Ravi Menon: Singapore's approach to the regulation of capital markets
Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore, at the Thomson Reuters 2nd Pan-Asian Regulatory Summit, Singapore,
28 September 2011.
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What do capital markets do?
Distinguished guests, ladies and gentlemen, good morning. And to all our guests from
abroad, welcome to Singapore.
Two thousand years ago, in ancient Rome, enterprises contracted with the government to
build temples and collect taxes. The enterprises funded these ventures by selling ownership
or equity stakes in the form of shares which were readily transferable among the Romans.
Later, the Italian city states sourced for funds from their citizens in the form of bonds to
finance wars, while merchants sought financing from individuals to procure better vessels for
sailing over ever increasing distances. Over time, a market developed to enable holders of
bonds and equities to sell their holdings to other interested buyers. Thus was born - what we
now call - capital markets.
Since those early days in Imperial Rome, capital markets have spread far and wide across
the globe. But the fundamental function of capital markets has remained unchanged - to
allocate capital to those who need it and transfer risk to those who are able to bear it. It is the
ability of capital markets to efficiently mobilise financial resources that has made possible the
large investments needed for the Industrial Revolution of the 18th century, and the risk
capital that funded the global Internet Revolution more recently.
Like other markets, capital markets are prone to volatility as demand and supply fluctuate.
But unlike other markets, turbulence in capital markets can have far wider consequences on
the rest of the economy. From the Wall Street Crash of 1929 to the Global Financial Crisis of
2008, we have seen how dislocations in capital markets can have devastating effects on
financial stability, economic growth, and the welfare of citizens.
Capital markets must therefore be regulated, but in a way that does not unduly undermine
their efficiency and effectiveness.
This morning, I want to share with you Singapore's approach to the regulation of capital
markets.
Why we regulate capital markets
We can think of the capital market as an ecosystem comprising four key components:
 one, issuers - those who issue securities to raise capital;
 two, investors - those who invest in these securities;
 three, intermediaries - those who advise issuers or investors and facilitate the
trading of securities;
 four, infrastructure - the platforms or systems through which securities are traded.
Each component of this ecosystem is prone to market failure - hence the need to regulate.
 First, there is information asymmetry between issuers/intermediaries and investors,
and investors may be unable to make informed judgments about financial products.
 Second, there is a principal-agent problem, and intermediaries may not act in the
best interests of their clients, be they investors or issuers.
 Third, investors are sometimes prone to herding behavior, exaggerating price
movements and thereby precipitating market instability.
 Fourth, if issuers and intermediaries take on too much risk or liability that they
cannot manage, there will be loss of confidence and market instability.
 Fifth, critical infrastructure may fail, again leading to market instability.
The purpose of regulating capital markets is to safeguard the interests of investors, ensure
that risks are kept to an acceptable level, promote efficient price discovery, and maintain
confidence in the market.
In Singapore, the regulatory framework for capital markets is underpinned by the Securities
and Futures Act (SFA) and the Financial Advisers Act (FAA). Consumers who invest in
products or deal with entities that are regulated under this framework will enjoy the
safeguards provided under these laws. Together, the SFA and FAA cover each of the four
components in the capital markets ecosystem.
Issuers - dissemination of material information
Let me begin with issuers.
A key tenet of capital market regulation is that relevant information is transmitted efficiently
for price formation and discovery. Like most reputable regulators, MAS imposes stringent
rules requiring issuers of securities to disclose and disseminate all material information. We
conduct ongoing surveillance of market practices and undertake rigorous enforcement
actions to ensure compliance.
Disclosure
The SFA requires exchanges to develop rules for reliable and unhindered price formation
and discovery. First, disclosure must be ongoing. Post-listing, material information likely to
affect market prices must be disseminated in a timely and organised manner. For example, a
company that makes an acquisition which is likely to have a material impact on its share
price must immediately announce it on the website of the Singapore Exchange. Second,
disclosure must be accessible to all. Listed companies are prohibited from disclosing material
information on an individual or selective basis. These disclosure requirements complement
Singapore's statutory provisions on market manipulation and insider trading.
Enforcement .... and its limitations
Issuers and investors alike must have confidence that the ground rules are adhered to when
they transact in our markets. Constant surveillance and strict enforcement are therefore
critical. MAS takes a serious view of any false statement or omission of material information
that misleads the market. We will not hesitate to impose stiff penalties on issuers who have
made misleading statements in initial public offerings, or IPOs.
