Enhancing Cooperation & Regional Integration

of ASEAN Equity Markets

9th OECD-ADBI after the financial crisis:

Prospects towards the future
Tokyo
27 February 2008

Jaseem Ahmed
Director,
Governance, Finance and Trade Division
Southeast Asia Department
Asian Development Bank
Background Document

I. Overview: ASEAN Equity Markets

II. Initiatives for ASEAN Financial Integration
III. ADB‘s Technical Assistance: Progress to Date &
Next Steps

2
Overview: ASEAN Equity Markets

3
 Components of Securities Market Regulation

1. Issuers Equity and debt securities

2. Reputational intermediaries Accounting firms, investment banks,

law firms and stock exchanges
Investment funds, pension funds,
financial press
3. Self-regulatory organizations Professional federations
Standard setters
Exchanges
4. Government institutions Securities Commission
Courts
5. Laws Securities laws

4 Company laws
Bankruptcy laws
 Asset Distribution in Southeast Asia
 With the exception of Hong Kong, Singapore and Malaysia, all of which
have large equity markets as a percentage of GDP, banks tend to
dominate financial intermediation in East Asia.
(percent of GDP)

Banks Assets Equity Market Bonds Outstanding

Capitalization
Economy 1997 2004 2005 1997 2004 2005 1997 2004 2005
PRC 124.6 176.4 163.1 11.2 23.1 17.8 12.9 24.9 24.4
Hong Kong,
China 205.1 337.5 444.6 234.5 519.5 593.6 26.0 46.3 46.6
Indonesia 31.1 14.6 49.8 12.2 28.8 28.9 1.9 22.6 19.6
Republic of
Korea 37.9 130.1 93.5 8.1 57.1 91.2 25.2 83.3 76.2
Malaysia 100.9 169.0 159.4 93.2 153.3 138.0 57.0 90.0 88.0
Philippines 56.1 66.5 63.2 37.7 33.0 40.4 22.4 28.4 36.7
Singapore 122.0 176.8 185.4 110.8 202.3 220.4 24.7 73.1 68.2
Thailand 79.7 129.2 103.6 15.1 71.4 70.1 7.1 41.1 40.8
PRC = People‟s Republic of China.
Sources: International Monetary Fund, International Financial Statistics; Bank for International Settlements; Asian Development Bank, Asian Bonds
Online; and Ghosh, Swati R. 2006. East Asian Finance: The Road to Robust Markets. Washington, DC: World Bank.

5
 Different Stages of Development
 Among Southeast Asian countries, big differences exist in terms of
market cap, velocity & risk premiums.

Market Cap Velocity Market Depth* Equity Risks

(USD billion) (%) Mkt Cap/GDP Premiums

Malaysia 308 58 156 7.0

Singapore 531 78 291 5.5

Philippines 96 33 58 10.2

Indonesia 204 66 38 10.2

Thailand 193 69 68 6.5

World Federation of Exchanges (as of Nov. 2007)
•IMF 2006/ World Federation of Exchanges
Source: NYU Stern School, Goldman Sachs, Bursa Malaysia

6
Market Capitalization
 While Singapore and Malaysia have relatively deep capital
markets, Thailand, Indonesia, and the Philippines lag behind.

2006 Mkt Cap/ GDP (%)

- 200 400 600 800 1,000

Philippines 58
Singapore 291
Malay s ia 156
Thailand 68
Indones ia 38
Hong Kong 903
Taiwan 167
Korea 94
China 34
Japan 106
UK 160
Germany 57
US 146

* Source:ADB, World Bank Financial Structure Dataset * Singapore includes substantial foreign market cap of ‘23%,
while Hong Kong has about 45%
* Source: McKinsey, IMF, World Federation of Exchanges
7
Listed Companies & New Listing
 The larger global exchanges are pulling away in listing volumes,
with more than ten times the volume of Southeast Asia.

Nu mb e r o f Li s t e d Co mp a n i e s

2,000

1,500

1,000

500

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Malaysia Indonesia Korea Philippine

China (Shanghai) Singapore Thailand

* Source: World Federation of Exchanges * Source: McKinsey, World Federation of Exchanges

8
Value of Share Trading
 Value of share trading in each country of the region is less than
US$500 billions.

Value of Share Trading (USD billions)

4,500

4,000

3,500

3,000

2,500

2,000

1, 5 0 0

1, 0 0 0

500

0
19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006 2007

M a l a y si a I n d o n e si a K or e a P hi l i ppi ne C hi na ( S ha ngha i ) S i nga por e Tha i l a nd

* Source: World Federation of Exchanges

9
Turnover Ratio
 No regional exchange has turnover ratio of over 100%, and only
Thailand has a ratio of over 50%.
• This places Southeast Asia far behind the developed markets and
North Asian exchanges.

* Source: ADB, World Bank Financial Structure Dataset

10
Transaction Costs
 As a result of small markets with low velocity, trading costs in Southeast
Asian markets are significantly higher than in many other regions.
 Market impact costs, while higher than in larger markets, have been
heading in the right direction recently.

* Source: McKinsey, Elkins McSherry Survey * Source: McKinsey, Elkins McSherry Survey
* Market impact cost is the difference between the transaction price and what the market price would have been in the absence
of the transaction.
11
Composition of Equity Markets in ASEAN
 Composition of equity markets also shows different landscape among
Southeast Asian countries.
• Non-Resident composition: Indonesia 74% vs. Malaysia 17%.
2005/06 (in %)

Total Non-
Retail Institutional Other
Resident Resident
Singapore n/a n/a n/a 56 44 (36)
Malaysia 19 - 64 83 17 (17)
Philippines n/a n/a n/a 69 31
Indonesia 4 5 17 26 74 (56)
Thailand 62 10 n/a 72 28 (30)
China 6 9 36 51 49
Japan 20 27 29 76 24
Korea 18 11 31 60 40
Source: ADB. Figures in parentheses refer to year 2001.
12
Performance of Stock Market Indices
 Indonesia has been outstanding and the other Southeast Asian
countries have also showed good performance.

