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Saturday September 22, 2012

What trading link means for Singapore


Singapore Exchange CEO Magnus Bocker (pic) has this to say in a question and answer format about the Asean Trading Link:

Why is it important to have an Asean Trading Link and how did it get started?

In its simplicity, capital markets in Asia are moving very fast forward. Investors get more used to being able to invest in more markets. The competition for the attention of the investors is getting more fierce. From an Asean perspective, it was more of the question of can we be stronger by being more of a united front and provide more information, and see Asean as a market leader, combined rather than for the individual countries. There is the attention first, then of course the second pillar is that if we can come together and do things together all the time, we would be more efficient as exchanges. We will help investors have a stronger home base, not only for the outside investors but it's very much for the investors within, to make their home market bigger.

Internationally there are very few examples of how such collaboration actually take place, aren't there?

No. I'm a living example. We started in the mid-1990s incorporating among the Nordic exchanges in Europe. It started truly just to connect the markets. We started just like how we did here; combined and coming together. We talked about the challenges each market faces. We started very much as in just coming together and sharing things. Then we started saying how can we trade each other's products? Can we open up the borders even though we had different technology platforms and different history? After a number of years we started saying, “You have this technology. Can we go for the same surveillance system or for back office systems? Could we share that a little bit?” It became a very natural. We had all our own governance and our own governments, and our own corporates. But we came together very naturally. It was a very important thing to make the Nordic countries much stronger in a European competition among the exchanges. So my personal experience is very positive, and it turned out to be very fruitful.

There are already linkages between Malaysian and Singaporean brokers and what difference will a trading link between both countries make?

There shouldn't be more than one brand of cars, but there is still more brands of cars. And I think we drive more because there are more alternatives and I think we have better cars because there's more competition. I think generally, if there was just one way of trading between the two countries, I think it is generally less good for investors. I think the more alternatives we can give to investors, brokers to enable connectivity and trading it would grow. Liquidity feeds liquidity, opportunity feeds opportunity.You all know that in the trading link, the large brokers can already trade. But for the mid size brokers and the small they see this as an opportunity for them to do things they couldn't potentially do before. Some of the large ones will over time will see it as “This is good for this market, but for that market I'm doing it differently.” So we are creating new opportunities. And the more new opportunities and alternatives we can bring to the financial community in Asean, the better.

There is a divergence between the large, medium, and small brokers. The large ones may already have the linkages. The medium ones may see this as a viable option for them to expand in the region. But what about the small ones? Would they be squeezed out considering they may not have the tie-ups?

I think generally, if you look at the small and medium sizes, I think this creates for them the alternative they didn't have before. I think we don't have the type of really small brokers. In today's regulatory environment, all the brokers we have are well regulated. They have a certain size and certain competence. I think this would work well for even the smaller ones.

Will there be more interest from Singapore investors towards Malaysian shares and is the history of CLOB still a sour point in terms of relationship of customer and equities and stock?

When I listen to investors and brokers, none have given me an indication that would be the case. That goes back 14 years now and I don't think it affects them. Investors look into the future. They look for opportunities in the future. Therefore they look at corporates. There are a lot of interesting companies in Malaysia and Singapore that creates the opportunity and easier access.

Regulatory regimes in South-East Asia (SEA) have a lot of flip-flops that are taking place. Take Indonesia in their banking regulatory as an example. Will that be a risk given that there could be mood swings from regulators from time to time?

I generally believe that if we open up, the more easy access we get, the more secure the markets will get over time. The more the markets start to integrate, the more harmonisation we get among countries and regions, and I think the stronger the financial markets get. The more difficult it'll be to make individual and big changes. That's a very important thing for both international and local investors that they have the trust. To compare 15-20 years ago, it has passed. There will be new challenges but I don't think it'll be that kind.

As the member countries that will join the link benefit from it, would it make it harder for other countries to join in and share the rewards benefits?

No. The marginal value for each new member is just getting better for everyone. For those in the link and those wanting to join will have a very sincere interest to make it happen. The toughest is the first one. To go from two to three it's much easier and creates much more value for the other two and the third. For Thailand that comes in later, when they come in to already have Singapore and Malaysia creates a higher value. The way the market goes and I think you will see in years to come that it goes in waves. Suddenly there's a lot of interest from Singapore for a certain company in Malaysia for a certain industry sector. We always see that over time, we would have different flavours and the more connectivity the network value increases, for the one within and the one outside.

Has any simulation been done to estimate the impact of such a link?

