Asean’s integrated exchange to boost regional liquidity

Author: Ashley Lee | Published: 27 Sep 2012
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The Association of South East Asian Nations’ (Asean) bourse link-up has the potential to boost liquidity in the region’s exchanges, according to local lawyers.

But it will require a strong public relations campaign, and resolution of regulatory uncertainties.

Phase one of the Asean Trading Link opened on September 18, connecting Singapore Exchange (SGX) and Bursa Malaysia (BM). It allows investors to access stocks outside their home jurisdictions by facilitating connections between local brokerages.

“It is quite clear that an Asean exchange link will provide a wider platform for trading and give investors wider choices,” said Sin Boon Ann, director at Drew & Napier.

Supporters believe the link will make Asean’s exchanges more competitive with regional rivals, such as the Hong Kong Stock Exchange and Shanghai Stock Exchange.

But some counsel have warned that investors must be aware of the exchanges’ differing regulatory regimes. This is a similar situation Latin America’s integrated market, the Mercado Integrado Latino-Americano.

While investors are paying attention to Asean, it is difficult for one of its exchanges to compete against those in other regions, said Bangkok-based Baker & McKenzie partner Thananan Sangnuan. “However, the link will increase the competitiveness of the region as a whole,” she added.

The link is set to expand rapidly. The Stock Exchange of Thailand (SET) is expected to join in October. The four other participating exchanges – Hanoi Stock Exchange (HSX), Ho Chi Minh City Stock Exchange (HOSE), Philippine Stock Exchange (PSE) and Indonesia Stock Exchange (IDX) – will participate at a later date.

Regulatory issues across Asean

A potential shortfall of is that the broker system means there is no central clearinghouse. Instead, transactions are governed by the relevant exchange’s regulator. It makes it important for investors to be familiar with regulations across all three jurisdictions.

Most sources agree that SGX, BM and SET are the ideal exchanges to open the link. Together, they represent 67% of the seven participating exchanges’ market capitalisation.

Further, Singapore, Thailand and Malaysia have the benefit of high corporate governance standards compared to other Asean jurisdictions. In the recent CG Watch 2012 study co-published by CLSA Asia-Pacific Markets and the Asian Corporate Governance Association, the three jurisdictions are among the top five for corporate governance standards in Asia.

Regardless, Stamford Law partner Ng Joo Khin recommended that counsel look into the disclosure regimes of the various countries and how transparent the corporations are expected to be. He noted that Singapore-listed companies are required to announce material information very promptly. “Are the disclosure rules in all other countries just as robust? Admittedly, some may not be,” he said.

Ng also raised questions about cross-border disputes. He asked whether there is an easy and cost-effective avenue to enforce against recalcitrant directors or companies in other countries, and warned that costs, cultural and language differences as well as physical distance could be deterrents.

Investors should also pay attention to the link’s clearing mechanism. Sin recommended looking at clearing systems, such as how effectively the link will ensure seamless clearing for the traded securities and handle arbitraging opportunities.

Certain home-country regulations may also be adjusted. Sangnuan said that the link has prompted rule changes in Thailand, even before the Asean link has been implemented. For example, Thai securities companies can now publicise the research and reports of foreign securities companies.

Indonesia concerns

While Singapore, Malaysia and Thailand are all attractive targets, the most popular Asean jurisdiction among foreign investors is undoubtedly Indonesia. However it is unclear when the IDX will join the link and how it will benefit Indonesian investors.

Sources agree that the Indonesian Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) will not handle issues related to the link this year.

Iwan Setiawan, partner at Makes & Partners, said that counsel are waiting for the Indonesia Financial Services Authority (OJK) to begin operations to look into this issue.

Counsel disagree on how the link will affect Indonesian or foreign investors. Rambun Tjajo, partner at Hadiputranto Hadinoto & Partners said it is not very clear how the link will assist thier development as there are effectively no restrictions for foreign investors to invest in share trading on the IDX.

In addition, Tjajo said that from an Indonesian investor’s perspective it is far from clear that the Asean exchange link would, at least in the short-term, make any difference.

Richard Weiss of Makes & Partners agreed, and said that the low stock prices on the IDX may make Indonesian investors reluctant to invest in other Southeast Asian exchanges with higher share prices. He added: “We may see more investors looking at Indonesia via the link, rather than Indonesian investors looking elsewhere.”

See also

'Thai stock exchange to integrate regionally'

'Investments in Asean region'

'How to make LatAm's Mila exchange work'