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Asia-Pacific exchanges: Off life support and into recovery mode

Date 15/06/2003

Sean Kennedy

Last year, many Asian bourses sought to rebound or at least rebuild after the damage wrought by 2001, when an economic slump combined with September 11 attacks sent markets into freefall. Some fared better than others. South Korea, Singapore and Australia ended the year in good shape, but Asia's biggest player, the Japanese market, remains troubled. The Nikkei 225 lost 18.6% in 2002 and the Topix fell just over 18 %, making them the fifth and sixth worst performers. It was the Nikkei's third consecutive year of losses. The best performing index in Asia was Pakistan's Karachi 100, which gained 112.2%. But a lack of liquidity and on-off war fears with India make this a volatile market, which also suffers from a lack of disclosure and product innovation.

South Korea had a solid year, with annual trading totalling KRW742.2tr, up almost 50% year-on-year. That was its second highest since 1999. But the Korean Stock Exchange (KSE) says average daily turnover fell sharply from February 7. It fell from Feb 7, 2003. It blames the fall largely on concerns about possible war between a US-led coalition and Iraq and worries about North Korea's nuclear programme.

Singapore Exchange (SGX), one of the region's most well-managed and innovative, is a market leader. It managed to lift interim earnings in the latter half of 2002 by a whopping 43 per cent despite a 23% fall in the traded value of securities. SGX's total derivatives trading volume has been growing steadily, driven by strong trading interest in Eurodollar Futures, and trading performance was boosted by the MSCI Taiwan Index Futures and Options and the MSCI Singapore Index Futures contracts.

Hong Kong's market was one of the worst performing in the region last year, with the Hang Seng Index losing almost 20%. Turnover remained low, averaging just HKD6,474m and HKD178m for the Growth Enterprise Market (GEM).

Bucking the trend for many markets, equity trading turnover in Australia rose 13.5% in 2002. Equity trading turnover by value in 2002 rose 13.9% year-on-year.

Some markets moved aggressively to attract new business through new products. The SGX plans to launch the world's first DRAM chip product in the second quarter of this year (2003). The volatile DRAM industry chalked up a total of about USD12bn in revenue in 2001. SGX decided to develop a DRAM futures contract after feedback from chip manufacturers, users and other players in the electronics industry. SGX's SGX MSCI Futures Contract made its debut in the second quarter of 2002, and it announced plans last August to add six Single Stock Futures (SSF) contracts to its derivatives market – Creative Technology Ltd, Datacraft Asia Ltd, Pacific Century Regional Developments Ltd, Parkway Holdings Ltd, Singapore Exchange Ltd and ST Assembly Test Services Ltd. SGX launched its first 15 SSF contracts in October 2001.

SGX launched a USD-denominated SGX Middle East Crude Oil (MECO) Futures contract on the SGX Electronic Trading System (SGX ETS) in November. The contract's final settlement is based on the Monthly Average of the Daily Dubai and Oman crude oil prices assessed by Platts, a unit of McGraw-Hill Companies, Inc. The SGX MECO Futures contract is being launched in cooperation with the Tokyo Commodity Exchange (TOCOM), which has been successfully trading a similar Yen-denominated Middle East Crude Oil futures contract since September 10, 2001. Other new SGX products included full-sized Japanese Government bond (JGB) futures and options contracts.

Asia's ETF market is growing steadily. Singapore's first locally-traded Exchange Traded Fund (ETF) made its debut on April 17, 2002. The KSE entered the ETF market in October, with two kinds on offer. The ETFs are designed to track the performances of the KOSPI 200 and the KOSPI 50 indices. Trading and settlement are similar to those for individual stocks.

Taiwan authorised the launch of ETFs from April 2003. Taiwan's first ETF will be created by Polaris International Securities Investment Trust Co. and State Street Global Advisors (SSgA). Polaris-SSgA's ETF will be based on the 50 constituents of the 'TSEC Taiwan 50 Index' launched by the Taiwan Stock Exchange and London-based FTSE at the end of November last year. Fuh-Hwa Investment Trust Co. is also working on an ETF product with Barclays Global Investors (GBI).