But no regulator can totally prevent fraud or misconduct. Take for instance our experience
with S-chips, or Chinese companies listed on the SGX. Many of them are reputable
companies and add breadth to our equity capital market. But some of them are not. Since
2006, accounting irregularities or outright frauds have been discovered in 14 such companies
listed on the SGX. Most of these cases came to light when the auditors were unable to
confirm the companies' cash and account receivables. The counters were suspended
pending investigations by special auditors, and investors had to bear the losses. I still get
letters from investors who had lost money in these shares. I can understand their
frustrations.
Many have asked MAS to do more to bring the full force of our law to bear on the
wrongdoers. Let me state the position categorically: MAS will leave no stone unturned to take
rigorous action against those who break our laws. But there are real challenges when the
fraud is perpetrated by parties outside our jurisdiction. Cross-border investigations and
enforcement are intrinsically difficult.
Singapore is not alone in facing challenges with international listings. Co-operation among
securities regulators and enforcement agencies in different jurisdictions is therefore critical.
We cannot eliminate fraud. But we can and must ensure that companies that are brought to
the market are of good quality. SGX must be rigorous in evaluating the suitability of listing
applicants before admitting them. Other stakeholders must play their part too.
 First, directors of the company seeking a listing must exercise adequate oversight of
internal controls and ensure the veracity of information disclosed.
 Second, IPO advisers have a legal and professional responsibility to conduct proper
due diligence when bringing companies public. They must have a healthy dose of
skepticism, and never place their commercial interests above the need to ensure
that a company is suitable for a public listing. MAS will not hesitate to take advisers
to task for poor due diligence work.
If the regulators, issuers, and advisers each do their jobs well, we can reduce the likelihood
of poor quality companies gaining access to our markets.
Investors - safeguarding their interests
This brings me to the second component of the capital market ecosystem - investors.
Well-informed and empowered investors are at the core of a well functioning capital market.
Investors will lose confidence in a market where disclosure is misleading and where selling
practices are irresponsible.
Safeguarding the interests of investors, particularly retail investors, is therefore a key focus of
MAS regulation. But this objective has to be balanced against the need for investors to take
ownership of their investment decisions. A regulatory approach that requires issuers or
intermediaries to bear all the risks and losses will not work. If investors expect their losses to
be always made good, there will be moral hazard and it will encourage reckless investing.
MAS safeguards the interests of investors in five ways:
First, we demand stringent disclosure of information by issuers;
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 Second, we require transparency in the information disclosed;
 Third, we set standards for intermediaries who sell investment products to provide
quality financial advice;
 Fourth, we promote investor education, so that investors are empowered to make
informed decisions.
 Fifth, we provide affordable and accessible dispute resolution mechanisms for
investors who feel aggrieved by the investment process.
Let me take each of these aspects in turn.
Disclosure
There is nothing like disclosure to instill market discipline. In the words of US Supreme Court
Justice Louis Brandeis, "Sunlight is said to be the best of disinfectants; electric light the most
efficient policeman". Disclosure is about shining that light so that all can see and make
informed decisions.
Investors are entitled to accurate and timely disclosure of material information so that they
can assess the risks and rewards of their investment. Disclosure works not because all
investors understand every word that is disclosed. Disclosure works because it facilitates
scrutiny by experts in the market; it is this professional scrutiny that acts as a check on
issuers and helps to inform the broader investor base.
Take for example an IPO prospectus. It can typically run into hundreds of pages, with
detailed descriptions about the company's business operations, its competitive environment,
governance practices, and risk exposures, not to mention a full set of financial statements.
Most retail investors cannot easily digest all this information. But the scrutiny of the
prospectus by analysts and institutional investors helps to bring to light any significant
weakness in the company.
Having said that, I must acknowledge that greater disclosure does not always improve our
understanding of investment products. While all material and relevant information must be
disclosed, there is a tendency for disclosure to be voluminous and legalistic - often made for
the purpose of limiting legal liability rather than facilitating understanding by retail investors.
MAS therefore seeks to ensure that information disclosed is not only adequate but also
transparent.