Broad Market Indices

800

700

600

500

400

300

200

10 0

0
19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006 2007

M a l a y si a ( K L C o m p o si t e ) I n d o n e si a ( J S X C o m p o si t e ) K o r e a ( K OS P I )
P h i l i p p i n e ( P S E C o m p o si t e ) C h i n a ( S h a n g h a i , S S E C o m p o si t e ) S i n g a p o r e ( a l l S i n g Eq u i t i e s)
T h a i l a n d ( S ET ) J a p a n ( T o k y o , T OP I X)

* Source: World Federation of Exchanges (1998 = 100)

13
Market Infrastructure: Exchanges
 Exchanges have merged and consolidated their operations.
• To improve efficiency, in addition, most exchanges vertically integrated
clearing, settlement and depository operations (Malaysia, Singapore,
Philippines and Thailand).
Country Exchanges
• One exchange (SGX), Merger of Stock Exchanges of Singapore & Singapore
Singapore
Monetary Exchange (derivatives). Central depository is also a division.
• Three Exchanges - Securities Exchange (Bursa Malaysia), Derivatives
Malaysia
Exchange and the Offshore Exchange (Labuan Int‘l Financial Exchange)
• SET is the main exchange. The SET also operates wholly owned
subsidiaries to trade corporate & government bonds under the name of
Thailand Bonds Exchange (BEX) & Thailand Futures Exchange (TFEX) that trades
SET 50 futures contracts.
• The PSE, Inc. is the only market for equity securities in the Philippines.
Philippines • Bonds are also traded at the PSE, and at the recently established Philippine
Dealing and Exchange Corporation (PDex)
Indonesia • One exchange (consolidated in Dec. 2007)

14
Status of Demutualization
 Exchange has been demutualized and listed in Singapore,
Malaysia, and Philippines.

Country Status of Demutualization

• Exchanges in the region continue to
• Demutualized (Dec, 1999) face increased competition from
Singapore
• Listed (Nov, 2000) other exchanges and trading
• Demutualized (April, 2004) platforms.
Malaysia
• Listed (March, 2005)
• To raise needed capital to enable
Thailand • Not Demutualized them to modernize their operations
• Demutualized (Aug, 2001) and operate more efficiently, most
Philippines regional exchanges have converted
• Listed (2003)
from a not-for profit membership
• Capital Market Master plan owned entity into a for profit
envisages demutualization after
Indonesia the merger of Jakarta and corporation (demutualized) or are in
Surabaya stock exchanges in the process of demutualizing.
December 2007.
15
Legal & Regulatory Framework
 Lack of adequate disclosure/transparency and poor corporate governance
in the Philippines & Indonesia undermines investor confidence.
(%)

Institutional Country
Country Rules & Enforcement Political/reg Adoption Mechanisms score –
Regulations environment of iGAAP and CG highest to
culture lowest
Hong Kong 60 56 73 83 61 67
Singapore 70 50 65 88 53 65
Korea 45 39 48 68 43 49
Malaysia 44 35 56 78 33 49
Thailand 58 36 31 70 39 47
PRC 43 33 52 73 25 45
Philippines 39 19 38 75 36 41
Indonesia 39 22 35 65 25 37
* Source: CLSA “CG Watch 2007

16
Compliance with IOSCO Principles
Country Compliance

• FSAP Assessment (2002-2003), most principles are fully and broadly implemented
Singapore • Further Strengthening valuation methods & disclosure practices of CIs was recommended

• Self Assessment (2006), most principles fully and broadly implemented

Malaysia • Further alignment of Malaysian Accounting Standards with International standards was mentioned

• Assisted Self-Assessment (2004) in preparation for FSAP. Most principles fully & broadly
implemented
• Strengthening was recommended in the legal provisions & procedural arrangements for the
Thailand following areas: information sharing, investigation powers, appointment of administrators to take
control over market intermediaries when warranted, and access to collateral & clearing funds of
clearing house in case of member default

• FSAP assessment (2002), and its assisted self-assessment update

• Majority of the principles are fully or broadly implemented, with several principles only partially
implemented
Philippines • Strengthening of laws, regulations, and practices in the following areas was recommended:
regulation of investment advisors, full implementations of exchange governance arrangements,
segregation of client assets, standards for NAV calculations & CIS disclosures, oversight of SROs,
and regulators access to market surveillance system, etc

• Assisted self assessment (2005)

• Several principals are only partially implemented strengthening recommended in: transparency of
Indonesia
regulators approach, independence of regulator, information sharing/cooperation arrangements.
Procedures to deal with failures of intermediaries, and supervision & governance of mutual funds

17
Transformation of Regulators

Southeast Asian securities markets have established securities

market regulators, although a few markets have integrated all
financial regulators to reflect the integrated nature of their
markets (Singapore, Korea).

• In Hong Kong & Singapore, securities regulators are independent, provided

with adequate funding, are able to attract competent staff and are provided
with sufficient powers to effectively regulate the market.

Where stock exchanges have self listed, regulators have

assumed primary oversight over the listing and trading of
exchange shares.

• In some jurisdictions, self listed exchanges are no longer primary market

regulators. For example, The Hong Kong Stock Exchange is no longer an
SRO – the Government regulator has primary oversight of the market.

18
Openness of National Markets
Singa Malay Indone Thail- Phili- Hong
Indicator Korea
-pore -sia -sia and ppines Kong
Nonresident holdings of 44 17 73 34 61 36 40
equity as % of market cap (36) (17) (56) (18) (-) (-) (-)
No. of domestic companies
0 n/a 5 2 0 n/a n/a
listed abroad
No. of foreign companies 267
n/a 0 0 2 n/a n/a
listed domestically (34)
Equity holdings in other
19 43 65 24 3 2 1
ASEAN as % of total equity
(27) (44) (-) (46) (-) (-) (-)
assets held abroad
Equity holdings of ASEAN
investors as a % of total 1.5 19 24 13 6 9 2
non-resident equity liabilities (1.0) (20) (17) (17) (6) (-) (-)
of each country
Index of Capital Account
.38 .92 .85 .85 .92 .92 .85
Restrictions
*Figures in parentheses are for 2001
Source: ADB

19
 In Sum: ASEAN Equity Markets

• While ASEAN capital markets have made significant

progress in recent years, much more remains to be done.

• Many countries still have fairly shallow capital markets,

reducing their flexibility with capital allocation & resilience.

• These countries exchanges tend to be sub-scale, with low

turnover, liquidity & high transaction costs.

• In addition, levels of development and openness are

different Among them.

20
II. Initiatives for ASEAN Financial
Integration

21
ASEAN Financial Integration Initiative (1)
 The multitude of ASEAN level initiatives underway to foster
ASEAN Regional Financial Integration are as follows:

• ASEAN leaders at their Summit in Cebu in 2006 decided to accelerate

regional integration by bringing forward to 2015 (from 2020), the target
date for the realization of the ASEAN Community, consisting of (as
envisioned in Bali Concord 2003) the ASEAN Economic Community;
ASEAN Security Community; and ASEAN Socio-cultural Community.

• Under the ASEAN Economic Community (AEC), the target for regional
economic integration has been defined mainly as free flow of goods,
services, investment, skilled labor, and freer flow of capital — commonly
referred to as ―a single market and production base‖.

22
ASEAN Financial Integration Initiative (2)

 Work toward these targets has been going on since 2003 through
the ASEAN Free Trade Agreement (AFTA); ASEAN Framework
Agreement on Services (AFAS); and ASEAN Investment Area (AIA).

