World Federation of Exchanges Working Committee meeting

14 November 2015 | By : Datuk Ranjit Ajit Singh, Chairman, Securities Commission Malaysia

Keynote Remarks

by YBhg Datuk Ranjit Ajit Singh
at the World Federation of Exchanges Working Committee Meeting
Wednesday, 19 June 2015

Good morning ladies and gentlemen. It is a privilege for me to be here today. I am very pleased to have been invited by the WFE to address this important international grouping of exchanges at your WFE Working Committee meeting.
The WFE has been the central reference point for global exchanges for many years, and I note that the organisation has been playing an active role in promoting quality market standards and data, working with policy makers and regulators in advocating fair, transparent and efficient markets, and helping newer, smaller exchanges to meet international exchange standards.
I would also like to commend Nandini Sukumar, CEO of WFE and her team for a substantive meeting agenda. [I gather this is the first time the WFE is having its Committee meeting in Kuala Lumpur], and I hope that you will find some time after your meeting to get better acquainted with our city, and savour our delightful post-Ramadhan cuisine!

Ladies and gentlemen.

We meet today against the backdrop of what are very challenging times for financial markets across the world. While the world’s overall balance of risks has declined since the financial crisis, deteriorating market liquidity, lower commodity prices, diverging outlooks for monetary policy across major jurisdictions, coupled with geopolitical factors, have caused increased tensions in global financial markets and requires greater vigilance against the emergence of short-term pressures. Uncertainties surrounding the Greek debt crisis as well as the performance of the equity market in China are also said to have an impact on investor sentiment, particularly over emerging markets, in the immediate term. It is as one leading central banker1 put it, “a complex picture for both market participants and policy makers”.
In the face of heightened uncertainty and volatile financial markets, building resilience is one of the best lines of defence to deal with spillovers from external developments on future shocks. At IOSCO, emerging risks and potential vulnerabilities are at the forefront of our deliberations, and we have devoted significant resources to being much more proactive and forward-looking in identifying where these new risks may come from. Some of these risks relate to the structure and operations of markets and the conduct of market participants, while others are much broader and have the potential to have a systemic impact on markets.

Ladies and gentlemen,

As the Chair of IOSCO’s Growth and Emerging Markets Committee, which is the largest Committee within IOSCO representing about 75% of the membership, there are several priority areas on our current agenda. The first relates to digitisation in capital markets.
Technology has transformed and disrupted the traditional mode of business and transactions in today’s financial markets. For both sophisticated and retail investors, technology has played a significant role in providing alternative market-based platforms to lowering the barriers-to-entry and creating opportunities for new and innovative ventures and investments. The digital revolution is set to continue accelerating in the years to come as global internet connectivity expands, particularly in emerging markets, with greater demand for new products and services and as mobile devices become more accessible to a wider reach of users.
Digitisation however brings new challenges. From a regulatory perspective, there is a need for us to be able to strike a balance between facilitating positive innovation and growth in the capital market, while ensuring that potential risks arising from such innovation are appropriately managed. Further, the increase in substitutes for traditional capital market platforms and channels often requires a review the existing regulatory perimeter, and an assessment of whether the current regulatory and supervisory framework adequately addresses new or emerging technology risks.
The widespread adoption of technology has, in particular, fundamentally altered the exchange business. Through ATSs, HFT, algo trading, co-location etc, there have been vast improvements to market efficiency and trading with faster connection and execution speed as well as lower latency rates. Meanwhile, exchanges are also leveraging on big data technology to widen access to data and data-mining tools for trading, analytics and risk management.
However, the benefits offered by technological developments and electronic trading should not overshadow the potential risks posed by errant order flow to fair and orderly markets and inherent systemic vulnerability if electronic systems do not function properly. Further, the extremely high speeds at which markets operate today can compound the overall impact of even small operational failures by propagating errors quickly and widely.
The increase in technical incidents in recent years has raised concerns on exchanges’ vulnerability to operational risks. System and technical malfunctions that have resulted in exchanges delaying or halting IPOs and connectivity issues that have stopped trade and quote data dissemination have had severe implications on the fair and efficient functioning of markets and overall investor confidence. Further, an operational failure that occurs in emerging markets may be much more challenging to manage given that emerging markets are typically characterised by a single exchange and the ability to route buy and sell orders to other exchanges or trading venues is not readily available.

Ladies and gentlemen,

Given the accelerated technological innovation in an environment that is increasingly inter-dependent, one of the key concerns that is on the radar of regulators and exchanges is the risk of cyber-threat. A cyber-attack could have a potentially systemic impact affecting confidence and reputation, market integrity, efficiency and financial stability.
As you may be aware, in a report jointly published by IOSCO and the WFE², over half of the exchanges surveyed had experienced a cyber-attack in 2012³. Attacks tend to be disruptive in nature rather than for immediate financial gain, where the most common forms of attack reported are Denial of Service attacks and malicious codes. Further, it is estimated that the annual cost of cybercrime to the global economy is between USD375 billion and USD575 billion⁴, and WEF estimates that delays in adopting cyber security capabilities could result in a loss of USD3 trillion in economic value by 2020⁵.
As cybercrime has become increasingly sophisticated, it is critical that exchanges have in place a robust cyber security framework, as well as regularly assess the effectiveness of their disaster recovery protocols and facilities to perform systemically critical functions. I am pleased to hear that the WFE has a Cyber Security Working Group, whose work will presumably address many of these issues.

