this stage of the development of the derivatives industry in Malaysia, this can place added strain on the problem resulting from scarcity of skilled resources much needed to develop the industry.

Yes, just as I believe it makes good business sense to merge the clearing houses, it makes equally good business sense for the futures exchanges to consider consolidating their operations, marketing and promotional efforts as well as their developmental activities. Not only would this consolidation reduce operating, capital and development costs for the exchanges, but considerable savings would also enure to the benefit of trading members from economies of scale and scope resulting from unified and more efficient reporting and compliance systems, procedures and obligations. Monetary savings of the magnitude that can be expected from a merger or mergers of futures exchanges could be harnessed and channelled towards development of the Malaysian derivatives markets and products, improving the competitiveness of Kuala Lumpur's financial and derivatives markets against regional and other international financial centres. In the light of the obvious advantages to be gained, I hope that the exchanges will give serious thought to the prospects awaiting a merger.

Finally, I realize that a merger engages a substantial amount of time and effort. However, due to the uncertainties that tend to hover during the period of implementation, it is also in the interest of the market to complete a merger within the shortest time practicable so as to minimise the period of uncertainty for market participants. I trust that mdch and mfcc, having entered into a commitment to merge, would consider the relevant implications of actions being taken and act in the best interests of the market.

We can now look forward to the consummation of the merger of the clearing houses and, who knows, perhaps to the signing of the next mou, this time between the exchanges.

Thank you.
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