The first ETF launch in Taiwan is intended to coincide with the Taiwan Stock Exchange's new TSEC Taiwan 50 Index Futures on the local bourse in the second quarter of this year (2003). Elsewhere in greater China, the mainland is making significant attempts to lure investors, while Hong Kong launched an array of new derivative products. The HKEx's first batch of derivative warrants issued under the amendments to the listing rules in November 2001 commenced trading in February 2002. Under the amended rules, issuers are required to appoint a liquidity provider. In May, the HKEx introduced Dow Jones Industrial Average (DJIA) Futures for trading at its wholly-owned subsidiary, the Hong Kong Futures Exchange.

In August 2002, the HKEx's first batch of Equity Linked Instruments (ELI) were listed, and in November , the exchange launched Mini-Hang Seng Index (HSI) Options. The new contract was introduced to meet the trading and hedging needs of retail investors, allowing investors to participate on a smaller scale, compared with the existing HSI Options. This year (2003), the HKEx says it is looking at introducing capital protection products in the securities market, interest rate swap futures, flexible options on Hong Kong stocks and indices and cash-settled Exchange Fund notes futures. "We also plan to launch an S&P/HKEx index series in the first half of 2003, following an agreement signed between the two companies in July 2002," an HKEx spokeswoman added.

In October, China also unveiled one-day treasury bond repurchase contracts to help its debt markets. Brokerages were authorised to charge a trading fee of 0.0025% of the contract's value or at least CNY5 and have to pay 5% of their commission to the exchange. China also cut brokerage trading commissions on treasury and corporate bonds at the same time to boost its bond markets.

The Korea Stock Exchange (KSE) launched an equity (individual stock options market in January 2002. The options are European-style and settled through stock delivery. It also opened a repo market in February. The bonds chosen are highly rated government bonds, monetary stabilisation bonds and corporate bonds. The KSE says it plans to launch an Equity-linked note (ELN) market in 2003 and a covered warrant market. This will require an amendment in 2003 to the Securities and Exchange Act to include ELNs. The Act was amended to include covered warrants last year.

In Australia, the ASX began trading futures contracts from January 30, 2002. The ASX Mini200 is based on the S&P/ASX 200 share price index and the ASX Mini50 is based on the S&P/ASX50 share price index. Like Singapore, the ASX is something of a trail-blazer. It is working on an electricity futures contract, citing industry demand since the demise of Enron in 2001. In August, the ASX also started trading futures contracts over the S&P/ASX Property Trust Sector Index, and thinks its futures operations are working well. "It's very early days but our futures market has every prospect of being successful principally because the equities market underpins the futures product," said ASX managing director and chief executive Richard Humphry after the launch of the Property Trust Sector Index.

In another breakthrough, the ASX plans to introduce agricultural futures during 2003, but details remain sketchy. The country is being ravaged by one of its worst droughts in decades.

In Malaysia, the Kuala Lumpur Stock Exchange has launched five-year government securities futures contracts (FMG5), a cash settled contract to buy or sell five-year Malaysian government securities at a future date. It plans to introduce a single stock futures (SSF) contract in the first quarter of 2003, lifting its total number of product types to six.

In the Philippines, small investors gained equal access to the government securities market in 2003 after the government decided to sell treasury bills directly to the public through Philippine Stock Exchange (PSE) brokers.

The Tokyo Stock Exchange, Inc (TSE) joined with the Japan Securities Dealers Association, Osaka Securities Exchange Co Ltd, Nagoya Stock Exchange, Sapporo Securities Exchange and Fukuoka Stock Exchange to set up a unified clearing organisation in Japan. Asian markets have been continuing efforts to set up links with others in the region as well as Europe and North America. In February, TSE and Chicago Mercantile Exchange Inc (CME) and TSE signed an agreement to allow customers to trade S&P/TOPIX 150 stock index futures around the clock on both exchanges. The two exchanges had earlier agreed in late 2000 to further their fixed income and equity derivatives markets.