Ladies and gentlemen,

Another major area of focus for IOSCO, and in particular for the Growth and Emerging Markets Committee, relates to corporate governance. Sound governance regimes are an important foundation for the development and stability of capital markets, and engenders investor trust and confidence. For exchanges, important elements of governance include risk management, internal controls and procedures, and decision making. As many exchanges are also listed companies, transparency and disclosure are absolutely critical.
Further, exchanges as frontline regulators, should strive to provide a market of quality and integrity through high adherence and practice of good governance. Listed exchanges should therefore aim to set the benchmark for good governance among other public listed companies. In this regard, I am pleased to share that the ASEAN Corporate Governance Scorecard which assesses the corporate governance standards and practices of ASEAN plcs has consistently ranked the exchanges in the region very highly.
Further, demutualisation and self-listing of exchanges have often spurred debate on the role of exchanges, including the challenges in balancing commercial and regulatory objectives. In particular, there are concerns that there may be a dilution in the exchange’s focus on its regulatory role or a reduction in regulatory resources once an exchange is listed. The regulatory responsibilities of an exchange are also continually being redefined, including in some instances, delegation of certain traditional exchange functions to other SROs and entities.

Ladies and gentlemen,

Since the global financial crisis, market based financing has played a major role in supporting economic growth. Much of this has been due to increased constraints placed on the banking sector, and the growth of avenues and instruments such as the equity market, corporate bonds, the Islamic capital market and securitisation.
For many markets globally, SMEs often face financing challenges. They can be perceived as risky, lack collateral to offer as security and generally have no track record they can share with investors. These features have driven SMEs to look for alternative funding sources, including crowdfunding and other sources of micro finance.
In this regard, capital markets have the mobilisation and risk diversification capacity to bridge this gap. I am pleased to note that SME Financing is on your agenda for discussion today as it is imperative that regulators and exchanges intensify our efforts to harness market based financing for SMEs, particularly in growth and emerging markets.
Some of these issues have been identified in the work that has been undertaken by IOSCO’s Task Force on Long Term Financing which I jointly led with the Chair of the Ontario Securities Commission. Our findings have been published in an IOSCO report which was presented to the G20 Finance Ministers meeting in Australia at the end of last year.
Among others, the report identifies the importance of equity financing via listing on multi-tiered markets as instrumental in facilitating SME’s access to capital markets. These platforms are often designed to accommodate innovative start-ups and high-growth SMEs by offering flexibility in terms of listing, fundraising, deal arrangements and trading. The tiered structure also enables SME issuers to grow and transition to upper tiers as the company matures, and facilitates a successful feeder system for listings onto the main board of the exchange. In this regard, Bursa Malaysia recently introduced several new enhancements to the ACE Market listing requirements as part of its efforts to incentivise and attract more eligible SMEs to consider IPOs on the alternative market⁶.

Ladies and gentlemen,

As Chair of the ASEAN Capital Markets Forum, I am pleased to share with you that the ASEAN capital market regulators are working on several initiatives to promote freer flow of capital and greater connectivity of the region’s capital markets. Initiatives under the ACMF include the framework for Expedited Entry of Secondary Listings to allow for faster time-to-market for corporates seeking secondary listings; the ASEAN Disclosure Standards to facilitate multi-jurisdiction offerings of equity and plain debt and the ASEAN Framework for cross-border offering of CIS.
The launch of the ASEAN Trading Link among regional exchanges in 2012 is seen as a significant step towards better market integration and supports the establishment of the ASEAN Economic Community. The ASEAN Exchanges, when taken collectively would rank among the top 10 exchanges globally, by market capitalisation, with the potential to offer access to more than 3000 listed companies. The ASEAN Trading Link, which is currently operational among the exchanges of Malaysia, Singapore and Thailand, has increased inter-exchange connectivity and allowed more efficient investor access into regional markets.
Admittedly the volume of trades through the Link has not been overwhelmingly large and with any market integration effort, there are challenges that need to be overcome. We continue to work on these issues, including improving the post-trade services to address the needs of an end-to-end seamless trading, as well as to raise investor awareness and familiarity of ASEAN as an attractive investment destination.

Ladies and gentlemen,

Your meeting is taking place during a time of an increasingly challenging external landscape, where uncertainties surrounding the global economy is impacting overall sentiment and confidence. In an environment that has become much more interconnected, interdependent and complex, exchanges need to continue to steadfastly fulfill their role as efficient platforms for liquidity, price discovery and capital raising.
It is also essential for all of us to continue to intensify efforts to strengthen the capital markets’ resilience against short-term volatility, while building capital markets that can truly promote sustainable and inclusive growth. These obligations are all the more pressing in these dynamic and uncertain times
I hope you have a productive set of discussions today. Thank you.

¹ Glenn Stevens, Economic Conditions and Prospects: Creating the Upside, 10 June 2015

² Joint Staff Working Paper of the IOSCO Research Department and World Federation of Exchanges “Cyber-Crime, Securities Markets and Systemic Risk”, July 2013

³ In the survey involving 46 exchanges, 53% suffered an attack in 2012

⁴ Center for Strategic and International Studies and McAfee, “Net Losses: Estimating the Global Cost of Cybercrime”, June 2014

⁵ Risk and Responsibility in a Hyperconnected World, Insight Report, World Economic Forum in collaboration with McKinsey, January 2014

⁶ Changes to the ACE Listing Requirements include providing greater clarity of the admission criteria (eg: clarifying the admission criteria and suitability assessment, introducing a new pre-IPO consultation procedure etc), and enhancing the attractiveness and competitiveness platform for listing and investment (eg: liberalizing moratorium requirements for eligible promoters, pre-vetting prescribed circulars, liberalizing the sponsorship framework etc)