Transparency
MAS has sharpened the focus on providing investors information in a clear and concise
manner to aid understanding. Earlier this year, we introduced a new regulatory requirement
for a Product Highlights Sheet to accompany offers of investment products that come with
prospectuses. Its purpose is to convey key risks and product information in plain language
and in a simple question-and-answer format. Let me give an example. In one recent
prospectus, the right of the investors to cancel their subscription within seven days was
spelled out in two rather technical paragraphs using a total of 170 words. In the Product
Highlights Sheet, the same point was made in two simple sentences.
Financial advice
The third aspect of investor protection is the provision of sound financial advice by
intermediaries when they sell investment products. The Fair Dealing Guidelines issued by
MAS require intermediaries to conduct their own internal assessment to ensure that a new
product being launched for sale is suitable for its targeted investor base. Intermediaries must
also ensure that their representatives have the competencies to understand and explain the
product features to their customers.
MAS has introduced new rules requiring intermediaries to assess their customers'
investment knowledge or experience before investing in complex products. The rules will
come into effect in January 2012. Where an investor does not possess the requisite
knowledge or experience, intermediaries must provide appropriate advice. Investors who
choose not to heed their advice or insist on buying a product which has been assessed to be
unsuitable for them must take responsibility for their decision. This approach recognises that
investors' capacity to understand complex products is uneven, while respecting their right to
invest as they see fit.
Over the last two years, MAS has conducted surveys and inspections to assess
intermediaries' delivery of these fair dealing outcomes. We will use our findings to fine-tune
the Guidelines on Fair Dealing.
While MAS has taken these steps to ensure that the financial advisory industry is able to help
investors make informed decisions, the best way to instill discipline on the industry is for
investors to demand good advice. Singapore's investing public should seek good financial
advisers who are prepared to even advise them against buying an unsuitable product. They
should be prepared to pay a fee for such advice.
Investor education
Even with the best of disclosure and transparency, investors can make informed decisions
only if they have the knowledge and skills to do so. This brings me to the fourth area of
investor protection - education.
The centerpiece of Singapore's investor education efforts is the MoneySENSE national
financial programme. It was launched in 2003 to raise consumer understanding of basic
money management, financial planning, and investment products. Through various seminars
and media initiatives, MoneySENSE has reached a large segment of the population since its
launch. In the last year alone, MoneySENSE events attracted close to 100,000 attendees
while media initiatives reached more than two million people. These events are conducted by
industry practitioners, academics, and investor advocates. To-date, Money SENSE has
published more than 230 educational articles on its website and in the media. More than 30
consumer guides have been issued and are available online.
While we have made steady progress, much more needs to be done. Most Singaporeans
have sound savings habits and are generally responsible in managing credit, but many still
do not have a good understanding of common investment products. Every month, MAS
receives, on average, about 10 complaints from the public involving the sale of investment
products.
I read many of these letters. Sure enough, there are indeed a few cases of inadequate
disclosure or mis-selling, which the financial institution concerned should remedy. But there
are others where the customer has failed to exercise basic due diligence. These are the most
painful letters to read:
 of investors who were attracted by headline returns and purchased products without
reading any of the product documentation;
 of investors who willingly signed blank sheets of product assessment forms without
realising what they were buying; and
 of investors who insisted on buying risky products even though they were advised
that the products were not suitable for them.
It is very difficult to help in cases like these.
MAS will continue to explore ways to equip investors with core financial capabilities. We are
currently studying the feasibility of establishing a financial literacy institute to complement
existing MoneySENSE initiatives through talks and workshops to reach a larger segment of
the population.
We are also reaching out more to students, through the schools. The objective is not so
much to instill technical expertise in investment products, but to inculcate good money habits
from a young age - being prudent, being alert to risks, being clear about the objectives of
investing.
Dispute resolution
Even with well-informed consumers, occasional disputes with those who sell investment
products will be inevitable. Hence the final area of investor protection is to provide an
affordable and accessible dispute resolution mechanism for aggrieved investors.
MAS has set clear expectations that financial institutions must establish a robust process to
resolve customer grievances independently, effectively, and promptly. We also expect
financial institutions to investigate and rectify issues related to any widespread complaints on
a particular product or selling practice.