Separately, the TSE and the New York Stock Exchange, Inc. (NYSE) in June announced a pact to share market surveillance information. They had already signed an agreement for 'comprehensive cooperation in February 2000'. Under the latest agreement, TSE and NYSE can ask each other to provide information or documents relating to financial instruments traded on their respective exchanges, and information relating to members and trading participants on the exchanges. The information can be used only for the purpose of market surveillance or investigative activities. And in September, Tokyo signed a cooperation pact with Euronext, which groups Amsterdam, Brussels, Lisbon and Paris. It ended the year with a memorandum of understanding (MOU) with Shanghai Stock Exchange (SSE) in December 2002, and signed an MOU with Shenzhen Stock Exchange in January 2003.

South Korea didn't enter any alliances with other stock exchanges. It says its priority is restructuring its three domestic exchanges: the KSE, the KOSDAQ and the KOFEX. It said this would save it an estimated KRW27bn in annual costs. "In the meantime, we are making efforts to improve our market systems and norms to be in line with international standards and practices so that we may quickly respond to any needs of alliance or cooperation with other overseas exchanges in the future," it told The Handbook of World Stock, Derivative & Commodity Exchanges.

The Taiwan Futures Exchange (TAIFEX) was admitted into the Swiss Futures and Options Association (SFOA) in August 2002. And late last year (November 2002), the TAIFEX signed an MOU with the Korea Futures Exchange (KOFEX) to work more closely together.

SGX last December unveiled plans to cooperate with the SSE. SGX supported SSE's Singapore seminar in early 2003 targeting institutional investors and companies in Singapore. In return, SSE helped SGX's March 2003 seminar in Shanghai aimed at attracting Chinese companies to list on SGX. As well as reaching out to other exchanges, SGX also held roadshows last April (2002) in India to try to convince Mumbai and Bangalore firms to list on SGX. Singapore has also been welcoming signals from Taiwan last April that it intends to renew a plan for cross-border trading with SGX. The two exchanges signed an MOU in 1998 but nothing has happened since then.

While rival exchanges are stepping up efforts to attract business from China, HKEx remains upbeat about its unique role in China. "Hong Kong remains the preferred choice for mainland enterprises' listings by providing a capital raising market in freely convertible currency. Our role as a channel between the mainland's capital raising needs and the international capital market has immense potential following China's entry into the WTO (World Trade Organisation)," an HKEx spokeswoman told The Handbook of World Stock, Derivative & Commodity Exchanges. "We expect China will become the biggest source of new issuers of the Hong Kong market in the years to come," she said.

ASX says it is fine-tuning existing alliances for the moment. "(We're) currently maintaining the links we have already forged into Singapore and the US," an ASX spokesman said.

Across the Asia-Pacific, there were significant efforts to tighten disclosure and lift transparency. In Australia, the Financial Services Reform (FSR) Act took effect in March. The FSR creates a new uniform licensing and disclosure regime to regulate financial service providers, financial markets, and clearing and settlement facilities.

The Australian Stock Exchange (ASX) released an exposure draft on improving disclosure on July, 2002, and followed that up the following month with the formation of the Corporate Governance Council comprising ASX officials along with representatives from issuing bodies and the business community. It announced plans to tighten listing rules in November.

Separately, the Australian Federal Government announced planned corporate law reforms covering auditor independence, internal auditing, accounting standards, options expensing and compliance. Last September, the ASX Supervisory Review (ASXSR), the company established to enhance the accountability and transparency of ASX's supervisory activities, delivered its first annual report to the ASX Board and the Australian Securities and Investment Commission (ASIC). The company concluded that the ASX met appropriate standards, but the ASX will be introducing some ASXSR recommendations during 2003. Australia's Corporate Governance Council is due to release its best practices guidelines on March 31 this year (2003).

