Tharman Shanmugaratnam: Regulating the capital markets: making market
discipline work
Speech by Tharman Shanmugaratnam, Deputy Managing Director of the Monetary Authority of
Singapore at the StanChart-Reuters-Business Times Investment Awards ceremony, Singapore,
16 Feb 2001
* * *
The capital markets are undergoing a sea change. Technology and the Internet have opened new
channels for investors to access a wide range of investment information and to transact in securities,
often without advice or assistance from market intermediaries. Market intermediaries themselves are
consolidating, and exploring new business models to capture clients and add value to their decisions.
It is a more competitive environment all round, and the margins from traditional financial intermediation
have thinned.
Regulators are having to rethink their approaches towards the oversight of the markets in this new and
rapidly changing environment. The objectives have not changed to preserve confidence by
maintaining fair, transparent and efficient markets, and to minimise the risk of disruptions that threaten
the stability of the system. But the methods of achieving these objectives are being refashioned. It is
no longer possible for the regulator to root out all that is evil, dangerous or vaguely suspicious before
they get to the market. Greater emphasis is therefore being placed on discipline being exercised within
the market, and by the market.
Making market discipline work
We have embarked over the last three years on a shift in our approach to regulating the markets from
what is loosely called a merit-based regime, under which the regulator judged the appropriateness of
securities being made available to the public, toward to a market-driven, disclosure-based regime of
regulation. It is aimed at allowing market participants greater choice and the free play to take
calculated risks. We have made it clear that the shift in approach will not compromise our reputation
internationally as one of the most open, transparent and well-regulated markets in Asia. Market-based
regulation will indeed raise standards of business conduct, as is necessary for a more open,
competitive and innovative market environment.
Market discipline will not simply be a matter of 'caveat emptor'. The buyer cannot be expected to
beware if he is not provided with accurate and accessible information so as to make a reasonable
judgement of prospective risks and returns. Neither can he do so if the market is rigged without his
knowledge. It follows that market discipline requires a system of laws, rules and standards to
discriminate in favour of companies with high standards of corporate governance and disclosure, and
to exact penalties on those who manipulate the market.
Making market discipline work is therefore the responsibility of all participants in the system.
Let me briefly outline some of these roles:
• The will monitor compliance with the laws and regulations
MAS, as the statutory regulator,
that govern the integrity of the markets, seek enforcement of the laws, and propose
amendments in order to keep them relevant in a changing market environment. We have
undertaken a substantial review of our securities laws in the last year. Insider trading is now
both a criminal and civil offence, and we have recently proposed to amend the laws to
capture a wider pool of persons who seek to take advantage of inside information. The
proposed new Securities and Futures Act (SFA), to be put to Parliament later this year, will
contain other substantial changes. I will elaborate on one of these, concerning the
prospectus registration regime later in the speech.1
• The Singapore Exchange (SGX), with its frontline interface with the industry and markets,
plays a key role in preserving fair and transparent markets. It is responsible for the listing
rules for companies that raise capital and have their shares traded on the exchange. It is
also responsible for ensuring that conditions exist for orderly trading of listed securities.
• The conduct of issuers themselves is at the core of a system of market discipline. Issuers
must take it upon themselves to make full and prompt disclosure of material information. It is
not just a matter of meeting the requirements of the law and SGX's rules. It is increasingly in
the interests of companies to go beyond the minimum in disclosure standards, as investors
become more discerning to the quality of information available to them. A number of studies
have shown that the markets have attached an increased premium in recent years to
companies which demonstrate sound corporate governance and who are more forthcoming
and open with information on their businesses. The so-called 'corporate governance
dividend', previously not easily discerned in Asian markets in particular, is now fully visible.
• Market intermediaries play an important supporting role. Investment banks, accountants,
have a duty to provide high
lawyers and other professionals who advise issuers
standards of professional advice, and to exercise thorough due diligence to ensure that
issuers comply with laws and rules, as well as adopt high standards of disclosure. Brokers
and investment advisers likewise, have a duty to provide their investing clients with
objective advice that is in their clients' best interests.
• Finally, it is for investors themselves to take advantage of higher standards of disclosure in
making their decisions. Investors and the media also contribute to effective market discipline
by calling for more and better quality information from listed companies. Institutional
investors such as fund managers play an important role in this regard. They have greater
resources to monitor and analyse information, and typically greater leverage on companies
to encourage them to improve on standards of corporate governance and disclosure.