 In addition in 2003, a Roadmap for Financial and Monetary

Integration of ASEAN (RIA-Fin) was adopted by the ASEAN Finance
Ministers and the ASEAN leaders to promote free flow of financial
services. Some of the main action areas that were triggered are:
• Financial Services Liberalization through successive rounds of negotiations based
on a transparent positive list approach. One round of negotiations was concluded
in 2004, and the second round is underway;
• Capital Markets Development Program (e.g. Asian Bond Market Initiative);
• Capital Account Liberalization; and
• Currency Cooperation

23
III. ADB’s Technical Assistance (TA)
Progress to Date & Next Steps

24
 TA: Objective & Methodology
Objective: The ADB TA on Enhancing Cooperation Among Southeast Asian
Equity Markets was undertaken in 2007 to develop an actionable strategy
for Southeast Asian equity markets -- ASEAN equity markets in particular —
to work together towards greater cross border cooperation.

Methodology: ADB in collaboration with key stakeholders in the ASEAN

region has held a series of workshops in 2007 under the TA aimed at
supporting reforms at the country level to enhance cross border
collaboration among equity markets in the region.

• The TA prepared country stocktaking studies and reviewed the readiness of each market for
enhanced cooperation and options and stepping stones that can serve as a catalyst for
moving forward.

• As part of a collaborative and consultative process, three workshops were held to identify
issues and build consensus on how to address these among all the major stakeholders which
have an interest in or would be affected by integration of equity markets in the Southeast
Asian region.

25
TA: Summary of Workshops
Workshop Host Outcomes
• Brought together the capital market regulators, stock exchange
1st
officials, fund managers, national and international capital market
Workshop
Securities experts as well as the ASEAN Secretariat to review recent and
29~30
Commission evolving developments in national, regional and international
March 2007
Malaysia capital markets
(Kuala
• Identified the barriers to regional cooperation among equity
Lumpur)
markets in the ASEAN region.
• Focused on the constraints to regional integration of equity
Thai Securities
2nd markets, in particular exchange controls & capital account
& Exchange
Workshop restrictions and considered some global models for exchange
Commission &
26~27 July market alliances.
Stock
2007 • The Workshop was notable for bringing together senior officials
Exchange of
(Bangkok) from central banks, ministries of finance, regulators & market
Thailand
participants.
• Served as a high-level forum for ADB to present to the Ministries
3rd Philippine DOF,
of Finance, central banks, securities commissions, stock
Workshop Bangko Sentral
exchanges and the ASEAN Secretariat an overall strategic
29 October ng Pilipinas,
review of the project findings and its recommendations for equity
2007 Philippines
market integration in ASEAN.
(Manila) SEC & PSE
• A strategic Framework paper was endorsed by participants.

26
TA: Strategic Framework for Integration
 The Strategic Framework consists of seven recommendations
designed to promote enabling conditions, overcome constraints,
and build a mutual recognition and exchange alliance framework.
1. Refine domestic capital market development plans from a regional
integration perspective.
2. Establish a coordinating mechanism for ASEAN financial and
monetary integration process.
3. Sequence the liberalization of capital account and portfolio
restrictions.
4. Implement a mutual recognition framework while continuing to
strengthen and harmonize legal and regulatory framework in line
with global standards.
5. Strengthen and coordinate exchange governance arrangements, the
SRO functions, the listing rules and corporate governance framework.
6. Agree on and work toward an exchange alliance framework.
7. Promote new products, including ASEAN ―star‖ companies and new
intermediaries to foster regional integration.
27
 Key Aspects of The Strategic
Framework

28
Need for a Comprehensive & Coordinated
Strategy or Strategic Framework for
Regional Cooperation

• To build consensus on the modalities, benefits and costs of

regional integration of securities markets generally, and equity
markets in particular

• To overcome constraints to regional integration, including capital

account restrictions, and the absence of a level playing

• To build a mutual recognition regime that can support exchange

market alliances in the region and foster common standards

29
 National Strategies for Capital Market
Development – Linked to Regional Cooperation

• Complete demutualization and improvements in infrastructure.

• Strengthen investor protection and enhance regulatory
surveillance of market practices.
• Adopt common international standards such as IOSCO.
• Promote cross border regulatory cooperation and judicious use of
mutual recognition in finance and business.
• Further liberalization of capital controls and exchange restrictions.
• Further strengthening of prudential safeguards and risk
management capabilities to help manage volatility and compete
effectively

30
 Rationalizing the Process –
A Regional Cooperation & Integration Council

• Act as a sounding board and feedback mechanism to identify, analyze,

and propose priority actions on key issues in implementing regional
integration of financial markets in ASEAN.
• Help advise the ASEAN Finance Ministers and ASEAN Capital Market
Forum to set priorities for the various ASEAN Working groups and
Taskforces, propose additional taskforces and working groups as needed.

• Help to review the findings of these bodies, highlight the policy

implications of the findings to Ministers of Finance and central banks.

• Help monitor implementation of regional integration initiatives and the

actual progress in achieving integration in various markets.

• Help harness the support of APRC, IOSCO, and other regional and global
bodies to facilitate regional financial integration.

31
The Exchange Alliance Framework

32
SWOT for Exchanges in Small Economies
Strengths
• Part of national structure
• Local securities base
• Domestic investor base
Opportunities
• Attract foreign members
• Become the regional exchange
• Own national silo
• Participate in alliances
• Develop new markets
• Develop new services
• Seek cost reductions
• Sell to larger exchange
* Source: WWW.TVRonsult.dk
33
Weaknesses
• Highly dependent on a few big listings
• High fixed costs
• Too few international members
Threats
• M&As may imply de-listings
• Domestic investors diversify
• Neighbor exchange may become
aggressive
• International exchange may try to skim
the cream
• Next generation of systems could be
costly
• Members may develop competing
market
 Equity Markets – Lessons from Europe

• Radical transformation in equity market trading in Europe as a result of

competition and technology developments
• Automated trading and convergence to common trading model with
central limit order book trading for most liquid stocks
• Demutualization and emergence of for-profit exchanges: increased
ability to raise capital for investments in automation, freed opportunities
for consolidations and acquisitions, strengthened exchange networks,
created economies of scale by sharing costs
• Exchange strategy has shifted to acquire critical mass before their
competitors,
• Successful model – exchanges have independent identity, are members
of ―regulated markets‖ that have mutual recognition and harmonized
aspects, ―single passport‖ or single point of access for investors and
intermediaries, achieve consolidation through holding company and/or
shared trading structure.
34
Need for an ASEAN Exchange Alliance
 Three plausible scenarios for Southeast Asian capital markets:
(1) Dwindling relevance, (2) ―Cherry-picked‖ and absorbed in
global market?, and (3) A new force in global markets.