HKEx last year made nine amendments to the main board listing rules and five to the Growth Enterprise Market (GEM) Listing Rules. The main areas of change comprised:

  • Treatment of revalued assets in issuers' first annual accounts after listing.
  • Financial statements' content requirements for disclosing changes in equity.
  • Cutting listing fees for debt securities after July 1, 2002.
  • Introducing amendments to expand the range of derivative products.
  • Reducing listing fees for derivative warrants launched on or after April 2, 2002.
  • Allowing main board and GEM issuers to distribute summary financial reports.

The HKEx plans reforms in the first half of 2003 following a corporate governance report in January available at http://www.hkex.com.hk/library/listpaper/cc-e.pat.It plans to amend main board listing rules covering listing eligibility and cancellation of listing procedures in the second half of 2003, after it has reviewed market responses to consultation papers issued in July and November 2002. In January 2003, the HKEx said it would scrap the minimum brokerage commission from April 1, ignoring intense opposition from brokers who have warned that this would cause a market shakeout. Abolition of the 0.25% commission was proposed in 1999, but was delayed because of market weakness and fears of business closures and job losses.

SGX completed an overhaul of its listing rules, introducing a new regime from July 1, 2002. Among other amendments, the SGX's new manual:

  • introduced a graduated scale based on market capitalisation for the minimum float for main board members;
  • gave issue managers more flexibility in distributing IPO shares;
  • shortened the moratorium period for main board companies admitted under the profit test;
  • tightened disclosure of subscription of IPO rules for parties associated with the offering introduced new chapters setting our requirements for annual reports and formalising SGX policy on suspensions and delisting.

In Malaysia, the merger of the high-tech, high-growth MESDAQ (Malaysian Exchange of Securities Dealing & Automated Quotation Bhd) with the KLSE Group was approved in December 2001 and took effect on March 18, 2002. The systems were integrated to allow a common platform but there was no immediate change in membership or licensing requirements.

The KLSE also tweaked its disclosure rules. Under the amended rules it requires companies' quarterly financial statements to include (at a minimum):

  • a condensed balance sheet;
  • condensed income statement;
  • condensed statement showing either all changes in equity, or changes in equity other than those arising from capital transactions with owners and distributions to owners;
  • condensed cash flow statement; and
  • selected explanatory notes.

The KLSE also announced a series of measures in July to attract both issuers and investors, including:

  • expanding listing facilities to foreign companies;
  • offering reduced board lots to make securities more affordable and boost liquidity;
  • bring trading hours into line with international practice;
  • facilitating full online trading without manual intervention.

Last October, the KLSE also threatened to delist almost 100 companies if they failed to put their finances together by year-end. It said it would decide what to do about such companies in early 2003. The KLSE warned in early 2001 that it would delist distressed firms that did not submit restructuring plans. The KLSE expects to change its own governance structure after it demutualises, which it plans to do during 2003.

China, the market that has most financial institutions salivating, sent mixed signals during the year. The China Securities Regulatory Commission (CSRC) said it planned to improve the quality of its markets by banning lead underwriters arranging deals for poor-quality firms. It was the latest in a slew of reforms dating back to late 2000 to clean up its massive but inefficient markets. It has tightened listing rules and raised disclosure requirements. The CSRC's latest measure introduced a points system under which brokerages getting 12 points within one year would be penalised.

China also announced in November that it would let foreign investors into its USD500bn stock markets in a qualified foreign institutional investors (QFII) scheme. It opens up 1,200 companies with listed A-shares denominated in CNY and off-limits to foreigners. Closed-ended China fund managers can't withdraw their money for three years after making their initial investment and other qualified investors can't withdraw for one year. A single foreign investor cannot own more than 10% of a listed company and the total foreign shareholding in a company can't top 20%. Foreign investors also have to choose a Chinese commercial bank or a foreign bank with a local branch to have custody of their money and they must use a local brokerage for trading.

