Chairman of Bursa Malaysia Tun Mohamed Dzaiddin Hj. Abdullah said in regulating the market, the question of ethics is even more pronounced now, more than ever.
“This is true given the challenges of increasingly open markets, mobility and sophistication of issuers and investors empowered by technology.
“This is also true with the transformation of exchanges as demutualised entities with expanded commercial objectives,” he said.
Tun Mohamed Dzaiddin was speaking at a talk organised by the Business Ethics Institute of Malaysia in Kuala Lumpur today.
Tun Mohamed Dzaiddin added where Bursa Malaysia has been in the past, at present and going forward into the future - its role remains focused to continue striking a balance in preventing the wrong without impeding the beneficial.
“As you are aware Bursa Malaysia has demutualised and has been converted into a public company limited by shares. In addition to maintaining and enhancing its role in regulations, compliance, supervision, surveillance and enforcement as a demutualised exchange, Bursa Malaysia has expanded its obligations.
“In this regard, as a public company limited by shares, Bursa Malaysia has to meet its financial and commercial obligations to its shareholders,” he said.
Tun Mohamed Dzaiddin said the question of ethics has never been taken more seriously than with the present government under the leadership of Prime Minister Y.A.B Dato’ Seri Abdullah Ahmad Badawi with a focus on a national performance culture strongly based on ethics.
The National Integrity Plan, launched last Friday, April 23 2004 operationalises this objective with specific and measurable goals to be achieved within the next five years in 2008.
The targets for the National Integrity Plan include:
- Effectively reduce corruption and abuse of power
- Enhance efficiency in the public service delivery system and overcome bureaucracy
- Enhance corporate governance
- Strengthen the family institution
- Improve the quality of life of Malaysians
Measurable initiatives of the National Integrity Plan includes:
- Improve Malaysia’s standing in the Transparency International’s Corruption Perception Index from 37th position out of 133 in 2003 to 30th position in 2008
- Reduce the number of corporate fraud cases
- Increase the number of contracts awarded through open tender
In presenting his talk on Regulating The Market : A Question of Ethics – Tun Mohamed Dzaiddin covered :
1. Ethics in Market Regulations
2. Ethics in Managing a Demutualised Exchange
1. Ethics in Market Regulations
Tun Mohamed Dzaiddin said it is significant to note that in market regulations, the legal power of Bursa Malaysia is only as broad as its Listing Requirements. Thus, it is important to be aware that not every matter within the stockmarket is under the ambit of the exchange.
In undertaking enforcement, Bursa Malaysia works in cohesion with regulators, including the Securities Commission, the Companies Commission of Malaysia and Polis Di-Raja Malaysia. For example, if a case is found to be under the Securities Industry Act, the case will be forwarded to the Securities Commission. If it is under the Companies Act, it would be forwarded to the Companies Commission of Malaysia, and if the case is found to be criminal then it will be forwarded to Polis Di Raja Malaysia – for further action.
“Undoubtedly, the enforcement powers of Bursa Malaysia under the Listing Requirements have been progressively enhanced with the Revamping of the Listing Requirements in the year 2000, and the on-going progress and review of the requirements since then,” he said.
Additionally, Tun Mohamed Dzaiddin said instituting ethics in regulating the market is premised on three key principles:
- the protection of investors
- ensuring that markets are fair, efficient and transparent, and
- the reduction of systemic risk
- The Protection of Investors
On protection of investors - investors should be protected from misleading, manipulative or fraudulent practices. Full disclosure of information material to investors’ decisions is the most important means for ensuring investor protection. Investors are better able to assess the potential risks and rewards of their investments and to protect their own interests. As key components of disclosure requirements, accounting and auditing standards should be in place and they should be of a high and internationally acceptable quality.
- Ensuring that markets are fair, efficient and transparent.
The fairness of markets is closely linked to investor protection and, in particular, to the prevention of improper trading practices. Market structures should not unduly favour some market users over others. Ethics in regulation should detect, deter and penalise market manipulation and other unfair trading practices.
Ethics in regulation should also promote market practices that ensure fair treatment of orders and a price formation process that is reliable. In an efficient market, the dissemination of relevant information is timely and widespread and is reflected in the price formation process. Thus, ethics in regulation should promote market efficiency.