* Source: McKinsey
35
 Potential Benefits of
an ASEAN Exchange Alliance

 Global presence

 Shared infrastructure that reduces costs

 Momentum for harmonization of governance and

regulatory structures and market practices

 Star companies are enabled to raise finance

regionally

36
Models of Exchange Alliances
 Based on general agreement on the recommendations contained in
the Strategic Framework, developing a mutual recognition
framework was considered the key to successful regional integration.
• Options for mutual recognition are as follows:

Asian Alliance ASEAX AsiaNext

• All exchanges •All exchanges •All exchanges owned
Ownership independent independent by holding companies

• Separate, but Separate, but Mgm’t • Single team (with

Management market structure team for alliance with representation from
and data aligned decision authority all the exchanges)

• Membership • Membership managed

• Single membership
Membership managed independently but
across all exchanges
independently standards converge

• Independent • Common trading

• Independent
Infrastructure infrastructure
infrastructure but platform across
some convergence all exchanges

Regulation • Local regulation • Local regulation • Local regulation

* Source: McKinsey
37
Proposed Exchange Alliance – ‘pipe’
 Among the mutual recognition models, the easiest formulation is
to construct bilateral linkages (‗pipe‘) or a purely technical IT link
between exchanges to facilitate cross border trading between
brokers in the home & host exchanges.
• The attractiveness of the bilateral exchange to exchange links is that
they do not bypass the brokers, nor do they disrupt the current
licensing, trading and clearing mechanisms in place.
• One of the main issues is how to gain support from the market players
and the need for a technical study to clarify the benefits and costs of
such an alliance, including related tax issues and the need to address
competition risks to small brokers.

 The ‗pipe‘ idea provides a framework for discussion and could be

the first step toward broader collaboration as long as it does not
require too extensive investments in the short term.
38
The Elements of the ‘pipe’
 For a start, each exchange would allow a certain number of shares
(which could be say 20 or 50 highly liquid or index stocks) to be available
on an ―ASEAN Board‖.

• The ASEAN Board would comprise, say, up to 200 top ASEAN companies.
The Board would be electronic, and be equivalent to the second or third board.
A network can easily be established linking all the member exchanges. The
Board could be made available on the internet or Reuters, preferably real-time.

 Investors in country (A) would be able to route orders to buy and sell
through their home brokers, who can then trade on the ASEAN Board, via
placing orders to the ―host exchange‖, via clearing and settlement
arrangements with a ―host broker‖.

 Clearing and settlement arrangements will remain as normal, except that

each home and host broker must negotiate bilateral credit-risk
management facilities to help settlement. The exchanges and clearing
houses could help facilitate this electronically.
39
Options to Implement the ‘pipe’ Idea

• No direct linkages among exchanges, clearinghouses (CLH), or CSDs

Current state
• Brokers from bilateral linkages with one another direcly for trading,
(interbroker) clearing and settlement

Remote • No direct linkages among exchanges, CLHs, or CSDs

Trading • Foreign brokers can be members of exchange and trade directly
Membership • Brokers still need local partners to access the CLH and CSD

• Exchanges form trading links, allowing brokers to trade cross-border

Interexchange
through their local exchanges
trading links • Brokers still need local partners to access the clearinghouse and CSD

• No direct trading linkages among exchanges

CLH/CSD link
• CLHs and/or CSDs have links allowing local brokers to clear and/or
without
settle cross-border through the local CLH (eg local CLH is a member
Trading link of the foreign CLH)

• Exchanges form trading links, allowing brokers to trade cross-border

• Through their local exchanges
Trading and
• CLHs and/or CSDs have links allowing local brokers to clear and/or
CLH/CSD link settle cross-border through the local CLH (eg local CLH is a member
of the foreign CLH)

40
 Further Progress
Meeting of CEOs of ASEAN Stock Exchanges

 The ADB team including Andrew Sheng and Emmanuel Pitsilis from
McKinsey made a presentation on the exchange alliance framework
at the CEO‘s annual meeting in Bangkok on 25 November 2007.

 The CEOs concluded that they wished to move forward towards

implementing the concept of a virtual ASEAN Board – on a Reuters
or Bloomberg platform.

• They formed a technical working group to develop a road map.

41
 The ASEAN Board

Description of ASEAN Board Benefits

• Strengthen ASEAN capital markets‟
• Comprise of a number of shares from presence and enhance the visibility
each exchange (i.e. 20 or 50 highly of ASEAN as an asset class
liquid stocks)
• Would be electronic and equivalent to
• Attract more international funds into
the second or third board of each
ASEAN and encourage more intra-
exchange
• Show information on local currency ASEAN trading
• Link among exchanges through a
network, which can easily be • Allow local companies to raise
established funds through regional capital
• Could be made available on the
internet and data vendor (e.g.,
Reuters), preferably real-time

42
 Operationalizing the Proposal
Trading

Remote acc w/
Broker-to-B Exch-to-exch CCG*
one platform

1 4 5 7
Local Interbroker Interexchange CCG with Remote trading
basis trading links assigned local membership with
broker 1 platform
Clearing, (NYSE Euronext) (OMX‘s 1st step**)
settlement &
depository
2 4 6
CLH/CSD CLH/CSD link Trading and CCG with
link w/o trading link CLH/CSD link CLH/CSD link
(Euronext, OMX)

• Stands for “common customer gateway”

** Together with one trading rulebook
Source: SET
43
 Selection Criteria

Drivers Selection criteria

1. Ease of accessibility
Objective can be 2. Ability to mitigate risks, e.g., credit risk,
achieved Counterparty risk

3. Maintain liquidity in host markets

Conditions 4. Support from local brokers in both home and
are met Host markets
5. Ability to monitor trading volume

6. High technical practicality and regulatory support

It is feasible
7. Reasonable investment costs for exchanges

44
 6. (page 11)
Options

1 2 3 4 5 6 7
Inter- CLH/ Interex- Trading CCG w/ CCG w/ Remote
broker CLS link change and assigned CLH member-
w/o trad- trading CLH/ local CSD link ship w/ 1
ing link links CSD link broker platform
Selection criteria

1. Ease of accessibility
x x √ √ √ √ √
2. Ability to mitigate
risks x √ √ √ √ √ √
3. Maintain liquidity in
host markets √ √ √ √ √ √ √
4. Support from local
brokers √ √ x x √ x x
5. Ability to monitor
trading volume √ √ √ √ √ √ √
6. High technical
practicality and
regulatory support
√ √ x x √ √ x
7. Reasonable investmt
costs for exchanges √ √ x x √ √ x
45
 Summary

• Securities markets depend on (i) transparency and disclosure and (ii)

enforcement; complex interaction between reputational intermediaries,
enforcement agencies, SROs and enforcement of laws critical to market
development
• Significant improvements in Southeast Asia since 1997; markets and
intermediaries stronger, regulation enhanced, greater financial system
stability and resilience
• But cross country differences in market development are pronounced, as
are differences in linkages between regulatory stance and market
development
• Equity market trading in Europe undergoing radical transformation:
ASEAN exchanges need to act now to remain relevant: they need
support from regulators and policymakers.