We have tried to make estimates but I'm not sure they lead to deeper insights. When you look at this and when you start (coming back to the network) with one link, the value of that is not necessarily going to be a lot of trade or volume. The network effect increases when you get a lot of people on board to that, because it will also increase the savings of those involved. If you're a broker in Malaysia and suddenly you can offer all the Asean market through one connectivity, then your work is much easier. The second layer, which is not part of this, but it'll be something that will come is the back end. Which is the depository, where do I keep, how do I do the clearing, and do the settlement and depository. It's not only a question of trading, but what happens after I've done my trade. The network effect of the back end is bigger, more value to the infrastructure. You can never start with the back end. You need to start with the trade.

Do you feel there is a link between governance and transparency standards and the willingness of the investors to actually buy into in the markets?

Absolutely. I'm always a strong believer that increased governance, improved governance standards, improved openness and transparency and will lead to more active market, trusted market and a broader market that investors would like to join. There are so many clear examples of the more you open up the market, the more you up the governance and standards, the more liquidity, the more interest you see in investors.

In terms of regulatory standards between member bourses, is there a divergence that makes you pause and question the readiness of some markets?

Of course, but it's maybe those markets than those in the link. In Vietnam we have two exchanges with the possibility of merging into one. In Philippines and Indonesia they have their other issues. Should they have other products first? Do they want to have the derivatives business? What are the things they'd like to add anything to their portfolio? There are countries like Laos and Myanmar that are really far away from what real markets look like, so we have the full spectrum.

It goes back to education again. In order for everyone to join in, it is the responsibility of each home country. Singapore cannot be responsible for Malaysia. Bursa is responsible for what happens here in supporting and helping the market. We are very different and that is, we need to see it as a great opportunity. Coming to the Asean market, you'll have a lot of difference. A lot of different companies, a lot of different opportunities to invest. That is something good. You need to see that as something positive and something that is attractive to investors. Then we need to work with education and information to get to everyone to understand, because the consequence of that is a very different in different countries. So investors, please be aware.

In order to make this work, there is a need for greater promotion, exposure on what the different member countries have in respect to the companies that are traded. How important is research in terms of fulfilling such an objective?

I think research is an important thing in local markets irrespective of the link or not. I think we will see much more research reports in corporates going forward. And that is a tough one, because we as an exchange also need to promote research. I think though that we will see more research in years to come. We will be more international, if you compare to other markets we have much more research and more corporates. The biggest challenge is not the big companies I think today, because they have a lot of research among the big companies. It's more the small companies and medium companies, they have much tougher time to get research.

The onus of driving publicity of the link, will it be left to the respective stock exchanges? How are you going to drive interest in say Singapore investors saying there's this link out here and you should capitalise on it?

In three ways. One is that we as an exchange ourselves will do the promotion, talk about it. We have the Asean homepage, you can go online and see the indexes. You can see if you go to our homepage you can see how we promote the Asean lingkage and the Asean market, and how you can link in to those and see the development of those. So we take that responsibility. The brokers see it as a new kind of product, a new opportunity for them to offer their clients more things. We will help them to promote this link and how they promote it. The third one is how do we get the investors to get the interest out. That is getting both retail and institutional investors to think abroad beyond the local arena.

Both SGX and Bursa are listed, and if you were to drive the interest among investors in Singapore towards stocks listed in KL, isn't that potentially driving business out of Singapore and out of SGX?

I would be happy to do that. There is nothing more important in our world than to offer more products and more services to our brokers and investors. There is nothing, over time, as I start thinking too small, I will never grow. We are in an industry that where liquidity feeds liquidity. We never run out of stock. It's not like we are car sellers. You have 10 cars to sell and I have 5 cars to sell. And I can just sell the cars I have and then order new. We can always have more turnover and there is nothing more important than increasing the interest for what we do. And the more products we have, the more investors are getting in, the better.

Singapore has been a destination for a lot of firms in SEA to list. Will the link itself take away the lure of Singapore as companies don't have to be listed in Singapore for its shares to be bought there?

I don't think it necessarily affects it. Most listing decisions is not based upon connectivity. it's based upon other things such as where you run your business, where are the investors, corporate governance etc. tWhat I think it will do is it will be much more attractive to list in KL or Singapore after the link is up and running. A company that is listed in KL suddenly has a larger market. The interest for listing like-for-like can go up.

We will use that and I am sure Bursa Malaysia will use that. We can say we have this link and why don't you come and list here.

Will there be a common clearing house or a depository system?

I don't think there will be a common clearing house or depository system. For a long time the depositories will remain individual. But how can we cooperate between the depositories to make it easier, faster and cheaper once we have that with the trading? This will reduce cost for the brokers and the investors. Steps have already started towards this.

Related Stories:
Modest start for regional linkage
What it means for Malaysia
The task of linking Asean bourses
Making Asean trade more accessible

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