China also said it will let foreigners into its USD340bn bond market and let them buy treasuries, convertible bonds and corporate bonds. But one month later it backed down, saying foreigners couldn't buy and sell bonds for the moment 'for technical reasons'.

Taiwan also moved to boost investor protection in February this year (2003). Finance Minister Lin Chuan and Securities & Futures Commission Chairman Ting Ke-hua opened the Securities and Futures Investors Protection Centre, designed to protect investors' interests and maintain order in the equity market. Gordon S Chen, vice finance minister, will double as chairman of the centre. Centre services include legal consulting on securities and futures markets and filing complaints on investors' behalf. It will also help investors deal with any difficulties caused by futures transactions, file group complaints and provide arbitration services. It will also watch for insider trading.

In February last year, the Taiwan Stock Exchange ordered newly listed companies to hire at least two independent board members and one independent supervisor. In November, a TSE official called for stricter regulations governing the qualifications of independent board members to be added to the Securities and Exchange Law. The Taiwan Stock Exchange has been working on revisions to its Securities and Exchange Law requiring listed companies to hire a set number of independent board members and supervisors.

In Manila, the Philippines Stock Exchange late last year outlined tougher disclosure rules, including introducing a 'blackout rule' banning officials of issuers from trading their companies' shares during certain periods. The PSE also pushed hard for the passage of a reform exempting investors from stamp tax on secondary trading of equities, derivatives, fixed-income products and mutual funds.

The region's biggest bourse is still struggling to make an impact. Japan's TSE demutualised in November 2001 and plans to list its shares by the 2005 financial year. In the meantime, in its interim business plan, it intends to cut costs, including staff, add new products, scrap unpopular products and try to attract greater foreign participants, while giving domestic investors wider access to foreign investments.

Long seen as a regional laggard, the Securities and Exchange Board of India (SEBI), the capital markets watchdog, was last November (2002), invested with powers that are remarkable by Indian standards. SEBI can now search and seize property. Financial penalties have been raised to a maximum of INR250m (USD5.2m), or three times the gain made by offending parties, whichever is higher. Previously, the top fine was INR500,000. Finally, SEBI's board has been expanded to include three full-time members to lend the managerial and financial expertise to frame policy. "I can now impose fines that hurt," SEBI's reformist chairman Ghyanendra Nath Bajpai said.

SEBI last year also launched a controversial takeover code, and an upgraded code of insider trading is expected, which will sit alongside revised rules on asset management funds. The agency has tightened disclosure norms at mutual funds and removed grey areas such as banning commissions paid by funds to distributors. The new takeover rules are expected to strengthen the hand of minority shareholders and make multinationals think twice about buying out their local subsidiaries on the cheap.

Under the new rules, buyers have to use 'reverse bookbuilding' to buy out minority shareholders. This often effectively means minority shareholders can tender their shares at a price higher than the minimum price that buyers are now required to offer - the average traded price of the last 26 weeks preceding the offer. Under the new rules, this process will take place on screen-based trading platforms of the stock exchanges rather than through direct mailing as in the past. Finance Minister Jaswant Singh said last December (2002) that companies will be asked to offer a minimum 25% of their capital to the public at the time of listing, adding that 10% is far too low. The Securities and Exchange Board of India (SEBI) has given regional stock exchanges until the second quarter of 2003 to outline a way to corporatise and demutualise. Of 23 stock exchanges in the country, Ahmedabad Stock Exchange, Indore Stock Exchange and Mumbai Stock Exchange will have to be both corporatised and demutualised. Of the remainder, 18 have been corporatised and only need to be demutualised.

Sean Kennedy is a Hong Kong-based financial writer.