46
Questions and Comments

Thank you!

47
The Different Layers of Securities
Market Regulation

48
1. Issuers

Country Regulation

• The Issuer or the Public Company is fully responsible for the accuracy, adequacy and the truth of opinions and all information
presented in the Registration Statement submitted to Bapepam. If an item contained in a Bapepam rule or form regarding
disclosure requirements does not apply to a specific Issuer, Public Company, or Public Offering, it need not be disclosed in
the Registration Statement.
Indonesia
• In addition to the information and documents which must be included in the Registration Statement, the Person who submits
the registration Statement must also include other material information that is needed to ensure that investors have adequate
information regarding the financial condition and business activities of the Issuer or the Public Company and that the
disclosure is not misleading.

• Issuers are required to make full, timely and accurate disclosure of information to the public under the securities laws, and
guidelines issued by the SC.
Malaysia
• In addition, the listing requirements impose continuous disclosure obligations on listed issuers and seeks to ensure that equal
access to such information is practiced.

• Disclosure requirements are another area which was purposely strengthened under the SRC.
Philippines
• The disclosure requirements in the SRC and the IRR are modeled after those in the United States.

• Initial public offerings and continuing disclosure requirements for issuers are in place, providing timely, adequate, and
accurate disclosure of material information to investors. Prospectus disclosure requirements are state of the art.
• Issuers and their directors and underwriters are subject to criminal and civil liability if a prospectus contains false or
misleading information or if material information is not disclosed. Company law and listing rules accord fair and equitable
Singapore
treatment to all shareholders. The Take-Over Code provides additional protections to all listed Singapore companies and to
unlisted public companies with 50 or more shareholders and net tangible assets of S$5 million or more. Singapore generally
follows international auditing standards.
• Quarterly financial reporting is also required for listed companies above S$75 million.

• The SEC Act prohibits companies from offering newly issued shares and other securities for sale without prior approval from
the SEC, except for the rights offering to existing shareholders. The SEC focuses on the accuracy and sufficiency of
Thailand information disclosure in order to allow the public to make their investment decisions.
• All forms of public offering of securities must receive approvals form the SEC as well as conform to SEC prescribed disclosure
and accounting standards. The SEC also licenses and regulates all investment intermediaries as well as the SET.

49
2. Reputational Intermediaries

Country Regulation

• Among Singapore, Malaysia, Thailand and Indonesia, the later has the least number of equities and derivatives as investment
products.
Indonesia • Only a Company licensed by BAPEPAM may carry on business as a Securities Company.
• Licensing requirements and procedures include such things as: requirements with respect to management, capital and
expertise; and procedures for submitting license applications

• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the SIA and FIA.
Minimum entry standards, which include initial capital requirements, are applied equally and consistently to applicants applying
for the same category of licenses.
Malaysia • All license applicants must meet „fit and proper‟ criteria. Ethical, educational, industry knowledge, skills and experience are
assessed in approving principal officers which include directors, company secretary and key management personnel.
• The Syariah Advisory Council (SAC) advises the SC on issues relating to market compliance with Syariah principles in the
Islamic capital market.
• The legal infrastructure for regulating market intermediaries has been enhanced in the SRC which, among other things, raises
capital requirements (initial and ongoing), provides a disciplinary bar to registration, provides for indefinite registration, and
clarifies that all regulated intermediaries must register under the new law.
Philippines • Investment Houses (Presidential Decree 129), Broker Dealers (SRC), Financing Companies (Financing Company Act of 1998)
are primary NBFIs authorized and regulated by the SEC. Among them, the Investment Houses and Broker Dealers are the
primary securities market intermediaries while the Financing Companies are essentially credit institutions without deposit taking.

• The MAS has adopted a single modular licensing framework for securities and futures market intermediaries. The SFA
regulates intermediaries conducting regulated activities. The FAA regulates intermediaries providing financial advisory services.
The MAS has adopted a risk-based approach to supervising its licensed intermediaries. Capital requirements for licensees will
Singapore be largely based on the analysis underlying the Basel Core Principles. The new capital rule supersedes an adjusted net capital
rule and is being phased in conservatively to test the potential impact on capital.
• Holders of Capital Markets Licenses must observe customer protection procedures.

• Domestic institutional investor base is still under developed. Except for Government Pension Fund (GPF) there is no
compulsory retirement pension scheme.
Thailand • This narrow domestic institutional investors base coupled with investment restrictions for GPF and PVD meant that their
participation in the equities market have lagged behind those of retail investors and foreign institutional investors who have
played a much more active role in the equities market.

50
3. Self-regulatory Organizations (SRO)
Country Reguation
• SROs are;
- Securities Exchange: A Stock Exchange sets rules for the members, listing, trading and other activities related to its business.
- Clearing Guarantee Corporation: As a Self Regulating Organization, LKP is required to set rules on Guarantee, securities
Indonesia
transaction clearing, and other activities to its business. PT KPEI obtained its business license on June 1, 1998.
- Central Securities Depositary: As a Self Regulating Organization, LPP is required to set rules on depository, securities
transaction settlement and other activities related to its business. PT KSEI obtained its business license on November 11, 1998.
• The Federation of Malaysian Unit Trust Managers (FMUTM) is the industry body for unit trust managers in Malaysia,
responsible for the conduct of the following functions:
- The registration of Institutional Unit Trust Agents (IUTAs) through the Guidelines for Registration of Institutional Unit Trust
Agents for the Marketing and Distribution of Units); and
Malaysia - The registration of Persons Dealing in Unit Trusts (PDUTs) and the conduct of the examinations for the registration of PDUTs;
• The Malaysian Accounting Standards Board (MASB) and the Financial Reporting Foundation, both created by the Financial
Reporting Act of 1997, oversee accounting and corporate governance standards.
• The Minority Shareholder Watchdog Group (MSWG) was set up to promote better and more effective corporate governance
practices which could set a benchmark for others in the region. Its public mandate is to inform the investing public.
• Building a self-regulating market is part of the expressly stated objectives of the SRC. Section 39 of the SRC defines the role of
SROs and types of organizations that can apply for an SRO status.
Philippines • The Philippine Stock Exchange (PSE) is working as a front line regulator of the market as an authorized SRO.
• The Investment Company Association of the Philippines (ICAP) and the Securities Clearing Corporation of the Philippines
(SCCP) set code of conducts for the members, they are not (yet) formally recognized as SROs.
• The SGX-ST (securities) & SGX-DT (derivatives) are recognized by statute as the front line regulator of trading activities.
• The MAS has enhanced its supervisory arrangements for oversight of the exchanges and clearing houses since the
Singapore demutualization of the SGX. The MAS oversight includes testing the quality of the exchange front line program. The MAS
cannot, however, review access denial determinations. The arrangements in place to avoid conflicts of interest between its
regulatory and other functions could be more clearly specified.
• The SET is a statutory body under the Securities and Exchange Act with its own governing board of directors half of whom are
appointed by the SEC and the other half elected by members brokerage firms. Any changes in the legal structure of the SET
enquires an amendment in the law.
Thailand • According to the existing legal structure the SET is empowered under the Act to issue rules with regard to an orderly operation
of the exchange. Nevertheless, the Act makes clear that the SET is subject to regulatory oversight by the SEC.
• The SET performs the role of Self Regulatory Organization particularly in the areas of market disclosure and trading. An official
51 memorandum of understanding has been signed between the SEC and the SET in 2000.
4. Government institutions

Country Regulation

• Bapepam-LK is not an independent authority but an agency within the Ministry of Finance (MoF). It is the principal regulator
Indonesia
and is supported by a number of selfregulatory organizations (SROs).