- Reduction of Systemic Risk
On reduction of systemic risk, ethics in regulation should aim to reduce the risk of failure – including through capital and internal control requirements. We recognised that risk taking is essential to an active market and regulation should not unnecessarily stifle legitimate risk taking. Regulators should promote and allow for the effective management of risk and ensure that capital, ethical and prudential requirements are sufficient to address appropriate risk taking and check excessive risk taking.
In operationalising the principles in regulating the market, the regulators are driven by the following ethical guidance:
- The responsibilities in regulating the market should be clear and objectively stated
- The regulator should be operationally independent and accountable in the exercise of its functions and powers
- The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers
- The regulator should adopt clear and consistent regulatory processes
- The staff of the regulator should observe the highest professional
standards, including appropriate standards of confidentiality.
“Ethics in regulating the market, at its broadest and most basic level, is the protection of investor interest. Lest we forget, this principle reaffirms a simple and salient truth – that markets exist only by the grace of investors,” Tun Mohamed Dzaiddin said.
2. Ethics in Managing A Demutualised Exchange
Specific to the demutualised Bursa Malaysia, the ethical checks and balances are contained in the six dimensions of the Public Interest Framework established for Bursa Malaysia, he said.
The six dimensions of the Public Interest Framework are:
- A Balanced Board Structure - comprising directors
representing shareholders, independent directors and public interest
directors. Additionally, the posts of Chairman and Chief Executive
will be separated, signifying the Chairman will lead the Board,
whilst the Chief Executive will lead the daily operations of the
demutualised exchange The Board structure will also reflect full
compliance with KLSE’s own Listing Requirements and the
Malaysian Code of Corporate Governance
- Shareholding and Decision Making Limitations – to prevent
unhealthy concentration of shareholding with private individuals
or bodies. Key decisions made by Bursa Malaysia’s board
that impact on national policies would have to be approved by
the Minister of Finance.
- Independent Supervision of the Demutualised Exchange - the Securities
Commission is expected to supervise the demutualised exchange
directly once it is listed, including provisions for SC to issue
directives where conflicts exist and conduct regulatory audits.
Approval from SC will also be required to vary the fee structure
chargeable to participants and investors.
- Internal Regulatory Organisation Structure
– clearly defining and distinguishing regulatory and business
operations to achieve regulatory efficacy and business efficiency.
To ensure regulatory objectivity and clarity, the demutualised
exchange will incorporate three levels of checks and balances
for regulatory activities – operational, corporate, and
board oversight. Operationally, the lines of authority ensure
that the head of regulations will not be subjected to decisions
made at business unit levels.
- A Risk Management Organisation and System –
which emphasises comprehensive protection of market participants.
The primary aim of a good and reliable risk management framework
is to secure the best protection for market participants, especially
investors. Almost similar to the regulatory structure, there will
be three levels of separation for risk management activities -
operational, corporate, board oversight.
- Capital Market Development Fund (CMDF) – created from part of the value allocation, this fund is especially aimed at safeguarding the overall development and growth of the capital market in respect of public interest. CMDF will ensure availability of sufficient funding for continued market development purposes to be tapped by various market participants, providing benefits to the capital market.
Tun Mohamed Dzaiddin said a number of these provisions are not unique and have been adopted by other exchanges that have demutualised.
For example:
- Singapore Exchange – SGX is supervised by the Monetary Authority of Singapore (MAS)
- Hong Kong Clearing and Exchanges (HKEx) – HKEx is supervised by the Securities and Futures Commission (SFC) of Hong Kong. Any listing deemed to be in conflict with HKEx comes under SFC’s discretion.
- Australian Stock Exchange (ASX) – ASX is supervised by the Australian Securities and Investment Commission (ASIC).ASIC also requires regulatory reports from ASX. Supervision of listing and trading in the shares of the exchanges are undertaken by the regulators.
“Notwithstanding these ethical checks and balances, Bursa Malaysia takes cognisance that the framework needs to be reviewed continually to address any new conflicts that may arise.
“Whilst tomorrow’s market may not resemble today’s, the fundamentals – including ethical standards and behaviour – remain timeless. Buildings may rise, rivers may change course, new highways may be built – but unless the laws of nature betray us, true north will always remain true north," Tun Mohamed Dzaiddin said.