The move towards market-based regulation will be given a significant push by the recommendations of
two private sector-led committees that were appointed by the Government last year - the Corporate
Governance Committee and the Disclosure and Accounting Standards Committee. The committees
have recently completed an exercise of public consultation on their preliminary recommendations, and
aim to publish their final reports by April.
The development of a market-driven, disclosure-based regime is in progress. It will be naïve to expect
an effective system of market discipline to have arrived in a day, or in three years. The transition will
cause some uncertainties initially, and even the occasional revanchist call for a return to the regime of
the past. Market participants will take time to develop high standards of corporate conduct and
disclosure, and to discover the new boundaries. We can expect some of them to test the boundaries in
the process, either wittingly or otherwise. But the boundaries of what is permissible to preserve fair
and transparent markets should become quite apparent through a few salutary cases, which will help
define the new dispensation.
The MAS and SGX themselves have reviewed their respective roles in the new regulatory
environment. I will touch now on a number of issues concerning the regulatory functions of the SGX as
a demutualised, profit-oriented and listed exchange, and its relationship with the MAS as the statutory
regulator.
Can a demutualised, listed exchange regulate the market?
As a focal point of market activity, exchanges have traditionally been accorded the role of frontline
regulator of the securities markets. With the demutualisation and public offering of shares by a growing
number of exchanges - most recently the Deutsche Borse - questions arise as to whether a listed
for-profit exchange is able to discharge its role as frontline regulator competently and effectively.
Conflicts of interest in the regulatory functions of an exchange are not new however. They existed
before demutualisation. Members of the former Stock Exchange of Singapore (SES), a mutual body,
had to set and enforce rules in the public interest that could negatively affect their commercial
interests. The exchange was also expected to conduct effective and impartial supervision of its
member-owners. The potential conflicts of interest in these respects were mitigated by the fact that the
SES had only a small number of members, accentuating the financial risks that they each faced from a
failure of the exchange to properly regulate.
More importantly, the potential conflicts of interest made it necessary for the MAS to take a heavy
hand in the affairs of the exchange. The folklore sometimes exaggerated this, so much that some
observers attributed every decision of the SES to the mysterious ways of the MAS. But the hidden
hand of the regulator was not ideal for developing a mature and dynamic capital market.
Now that the SGX has been demutualised and listed, a new set of potential conflicts arises. While
profits were never irrelevant to the SES, they are the primary motive for shareholders of the listed
SGX. Share values and dividends also give greater transparency to the business performance and
prospects of the SGX, providing the management with greater incentive to raise operational efficiency,
and seek competitive advantage. This is as it should be, and is indeed a principle benefit of
demutualising and listing the SGX. There will however be concern from time to time as to whether the
greater drive for commercial success will reduce the commitment and resources deployed by the
exchange to fulfill its responsibility to regulate in the public interest.
The MAS believes that the interests of the SGX are more aligned than divergent with public interest as
represented by users of the exchange. A fair, transparent and efficiently-regulated market is
indispensable to the vibrancy and sustained business success of the SGX. Serious investors will
not trade on an exchange that does not have internationally acceptable rules of listing, trading and
settlement, or does not enforce the rules fairly and effectively. The examples of exchanges that have
failed to meet such standards and suffered the consequences of investor shunning their markets are
well-known. Without the interest and liquidity provided by investors, no exchange will find it easy to
attract issuers and to build its business.
Credibility in regulation is therefore a vital commercial asset for the SGX. The board and
management of the SGX recognise this fully. Corporate governance of the SGX is not designed to
favour short-term revenue objectives at the expense of long-term gains. Shareholders of SGX
themselves have it in their interests to hold the exchange to high standards of market regulation, so as
to achieve sustained returns on their investments.
MAS-SGX Regulatory Relationship
A demutualised, listed exchange however requires an enhanced role for the MAS in some respects,
even as the functions of the SGX and the MAS are more clearly delineated than in the past. The
Exchanges (Demutualisation and Merger) Act passed in 1999 was drafted to give MAS the power to
issue directives to SGX in the interest of ensuring fair and orderly securities and futures markets, and
the proper management of systemic risks. The MAS is the backstop. It is in the position to put things
right, where any potential conflicts of interest become real.