• The Securities Commission (SC) is a statutory body with investigative and enforcement powers and it reports to the Minister
of Finance. The SC is the regulatory authority for the Malaysian capital market; it also supervises the activities of market
institutions, including the exchanges and clearing houses, and regulates persons licensed under the Securities Industry Act
Malaysia
(SIA) and Futures Industry Act (FIA).
• Bursa Malaysia is vested with regulatory powers under the law and has a statutory responsibility to ensure a fair and orderly
market and prudent risk management. These responsibilities relate to the regulation and surveillance of securities markets.

• The Securities Regulation Code of 2000 empowered SEC to make it a more enforcement-oriented & independent regulator.
• The supervision of the Philippine financial market is divided among different regulatory agencies. Banking supervision is the
under the responsibility of the Bangko Sentral ng Pilipinas; supervision of the insurance industry is under the Insurance
Commission; and the supervision of the securities market is under the Securities and Exchange Commission. Moreover, the
mandate and jurisdiction of these agencies are defined under different legislations.
Philippines
• The “Compliance and Surveillance Group”(CSG) of the PSE carries front line responsibility for market surveillance,
compliance inspections, and investigation by PSE or SEC depending upon the type and scope of violations. SEC exercises
some oversight of PSE in order to enhance the independence and capacity to perform surveillance and compliance activities
through the CSG, the CSG was transformed into Market Regulations Division, supervised by a semi-independent, Market
Integrity Board (MIB).

• The MAS is legally and institutionally independent of the executive and legislative branches of the government and
accountable to the public. The MAS‟ responsibilities with respect to securities regulation are clearly stated in the applicable
Singapore legislation and rules in the SFA of 2001, the FAA, the Exchanges Demutualization and Merger Act, and related regulations.
• Exercise of regulatory powers in securities is subject to the SFA. The MAS clearly has the staff, powers, expertise, and
resources to conduct effective regulation. The consultation process with the industry and the public is in place and sound.

• Regulatory framework is quite advanced though fragmented. The Bank of Thailand is the main regulator for commercial banks
and finance companies and is in the process of implementing the BASLE II capital requirement as well as consolidated
Thailand supervision of financial institutions. The Bank also has limited jurisdiction over specialized banks and non bank activities.
• The Securities and Exchange Commission is an independent statutory body responsible for regulating all aspects of fund
raising, financial investment dealings, market activities as well as promotion of good corporate governance.

52
5. Laws
Country Regulation
• The legal basis for capital market activities in Indonesia is the Capital Market Law Number 8/1995 . The
Indonesia • Law governs the operations of the Capital Markets Supervisory Agency, Badan Pengawas Pasar Modal
• dan Lembaga Keuangan (Bapepam-LK).

• The Capital Market is governed by the following Acts of Parliament:

• Securities Industry Act 1983/ Securities Industry (Central Depositories Act) 1991/ Securities Commission Act 1993
Malaysia • Companies Act 1965/ Futures Industry Act 1993/ Labuan Offshore Securities Industry Act 1995
• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the Securities Industry
Act and Futures Industry Act. Minimum entry standards, which include capital adequacy requirement, must be met.
• BSP draws its supervisory and regulatory powers from Article XII, Section 20 of the 1987 Constitution, the New Central Bank
Act of 1993, and the General Banking Law of 2000. The mandate of the Insurance Commission is mainly based from the
Philippines Insurance Code of 1974.
• The Securities and Exchange Commission derives its authority from the Securities Regulation Code of 2000, the Investment
House Law of 1973, the Investment Company Act of 1960, and the Financing Company Act of 1998.
• The order of precedence of the various legislative and quasi-legislative instruments applicable to the Singapore capital market
and its participants are as follows in descending order:
- The statutory Act and related regulations
- The rules contained in the Rulebook
Singapore - Directives issued pursuant to the Rulebook
- Practice Notes
- Circulars
• In the event of a conflict between any provisions in the instruments provisions contained in the higher level instruments shall
prevail.
• To initiate a new legal framework and mark a new era for the Thai capital market, on March 16, 1992, the Securities and
Exchange Act B.E. 2535 (1992) or “the SEC Act” was promulgated and came into force on May 16, 1992 so as to reinforce the
unity, consistency, and efficiency in supervision and development of the market. The enactment of the SEC Act empowered
the Securities and Exchange Commission, Thailand to be established as an independent state agency with responsibility for
Thailand
supervision and development of the capital market under the direction and guidance of the Board of the SEC.
• On July 3, 2003, the Derivatives Act B.E. 2546 (2003) was promulgated and came into force on January 6, 2004 so as to
create a legal certainty for derivative contracts, provide a regulatory framework for derivatives markets and intermediaries, and
allow the SEC to oversee the financial integrity of the market and take action to prevent adverse systemic effect.

53
1. Indonesia
Layer Regulation

• The Issuer or the Public Company is fully responsible for the accuracy, adequacy and the truth of opinions and all information
presented in the Registration Statement submitted to Bapepam. If an item contained in a Bapepam rule or form regarding
disclosure requirements does not apply to a specific Issuer, Public Company, or Public Offering, it need not be disclosed in
the Registration Statement.
Issuers
• In addition to the information and documents which must be included in the Registration Statement, the Person who submits
the registration Statement must also include other material information that is needed to ensure that investors have adequate
information regarding the financial condition and business activities of the Issuer or the Public Company and that the
disclosure is not misleading.

• Among Singapore, Malaysia, Thailand and Indonesia, the later has the least number of equities and derivatives as investment
products.
Reputational
• Only a Company licensed by BAPEPAM may carry on business as a Securities Company.
intermediaries
• Licensing requirements and procedures include such things as: requirements with respect to management, capital and
expertise; and procedures for submitting license applications
• SROs are;
- Securities Exchange: A Stock Exchange sets rules for the members, listing, trading and other activities related to its business.
- Clearing Guarantee Corporation: As a Self Regulating Organization, LKP is required to set rules on Guarantee, securities
Self-regulatory
transaction clearing, and other activities to its business. PT KPEI obtained its business license on June 1, 1998.
organizations
- Central Securities Depositary: As a Self Regulating Organization, LPP is required to set rules on depository, securities
transaction settlement and other activities related to its business. PT KSEI obtained its business license on November 11,
1998.