This dispute resolution mechanism within financial institutions can be effective only if parties
to a dispute act fairly. Financial institutions must police their relationship managers and
enforce internal guidelines. Recently, we were alerted to a case where a financial institution
tried to salvage its reputation by denying that its relationship manager had recommended a
highly risky investment product to an elderly retiree with a low risk tolerance. This is not
acceptable. MAS will take firm action against financial institutions for such behaviour.
On the other hand, investors should not make unreasonable demands and expect financial
institutions to accede to them. For instance, a consumer demanded that her bank accept her
mobile text instruction to reverse a transaction when the message was sent a day after the
transaction was executed.
Where disputes cannot be resolved through the financial institution's internal processes,
investors can approach the independent Financial Industry Dispute Resolution Centre
("FIDReC"). FIDReC provides access to an independent and affordable dispute resolution
process through mediation or adjudication. This provides the consumer a low-cost alternative
to litigation. FIDReC awards are binding on the financial institution, but the investor can
choose to reject the award and pursue other options for recourse.
Intermediaries - safety and market conduct
I turn now to the next key component in the capital markets ecosystem - intermediaries. The
objective of regulation with respect to capital market intermediaries is twofold: their safety
and soundness, and market conduct.
Safety and soundness
We want intermediaries to be safe and sound, in the interest of preserving systemic stability.
Intermediaries connect the various parts of the capital market ecosystem. They stand
between buyers and sellers, underwrite risks, act as counterparties in risk transfers, and
participate as members of clearing houses. The failure of a major intermediary can transmit
risks across the system, causing severe market disruption and undermining confidence. Lest
we forget, Lehman Brothers was principally a securities firm, not a bank.
MAS regulation cannot rule out the failure of an intermediary. But we can seek to ensure an
orderly winding-down process.
The segregation of customers' funds from the intermediary's own funds is a key feature of
our regulatory regime. Unlike banks which can freely deploy the deposits they collect, capital
market intermediaries are required to segregate customers' assets from their own monies.
This acts as a safeguard for customers' funds should the intermediary fail. Fund managers
are required to appoint independent custodians and fund valuation firms, and be subject to
regular audits.
Market conduct
The second regulatory outcome we expect from intermediaries is fair conduct. Trades that
give a false or misleading appearance of market activity, actions to rig the prices of securities
or futures, are all prohibited under our law and severely dealt with.
MAS works closely with the Commercial Affairs Department to take enforcement actions
ranging from civil penalties to criminal action. Last year saw the fruition of MAS' first civil
penalty court action. We secured civil penalties against a fund manager who was found by
the High Court to have window-dressed his portfolio by creating a false appearance relating
to the price of one of the component shares. The fund manager and its CEO were ordered to
pay a civil penalty of S$250,000 each to MAS, as well as costs of the court action. The
decision was upheld by the Court of Appeal.
The assistance that we sought, and obtained, from our foreign counterparts was vital to our
success in this case. Similarly, MAS stands ready to assist our international counterparts in
their enforcement efforts. Earlier this year, the Australian authorities successfully prosecuted
a former fund manager of an Australian bank for insider trading. MAS had referred this case
to the Australian Securities and Investment Commission (ASIC) and provided ongoing
assistance during ASIC's investigations.
Infrastructure - sound and stable
The final component of the capital market ecosystem is the infrastructure that supports the
trading of securities and futures. Capital market participants trade either on a multilateral
basis through organised exchanges, or bilaterally with each other over-the-counter or OTC.
Exchanges
The Singapore Exchange and the Singapore Mercantile Exchange operate the
systemicallyimportant securities and futures markets in Singapore. They constitute critical infrastructure
that must function properly to preserve stability and efficiency. Our laws require the
exchanges to maintain sufficient financial, human and system resources, have frameworks
and processes to manage their risks, and to regulate and supervise their participants.
OTC derivatives
The OTC derivatives space has traditionally been the preserve of sophisticated financial
institutions which are well placed to assess and negotiate trades among themselves. These
financial institutions are regulated by MAS and the risks associated with their OTC
derivatives positions are taken into account under the respective regulatory frameworks for
these institutions.
OTC derivatives, unlike their more standardised counterparts on futures markets, enable
customised hedging of risks. Properly employed, they confer significant benefits to the
financial intermediation process and hence the wider economy. For example, interest rate
swaps enable companies to convert floating rate loans to fixed-rate loans. Companies with
large capital investments over a long horizon, such as airlines, shipping companies and
infrastructure builders, rely on interest rate hedging tools to manage their financial risks.
