Koh Yong Guan: Regulatory approaches in global capital markets
Keynote address by Mr Koh Yong Guan, Managing Director of the Monetary Authority of Singapore, at
the MAS Capital Markets Seminar 2002, Singapore, 2 May 2002.
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MAS Capital Markets Seminar
Ladies and Gentlemen
Good morning and a warm welcome to the MAS Capital Markets Seminar. For participants from
abroad, I wish you a pleasant and rewarding time in Singapore.
We have chosen "Evolving Regulatory Approaches" as the theme to underscore the importance for
regulators to keep pace with developments in the global capital markets.
Advances in technology have enabled instantaneous and seamless access into diverse capital
markets. At the same time, consolidation of specialist financial institutions into financial conglomerates
with cross-border presence has redefined traditional notions of market boundaries. The consequent
growth in cross-border transactions poses regulatory challenges to national regulators supervising
global market players.
As we have seen in recent months, a single event in one market can create significant ripple effects
elsewhere. These developments have not been lost on regulators. Having no less than 12 countries
represented here today bears testimony to the importance attached to learning from fellow regulators.
One key reason for organising the capital market seminar is to facilitate the exchange of views and
sharing of ideas. The occasion also provides an opportunity for regulators to get to know one another
better.
We hope that the interaction through presentations and panel discussions will provide ample
opportunities for participants to share the experiences and challenges in their home markets. To
provide a global perspective, we are honoured to have distinguished speakers from the US Securities
and Exchange Commission, the UK Financial Services Authority, and the Australian Securities and
Investments Commission. The presentations by leading industry practitioners will add an important
market dimension.
To start off the programme this morning, let me put to you three broad propositions which regulators
should reconcile with, in keeping with the demands of global capital markets:
(a) First, the need for cross-jurisdiction regulatory collaboration;
(b) Second, a growing impetus for international standards; and
(c) Third, how can regulators and regulations respond and facilitate capital markets' continued
innovation and growth.
The need for regulatory collaboration
The importance of cross-border regulatory cooperation is evident from the cross-border element in the
regulator's job. Local investors buy financial products overseas while foreign funds own substantial
stakes in locally-listed stocks. Capital market intermediaries compete vigorously to add value,
servicing global orders. Even markets now seek direct presence, in the form of trading terminals, in
different jurisdictions.
Increasingly, cross-border operations are no longer conducted predominantly via telephone or fax
wires, but by proprietary networks capable of channeling orders and funds across the globe almost
instantaneously. Such proprietary systems combined with the reach of the internet has pooled isolated
pockets of liquidity into a single global market.
With the aid of international rating agencies and global issue managers, corporate entities on their part
are raising funds wherever it is priced most cheaply and available with minimal hassle. On the demand
side, investors recognize the importance of global liquidity and market diversification. By taking
advantage of the financial links provided by intermediaries, retail investors have become empowered
to actively manage a global portfolio of investments.
In this environment, no single national regulator can afford to focus just on activities taking place in its
domestic markets. To achieve the objectives of investor protection and systemic stability, cross-border
regulatory cooperation is imperative. The Sep 11 incident demonstrates the degree to which financial
markets are interwoven and illustrates the need for such collaboration. All of you will recall that the
event resulted not just in the closure of US markets for 4 working days, but also justified the temporary
closure of several markets in Asia, while delaying trading hours in others. The reality was that
regulators the world over found themselves having to assess the situation, update one another, and
decide on actions to be taken in their respective markets.
Systemic risk has also increased with the trend towards commoditisation, ie volume business at
competitive costs. The concentration of volumes into key nodes such as large global custodians
represents exposure by market participants to entities located in other jurisdictions. Meanwhile,
crossborder capital flows have significantly increased the magnitude by which markets adjust to shocks as
evidenced in the Asian crisis. The same systems that allow international trades to be conducted from a
hub are also conduits by which volatility is transmitted globally.
For the risk to be satisfactorily managed, collaboration is necessary. Regulatory collaboration can take
many forms. It begins from interaction on occasions such as this, which represents an opportunity to
compare notes, discuss issues and exchange views. Such informal but regular contact should not be
discounted. Indeed, I understand from my colleagues that a series of telephone conversations and
e-mails with regulatory counterparts elsewhere in the aftermath of Sep 11 contributed considerably to
a quick appreciation of the type, and magnitude, of issues that could be expected. This contributed to
the avoidance of instability in individual markets. Looking back, we can all agree the markets stood up
remarkably well.