Government • Bapepam-LK is not an independent authority but an agency within the Ministry of Finance (MoF). It is the principal regulator
institutions and is supported by a number of self-regulatory organizations (SROs)

• The legal basis for capital market activities in Indonesia is the Capital Market Law Number 8/1995 .
Laws • The Law governs the operations of the Capital Markets Supervisory Agency, Badan Pengawas Pasar Modal dan Lembaga
Keuangan (Bapepam-LK).

54
2. Malaysia
Layer Regulation
• Issuers are required to make full, timely and accurate disclosure of information to the public under the securities laws, and
guidelines issued by the Securities Commission (SC).
Issuers
• In addition, the listing requirements impose continuous disclosure obligations on listed issuers and seeks to ensure that equal
access to such information is practiced.
• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the SIA and FIA.
Minimum entry standards, which include initial capital requirements, are applied equally and consistently to applicants applying
for the same category of licenses.
Reputational
• All license applicants must meet „fit and proper‟ criteria. Ethical, educational, industry knowledge, skills and experience are
intermediaries
assessed in approving principal officers which include directors, company secretary and key management personnel.
• The Syariah Advisory Council (SAC) advises the SC on issues relating to market compliance with Syariah principles in the
Islamic capital market.
• The Federation of Malaysian Unit Trust Managers (FMUTM) is the industry body for unit trust managers in Malaysia,
responsible for the conduct of the following functions:
- The registration of Institutional Unit Trust Agents (IUTAs) through the Guidelines for Registration of Institutional Unit Trust
Self- Agents for the Marketing and Distribution of Units); and
regulatory - The registration of Persons Dealing in Unit Trusts (PDUTs) and the conduct of the examinations for the registration of PDUTs;
organizations • The Malaysian Accounting Standards Board (MASB) and the Financial Reporting Foundation, both created by the Financial
Reporting Act of 1997, oversee accounting and corporate governance standards.
• The Minority Shareholder Watchdog Group (MSWG) was set up to promote better and more effective corporate governance
practices which could set a benchmark for others in the region. Its public mandate is to inform the investing public.
• The SC is a statutory body with investigative and enforcement powers and it reports to the Minister of Finance. The SC is the
regulatory authority for the Malaysian capital market; it also supervises the activities of market institutions, including the
Government exchanges and clearing houses, and regulates persons licensed under the Securities Industry Act (SIA) and Futures Industry
institutions Act (FIA).
• Bursa Malaysia is vested with regulatory powers under the law and has a statutory responsibility to ensure a fair and orderly
market and prudent risk management. These responsibilities relate to the regulation and surveillance of securities markets.
• The Capital Market is governed by the following Acts of Parliament:
• Securities Industry Act 1983/ Securities Industry (Central Depositories Act) 1991/ Securities Commission Act 1993
Laws • Companies Act 1965/ Futures Industry Act 1993/ Labuan Offshore Securities Industry Act 1995
• All market intermediaries must be licensed by the SC in order to carry out the permitted activities under the Securities Industry
Act and Futures Industry Act. Minimum entry standards, which include capital adequacy requirement, must be met.
55
3. Philippines
Layer Regulation

• Disclosure requirements are another area which was purposely strengthened under the SRC.
Issuers
• The disclosure requirements in the SRC and the IRR are modeled after those in the United States.

• The legal infrastructure for regulating market intermediaries has been enhanced in the SRC which, among other things, raises
capital requirements (initial and ongoing), provides a disciplinary bar to registration, provides for indefinite registration, and
clarifies that all regulated intermediaries must register under the new law.
Reputational
• Investment Houses (Presidential Decree 129), Broker Dealers (SRC), Financing Companies (Financing Company Act of 1998)
intermediaries
are primary NBFIs authorized and regulated by the SEC. Among them, the Investment Houses and Broker Dealers are the
primary securities market intermediaries while the Financing Companies are essentially credit institutions without deposit
taking.
• Building a self-regulating market is part of the expressly stated objectives of the SRC. Section 39 of the SRC defines the role of
Self- SROs and types of organizations that can apply for an SRO status.
regulatory • The Philippine Stock Exchange (PSE) is working as a front line regulator of the market as an authorized SRO.
organizations • The Investment Company Association of the Philippines (ICAP) and the Securities Clearing Corporation of the Philippines
(SCCP) set code of conducts for the members, they are not (yet) formally recognized as SROs.

• The Securities Regulation Code of 2000 empowered SEC to make it a more enforcement-oriented & independent regulator.
• The supervision of the Philippine financial market is divided among different regulatory agencies. Banking supervision is the
under the responsibility of the Bangko Sentral ng Pilipinas; supervision of the insurance industry is under the Insurance
Commission; and the supervision of the securities market is under the Securities and Exchange Commission. Moreover, the
Government
mandate and jurisdiction of these agencies are defined under different legislations.
institutions
• The “Compliance and Surveillance Group”(CSG) of the PSE carries front line responsibility for market surveillance, compliance
inspections, and investigation by PSE or SEC depending upon the type and scope of violations. SEC exercises some oversight
of PSE in order to enhance the independence and capacity to perform surveillance and compliance activities through the CSG,
the CSG was transformed into Market Regulations Division, supervised by a semi-independent, Market Integrity Board (MIB).
• BSP draws its supervisory and regulatory powers from Article XII, Section 20 of the 1987 Constitution, the New Central Bank
Act of 1993, and the General Banking Law of 2000. The mandate of the Insurance Commission is mainly based from the
Laws Insurance Code of 1974.
• The Securities and Exchange Commission derives its authority from the Securities Regulation Code of 2000, the Investment
House Law of 1973, the Investment Company Act of 1960, and the Financing Company Act of 1998.