But with the rapid growth of OTC derivatives globally, weaknesses in the market structure
can contribute to a build-up of systemic risk. We saw this during the global financial crisis.
The interconnectedness of OTC derivatives market participants and the limited transparency
on counterparty risks can trigger rapid contagion. Under stressed market conditions, this can
potentially threaten the stability of the financial system.
The G20 has called for changes to improve transparency and mitigate risks in OTC
derivatives markets. The Financial Stability Board has made recommendations under four
key thrusts. Singapore is fully committed to implementing these recommendations.
The first thrust is to standardise derivative contracts. MAS is working with the Singapore
Foreign Exchange Markets Committee to encourage standardisation of derivative products.
The Committee will formulate a code of conduct for financial institutions operating in the OTC
market.
The second thrust of the reforms is to mandate central clearing of all standardised contracts.
Central clearing mitigates systemic risk through multilateral netting and ensures that the
failure of a counterparty does not affect other participants. Since 2006, the SGX has
operated a clearing facility for OTC derivatives, covering derivatives contracts for
commodities, energy and freight. It started clearing interest rate swaps in November last
year, and will clear foreign exchange forwards by the end of this year.
But comprehensive implementation of central clearing is not without challenge. We need to
determine carefully the products for mandatory central clearing, particularly those employed
by commercial end-users. The cost of clearing can potentially increase their hedging cost,
causing a cut-back on needed investment or an increase in unhedged positions. We also
need to be mindful that while central clearing removes counter-party risks, it adds to
concentration risks. It is therefore critical that central clearing platforms be subject to robust
supervision to ensure that they manage their risks effectively. To the extent that these
platforms operate across geographical borders, appropriate arrangements for cooperation
among national supervisors must be in place.
The third thrust is to move derivatives trading to platforms where appropriate. This will help to
improve price transparency. Singapore is a major centre for exchange-traded derivatives in
Asia. We are well placed to move more derivatives trades to organised platforms, but the
extent would have to take into account the local context, such as product characteristics and
participant profiles.
The fourth thrust is to report trades. Mandatory trade reporting enhances supervision of
derivatives markets by addressing information gaps. For this to be effective, regulators need
timely access to relevant data that can be aggregated. This requires cross-border
supervisory cooperation on data access and harmonisation of reporting requirements and
standards. But national concerns have led to some jurisdictions setting up their own trade
repositories, which could make data aggregation more challenging. MAS is assessing the
need for a local repository and the appropriate regulatory regime to avoid duplication.
In recent months, there has been a notion in some quarters that as tighter regulations are
proposed for OTC derivatives in the US and EU, activity will flow to centres in Asia that are
purportedly less tightly regulated. This is mistaken. Leading centres in Asia - like Singapore,
Hong Kong, and Australia - are very much part of the G20 initiative and there is no room for
regulatory arbitrage. MAS is fully engaged in the OTC work of the FSB, the International
Organisation of Securities Commissions, and the Committee on Payment Systems and
Settlements. We will fully implement the OTC derivatives reform agenda.
There must be consistency in implementation across jurisdictions, but there cannot be
precise equivalence. The OTC derivatives landscape in Asia and Singapore differs
considerably from that in the US and Europe. We have smaller markets and less complex
derivative instruments. We have to consider how to implement the G20 reforms effectively
while taking into account enforcement issues and the characteristics of our markets. MAS will
consult the industry on its proposals for OTC derivatives market reforms by the end of this
year. We aim to meet the G20 target to implement the reforms by end-2012.
Conclusion - shared responsibility
Let me conclude.
In regulating capital markets, we are not dealing with a particular industry or a particular type
of institution. We are trying to create the conditions within what is essentially an ecosystem,
so that its risks are managed and its economic benefits sustained.
But these benefits cannot be achieved by regulation alone. As Winston Churchill puts it, "If
you have ten thousand regulations you destroy all respect for the law". There is a limit to how
far regulation can go without undermining compliance, not to mention efficiency and
innovation.
All components of the capital market ecosystem must play their part. A well-functioning
capital market is a shared responsibility. If all stakeholders do their part well, not only will we
have fair and efficient capital markets that everyone has confidence in, but we will also make
Singapore a competitive and vibrant financial hub in Asia.
Thank you for your attention.