The regulatory relationship between MAS and SGX may be broadly defined as follows. MAS, as the
statutory regulator, will administer the corpus of statutory law regulating the capital markets. We also
maintain oversight of SGX's regulatory responsibilities and seek to ensure that there are no gaps in
the overall regulatory framework. The SGX has direct and frontline regulatory responsibilities of the
securities and futures markets, and over the broker-dealers who trade on the exchange. This
MAS-SGX regulatory relationship applies to all the major areas of regulation:
a. Regulation of capital raising
• SGX defines and enforces the rules that apply to companies that seek to raise capital on the
exchange through primary or secondary issues.
• MAS' approval must be sought for any changes to SGX's listing rules. Under the proposed
SFA, the SGX will have to notify the MAS of any rule changes 21 days before its
announcement. MAS will be able to approve, alter or stop any rule change during that
21-day period.
b. Continuous listing and disclosure requirements
• SGX enforces the continuous listing requirements on companies, to see to it that listed
companies maintain timely and adequate disclosure of material information. SGX has the
power to suspend and even de-list a counter if a company fails to meet the standards set out
in the listing rules.
• Continuous disclosure by listed companies will also become a statutory obligation under the
proposed SFA. This means that non-disclosure or late disclosure of material information will
be a breach of the law, not just a breach of SGX's listing requirements, and carry either civil
or criminal penalty.
c. Market surveillance
• SGX carries out market surveillance to detect unusual trading activities that could reflect
attempts to manipulate the market. Such surveillance efforts could also lead to discovery of
parties trading on privileged insider information. SGX has the power to suspend or de-list a
counter if conditions for orderly trading are found to be absent.
• MAS will carry out independent surveillance on a selective basis, to ensure that SGX is
performing its responsibilities effectively.
• The MAS will have the power under the proposed SFA to pursue civil prosecution of listed
companies which fail to make timely disclosure of material information, and of any
participants suspected of market misconduct. The recently introduced civil remedy regime
for insider trading will be extended to cover other forms of market misconduct such as
market manipulation, or the employment of fraud and deceit in dealing. Civil remedy, which
lowers the burden of proof against offenders, will complement the present framework of
criminal remedy for offences under securities law.
d. Supervision of brokers
• SGX supervises and inspects brokers to ensure that they comply with SGX's rules, are
prudentially sound, and uphold high standards of market integrity. SGX has to act swiftly and
firmly to deal with any unprofessional conduct by brokers and their representatives.
• MAS conducts continuous off-site review of brokers' operations to check if they comply with
statutory licensing requirements. Such off-site reviews will be complemented by MAS'
selective, on-site inspection of brokers to assure itself of the competence and effectiveness
of SGX's supervision.
Regulation of SGX as a self-listed entity
When the SGX was listed on itself (on its Securities Trading subsidiary), MAS assumed the role of
frontline regulator for the listing and trading of SGX's shares. MAS was the approving authority for
SGX's listing, and was directly responsible for vetting SGX's prospectus. We are also conducting
surveillance of trading in SGX's shares, and monitoring the continuous disclosure of material
information by SGX. MAS has powers under the Exchanges (Demutualisation and Merger) Act to
issue directives to SGX to resolve any conflicts of interest arising from its self-listing. Such conflicts are
also addressed in a Deed of Undertaking to the MAS. In keeping with the Deed, SGX has appointed a
Conflicts Committee to deal with such issues, and MAS is the approving authority for the composition
of the Committee.
Revisiting the regulatory structure will be necessary
The relationship between the regulator and the exchange is evolving internationally. Regulators are
monitoring the effectiveness of self-regulation by the exchanges, and the division of responsibilities
between regulators and exchanges. No single model has gained universal acceptance, and no model
is regarded as good for all time in any jurisdiction.
The present MAS-SGX regulatory arrangement has major elements in common with that in the major
jurisdictions which have seen the exchanges demutualised, and in particular with arrangements in
Australia. The UK approach is also similar, except that the Financial Services Authority (FSA) has
taken over the listing authority from the London Stock Exchange (LSE). That decision was shaped by
the inappropriateness of leaving the listing authority with the LSE when other competing exchanges
are emerging in the UK.
We believe that the current arrangements for the regulation and supervision of the securities
markets between the MAS and SGX, with an enhanced oversight responsibility for the MAS and
powers to pursue civil prosecution, will prove robust. But we will continually review the
arrangement, keep in touch with international practices, and re-calibrate the roles of MAS and SGX
where necessary to ensure effective oversight of the local markets.