56
4. Singapore

Layer Regulation
• Initial public offerings and continuing disclosure requirements for issuers are in place, providing timely, adequate, and accurate disclosure of
material information to investors. Prospectus disclosure requirements are state of the art.
• Issuers and their directors and underwriters are subject to criminal and civil liability if a prospectus contains false or misleading information
Issuers or if material information is not disclosed. Company law and listing rules accord fair and equitable treatment to all shareholders.
• The Take-Over Code provides additional protections to all listed Singapore companies and to unlisted public companies with 50 or more
shareholders and net tangible assets of S$5 million or more. Singapore generally follows international auditing standards.
• Quarterly financial reporting is also required for listed companies above S$75 million.
• The MAS has adopted a single modular licensing framework for securities and futures market intermediaries.
• The SFA regulates intermediaries conducting regulated activities.
Reputational
• The FAA regulates intermediaries providing financial advisory services.
intermediaries
• The MAS has adopted a risk-based approach to supervising its licensed intermediaries.
• Capital requirements for licensees will be largely based on the analysis underlying the Basel Core Principles. The new capital rule
supersedes an adjusted net capital rule and is being phased in conservatively to test the potential impact on capital.
• Holders of Capital Markets Licenses must observe customer protection procedures.
• The SGX-ST (securities) and SGX-DT (derivatives) are recognized by statute as the front line regulator of trading activities on their markets.
Self-regulatory • MAS has enhanced its supervisory arrangements for oversight of the exchanges & clearing houses since the demutualization of the SGX.
organizations • MAS oversight includes testing the quality of the exchange front line program. MAS cannot, however, review access denial determinations.
The arrangements in place to avoid conflicts of interest between its regulatory and other functions could be more clearly specified

• The MAS is legally and institutionally independent of the executive and legislative branches of the government & accountable to the public.
• The MAS‟ responsibilities with respect to securities regulation are clearly stated in the applicable legislation and rules in the SFA of 2001,
the FAA, the Exchanges Demutualization and Merger Act, and related regulations.
Government
• The MAS has both prudential and conduct of business responsibility for those intermediaries for which Capital Markets Services Licenses
are required. Because there are significant interrelationships between the government and statutory boards, greater disclosure of the MAS‟
institutions
operating procedures that guide implementation of policies would enhance accountability and transparency.
• Exercise of regulatory powers in securities is subject to the SFA.
• The MAS clearly has the staff, powers, expertise, and resources to conduct effective regulation. The consultation process with the industry
and the public is in place and sound.

• The order of precedence of the various legislative and quasi-legislative instruments applicable to the Singapore capital market and its
participants are as follows in descending order: 1. The statutory Act and related regulations; 2. The rules contained in the Rulebook; 3.
Laws
Directives issued pursuant to the Rulebook; 4. Practice Notes; and 5. Circulars
• In the event of a conflict between any provisions in the instruments provisions contained in the higher level instruments shall prevail.

57
5. Thailand

Layer Regulation
• The SEC Act prohibits companies from offering newly issued shares and other securities for sale without prior approval from
the SEC, except for the rights offering to existing shareholders. The SEC focuses on the accuracy and sufficiency of
Issuers information disclosure in order to allow the public to make their investment decisions.
• All forms of public offering of securities must receive approvals form the SEC as well as conform to SEC prescribed disclosure
and accounting standards. The SEC also licenses and regulates all investment intermediaries as well as the SET.
• Domestic institutional investor base is still under developed. Except for Government Pension Fund (GPF) there is no
compulsory retirement pension scheme.
Reputational
• This narrow domestic institutional investors base coupled with investment restrictions for GPF and PVD meant that their
intermediaries
participation in the equities market have lagged behind those of retail investors and foreign institutional investors who have
played a much more active role in the equities market.
• The SET is a statutory body under the Securities and Exchange Act with its own governing board of directors half of whom are
appointed by the SEC and the other half elected by members brokerage firms. Any changes in the legal structure of the SET
enquires an amendment in the law.
Self-regulatory
• According to the existing legal structure the SET is empowered under the Act to issue rules with regard to an orderly operation
organizations
of the exchange. Nevertheless, the Act makes clear that the SET is subject to regulatory oversight by the SEC.
• The SET performs the role of Self Regulatory Organization particularly in the areas of market disclosure and trading. An official
memorandum of understanding has been signed between the SEC and the SET in 2000.
• Regulatory framework is quite advanced though fragmented. The Bank of Thailand is the main regulator for commercial banks
and finance companies and is in the process of implementing the BASLE II capital requirement as well as consolidated
Government
supervision of financial institutions. The Bank also has limited jurisdiction over specialized banks and non bank activities.
institutions
• The Securities and Exchange Commission is an independent statutory body responsible for regulating all aspects of fund
raising, financial investment dealings, market activities as well as promotion of good corporate governance.
• To initiate a new legal framework and mark a new era for the Thai capital market, on March 16, 1992, the Securities and
Exchange Act B.E. 2535 (1992) or “the SEC Act” was promulgated and came into force on May 16, 1992 so as to reinforce the
unity, consistency, and efficiency in supervision and development of the market. The enactment of the SEC Act empowered
the Securities and Exchange Commission, Thailand to be established as an independent state agency with responsibility for
Laws
supervision and development of the capital market under the direction and guidance of the Board of the SEC.
• On July 3, 2003, the Derivatives Act B.E. 2546 (2003) was promulgated and came into force on January 6, 2004 so as to
create a legal certainty for derivative contracts, provide a regulatory framework for derivatives markets and intermediaries, and
allow the SEC to oversee the financial integrity of the market and take action to prevent adverse systemic effect.
58
Markets in SE Asia – Lessons from Europe

• In Asia, progress towards international standards, IOSCO, etc. adoption

of risk based supervision, demutualization of exchanges.
• Greater market depth, transactions volume and openness.
• But each market is small, with limited openness to region, high
transactions cost because of sub-scale volume. The challenge is from
Europe
• In Europe, demutualization is complete, for-profit exchanges have
invested in automated trading and convergence to common trading
model with central limit order book trading for most liquid stocks
• Lower transactions cost and ability to link trading venues
• Greater competition between venues within and across borders
• But also alliances and mergers which have brought significant
advantages in terms of greater access to capital raising and lower costs
• Need to ensure competitive markets in trading, clearing, settlement and
deposit
59
 The Way Forward
 Phase 2: bilateral/multilateral linkage
• Agreed to pursue option 5 with determination of having option 6 as an end game
 Phase 2: issues to be addressed
ASEAN level
• Business requirement for selecting solution provider
- Tools (e.g., short selling, SBL)
- Infrastructure (e.g., speed)
• Business model, including data dissemination
• Revenue model, including investment costs and operating costs to conduct the
feasibility analysis
• Marketing messages
Bilateral level
• Ways to deal with credit risk
• Supporting rules and regulations at each exchange
• Support from market participants and regulators
1 2 3 4 5 6 7

60
 The Common Customer Gateway
‘Home’ ‘Host’
• Common customer gateway (CCG):
Exchanges set up a common customer gateway
Exchange A Exchange B routing orders from brokers directly to local
exchange (1)
1
• Foreign brokers do not have to be a member
Common Customer Gateway 2 of the local exchange. For non-member foreign
brokers, bilateral agreement with a local broker
is required (2)
1
• Clearing, settlement and depository services
Broker A Broker B by Local participants: Credit, clearing, and
settlement all are intermediated by host-country
3 4 participants (3) (4)
Custodian B
Clearing • No home country exchange, CLH or CSD have
Clearing any involvement in the trade, so no international
member A member B
4 coordination is required
3 • Alternatively, Broker A may have a direct
CSD B relationship with a clearing member and a
CLH A CLH B sub-custodian in the host country which clear
and settle for him (not shown on the chart)

Matrix Table DMT

61