International meetings and joint forums such as IOSCO are a further step towards setting the
foundation for more structured lines of communication amongst regulators. Participation in IOSCO
taskforces requires resources but helps to develop better appreciation of characteristics unique in
other markets, and alternative approaches to addressing regulatory concerns. It is in recognition of this
that MAS has devoted resources to active participation in IOSCO's committees and working groups.
We have also found the Memorandum of Understanding ("MOU") to be a useful instrument for setting
out mutually agreed procedures by which regulators may exchange information and provide mutual
assistance. Since the mid-1990s, MAS has entered into a number of such MOUs to ensure that the
level of regulatory collaboration keeps pace with the capital market linkages that are in place. A formal
arrangement enshrined in an MOU may not be necessary in all cases, but are helpful amongst
jurisdictions with substantive capital market linkages or trading arrangements in place.
Impetus for international standards
The second proposition is the growing impetus for international standards. In this regard, IOSCO has
taken the lead in putting forward a set of principles which its members subscribe to. Some of the
principles are necessarily pitched at a broad level, to allow members to agree on key areas which
regulators should focus their attention.
The challenge ahead is to continue working systematically on the principles to further cross-reference
against quantifiable standards. There are several reasons why such international standards are
important.
Danger of a weak link in the system
The first is that interconnected markets means that transactions involving intermediaries or markets in
different jurisdictions are always exposed to the weakest link. As an example, a localised weak link in
clearing and custody networks used for cross-border transactions that buckles under stress will have
far reaching repercussions on the smooth functioning of counterparties and markets in other
jurisdictions.
Benchmarking
The second reason is that, whereas regulations are developed for local usage, international standards
are invariably developed under the close scrutiny of different regulators, and are derived after rigorous
debate and sometimes protracted fine-tuning. The end product is usually of laudable standards and
serves as a good yardstick for domestic practices to be benchmarked against.
Investor protection
The third reason is that a common set of standards facilitates sound regulatory oversight that is based
on consistent treatment of cross-border markets and activities. With regulators using the same
standards in assessing systems, products and practices, market players that deal with foreign
institutions or instruments can take comfort that those institutions and products are regulated based on
similar high standards.
Efficiency & cost savings
And the fourth reason is that the establishment of a set of standards that is subscribed to
internationally has the effect of aligning the regulatory practices in different jurisdictions. This allows
international financial institutions operating in different markets with similar features and rules drawn
up according to international standards, to benefit from lower compliance costs. Given a choice, from
the business proposition point of view, few fund managers, issuers or financial advisers would wish to
expend resources on compliance systems to keep track of different requirements and procedures in
different markets.
Much work is already underway to develop international standards on specific subjects. Within IOSCO,
MAS is a participant of various of its working groups including the Internet Project Team and the
Implementation Committee which, as its name suggests, has been tasked to implement the 30 IOSCO
principles of securities regulation. Apart from IOSCO, a number of other fora has also proposed
recommendations in their respective areas. These include the Basle Committee's work on a set of
globally accepted principles of risk-based capital among banks; the Group of 30's work in the area of
standardising OTC documentation; and a collaborative effort by the Bank for International Settlements
and IOSCO on recommended standards for securities settlement systems.
Indirectly giving impetus to international best practices is the IMF and World Bank's Financial Sector
Assessment Programme ("FSAP"). Under this initiative, assessors will collaborate with regulators in
participating jurisdictions to benchmark financial systems and practices against global standards.
MAS is convinced that these efforts represent considerable value-add to the global regulatory
environment and has participated in support of these initiatives. We will be undertaking an FSAP this
year. As an international financial center, we are also committed to contributing to international
financial stability as a member of the Financial Stability Forum, and have found our involvement in
various of its working groups to be invaluable. The establishment of international standards and best
practices as the way forward will become even more compelling as globalisation continues, and
regulators should be prepared to stay engaged with the process.
In doing so, it should be recognised that initiatives to draw up international standards in themselves
also add value by prompting regulators to re-examine existing regulation and review the policy
rationale behind them. This is useful in bringing dated practices back into line with international best
practices. Improvements to comply with globally accepted principles will benefit the market's growth
and in the long term attract participants with strong internal controls.