I would now like to touch on two features of the regulatory arrangement that we have recently
reviewed. The first concerns the approval of substantial shareholdings in the SGX; the second,
proposed changes in the prospectus registration regime.
Approval of substantial shareholdings in the SGX
The Exchanges (Demutualisation and Merger) Act requires anyone who wishes to acquire 5% or more
of SGX to seek prior approval from MAS. This provision recognises the unique and important role of
SGX in providing the infrastructure and marketplace for the trading, clearing and settlement of
securities and derivatives in Singapore.
Strategic investors
As announced previously, MAS will allow suitable strategic investors who can promote SGX's growth
and development to acquire substantial stakes of 5% or more in SGX. How large a stake these
strategic investors will be allowed to take will depend on what they are able to contribute to the
exchange in terms of business alliances, technology or other ways of supporting the business and
infrastructure of the exchange.
Fund managers
In addition, SGX has received indications from fund managers that they would like to hold more
significant stakes in SGX than is currently permissible under the 5% cap. Fund managers are key
institutional players on the buy-side of the capital markets, and will, as shareholders, add to the
diverse range of groups with an interest in SGX's business. MAS will therefore generally allow fund
managers who invest pools of customer funds to hold SGX's shares beyond the 5% limit. They
will have to apply to MAS for approval first. The combined holdings of such a fund manager will be
capped at 10%. A fund manager, however, cannot expect to be represented on the SGX Board
unless it has a substantive, strategic relationship with the Exchange.
Proposed changes to the prospectus registration regime
The Companies Act requires every company seeking to raise funds via a public offer to issue a
prospectus to inform potential investors of the financial status of the company, its business plans, the
risks of investing in the company, and all other material information which will enable them to make
informed investment decisions. Currently, companies submit their draft prospectuses to the Registry of
Companies and Businesses (RCB) to be vetted for compliance with the Companies Act. Companies
applying to list on the SGX will also send their draft prospectuses to the exchange for vetting to ensure
that they meet SGX's disclosure requirements.
When the capital-raising provisions in the Companies Act are transferred to the new SFA later this
year, MAS will take over from RCB as statutory regulator for prospectus registration. We are now
reviewing the prospectus registration regime with a view to enhancing market accountability, and
raising the standards of prospectus disclosure.
Under the proposed regime, MAS will register a prospectus not earlier than 14 days and not later than
28 days after an issuer has lodged the prospectus with MAS. This period will allow for both
regulatory review by the MAS and SGX, and public scrutiny and comment. (Currently, there is no
public scrutiny before a prospectus is registered.) The prospectus will be published on the Internet to
give investors the opportunity to scrutinise the prospectus prior to its distribution, and raise any issues
of concern. This model is similar to that which has been introduced in the Australian markets.
There will be a more measured approach to prospectus review by the regulator. I was told that SGX
currently vets an average of five drafts for every prospectus that gets published. This is clearly not
desirable going forward. The review of prospectuses by the MAS and SGX will focus, respectively, on
compliance with laws and SGX's listing requirements on prospectus disclosure. MAS and SGX will no
longer vet prospectuses with a view to determining if they contain inaccuracies in information or factual
errors. Issuers and their advisers have to bear greater responsibility for ensuring accurate and
adequate disclosure.
After a prospectus has been registered, it is proposed that MAS be empowered to issue a stop order
and prevent further issues of securities if a prospectus is found to contain misleading or incorrect
statements, or to have omitted material information. Investors who have subscribed for securities on
the basis of the deficient prospectus can withdraw their applications and have their monies refunded.
The new prospectus registration regime is aimed at placing greater responsibility on issuers and their
advisers to meet the high standards of disclosure necessary for the development of more effective
market discipline, and a more mature capital market environment. MAS will be seeking feedback on
the proposed prospectus registration regime shortly, as part of our public consultation on the draft
SFA.
Conclusion
Approaches to regulation worldwide are evolving with the times. An effective system of market
discipline is necessary to sustain and promote the growth of open, transparent and competitive
markets. Singapore is making substantial changes to its laws, rules and standards to support
enhanced market discipline. It will be a process of evolution, but we have made good progress.
Succeeding in this endeavour will require effort by both the regulator and all market participants,
including issuers, their advisers and investors themselves. It is an indispensable part of our efforts to
make Singapore a premier financial hub in Asia, and we have every confidence in getting there.