Call for responsive regulation
My third point concerns the role of regulators and regulations. Markets are calling and indeed
demanding for regulation to be more responsive to the needs of innovation and growth. If globalisation
has changed the international outlook of markets, the blurring of sectoral boundaries has transformed
financial markets from within.
With the mergers and acquisitions of the 1990s in the financial industry, cross-selling has become
prominent today with banks seeking to distribute investment and insurance products while
stockbrokers offer cash management and checking accounts. Insurance corporations on their part
have concentrated efforts to promote investment-linked policies. The trend is in part demand-driven
with customers seeking a one-stop financial house that provides convenient and integrated approach
to money management. Notwithstanding the global economic downturn which has checked M&A
activities, market players have not let up efforts to gain a competitive edge by consolidating their
positions through alliances.
The regulatory response to this has been a trend towards more integrated supervision. This allows
regulators to supervise the range of activities more efficiently by taking a holistic view of the financial
services market. The UK FSA is one example of integrated supervision under one roof while
Australia's Securities and Investments Commission and the Australian Prudential Regulation Authority
have ambits that cut across different industries.
As product lines converge, regulators in setting the rules have to be careful not to inadvertently pick
and choose the winning models. Put another way, similar activities that involve identical risk issues
should be regulated on an equal basis to avoid tilting the playing field. Failure to do so will result in
regulatory arbitrage and cause activities to migrate towards looser controls.
In Singapore, the regulators for banking, securities and insurance activities are consolidated in MAS.
Specific to the capital market, we have integrated our legislation for the securities and futures
industries, and harmonised our regulation of the financial advisory business to support the
cross-selling of products. What is critical however, is not how regulatory responsibility is divided or
consolidated into one or more agencies. The overriding objective is equitable treatment and
consistency in the approach to the measurement and management of risk.
Capital requirements illustrate this most clearly. Most regulatory models have moved away from
setting fixed minimum capital for regulated activities. In banks as for capital market intermediaries,
regulators are adopting and refining the risk based regulatory approach. Where risks take on a similar
profile therefore, the capital charges should be aligned based on a consistent principle. This is so even
as the risk management regime in the banking, securities and insurance sectors retains some
distinctive features that recognises the differences in these businesses.
Legislative initiatives in Singapore
In Singapore, at the heart of the regulatory framework for the capital markets is the Securities and
Futures Act ("SFA") which was enacted in September last year. The SFA is an omnibus Act that sets
out the regulatory framework for the capital market. It seeks to cover in a single rulebook the range of
capital market activities undertaken in Singapore, for the convenience of market participants.
The SFA introduces a single licensing regime covering the various activities in securities and futures,
fund management and corporate finance advice under a modular approach. This is a shift away from
folding all capital market activities into the categories of dealing in securities, and provision of
investment advice. In its place, the new licensing framework is designed to accommodate individual
slices of the capital market value chain.
To complement the modular licensing of intermediaries, MAS has announced the introduction of a risk
based capital framework which will take effect later this year. Under the framework, capital market
licence holders need only maintain capital sufficient to the business risks they undertake, according to
their respective operations.
Complementing the SFA is the Financial Advisors Act which governs the provision of investment
advice and the sale of collective investment products across all financial institutions. This will include
banks, insurance companies, capital market intermediaries as well as independent financial advisers.
A common code of conduct and business practices will be promulgated under the FA Act, and will set
minimum standards for all investment advisers.
Conclusion
In concluding, there is little doubt that the new financial landscape both domestically and
internationally has thrown up challenges and opportunities for regulators and market players alike. It is
a time of change and renewal as the tried and tested means of doing things come under scrutiny as
markets continually innovate. The challenge for us as regulators is to put in place a regulatory
framework and operate the system flexibly to meet the market demand for innovation and dynamism,
without compromising the safety and soundness of the system.
I hope to have given you some food for thought that will spark off questions and discussion over the
next few days. It remains for me to encourage all of you to make the most of this opportunity and give
voice to your views in the course of the seminar. I have no doubt that you will have much to share and
learn from the speakers, and from one another's experiences. I wish you a lively and useful Seminar.
Thank you.