Bursa Malaysia 2008 Regulatory Market Report

The release today of Bursa Malaysia’s regulatory market report for 2008 indicates that the integrity of the capital market remained intact amidst the volatile global environment that took hold of the market in 2008.

Bursa Malaysia Berhad’s Chief Regulatory Officer, Selvarany Rasiah said, “We continued to pursue our core objectives of providing investor protection and preserving market integrity through robust and effective market regulation. We are also committed to promoting investor confidence through high levels of market transparency and orderly trading.”

The Exchange undertook a thematic approach focussing on five key areas which are central to the maintenance of a fair and orderly market, as follows:
1. enhancing the standards of corporate governance among listed companies
2. improving standards of disclosure
3. promoting high standards of business conduct among market participants
4. enhancing the effectiveness of enforcement
5. elevating the level of education and awareness in the industry

Selvarany said, “We are committed to maintaining and promoting high standards of corporate governance which is inextricably linked to market integrity. Listed companies must not lose sight of their listing obligations while addressing challenges posed in the uncertain times. The Exchange believes that adherence to high standards of corporate governance (CG) is imperative in facilitating a safe and regulated environment within the scope of transparency, accountability and integrity.”

1. Standards of disclosure

Bursa Malaysia emphasises on regular, accurate and timely disclosures to the market in order to ensure that investors have on hand relevant material information to aid informed investment decisions.

The compliance rate for issuance of financial statements remains high. For 2008, Bursa Malaysia recorded 98% compliance to financial report submission (excluding companies where extension of time was granted). The high adherence of listed companies to Bursa Malaysia’s Listing Requirements (LR) on financial reporting obligation demonstrated a regular flow of financial information to the market.
The Exchange also made concerted efforts to procure disclosures from listed companies to ensure adequate and timely information is released to the market. Bursa Malaysia issued 192 announcement queries requiring listed issuers to disclose additional information on their announcements. In terms of media queries, a total of 205 queries were made in 2008 to clarify, deny or confirm rumours or reports on material information that have not been previously announced.

2. Business conduct and surveillance among market participants

The Exchange’s regulatory efforts do not stop at listed companies alone. Bursa Malaysia has intensified monitoring and surveillance of market participants in view of the global financial crisis and the challenging global economic condition. The Exchange was poised to deal with the uncertain market environment through the implementation of several market safeguard measures which were aimed at securing investor protection and preventing systemic risks, particularly from defaults arising from the volatile market conditions. The measures include heightened supervision of market participants, vigilant monitoring of their financial conditions and clients’ assets under their custody, review of key market indicators, industry positions and exposure, conducting impact testing for potential deterioration in positions held, and constant engagement with market participants.

Selvarany emphasised that the Exchange’s sound regulatory approach, which it has continuously practiced over the past years, has put the bourse in good stead to weather the current uncertainties. In view of the current challenging market environment, the Exchange has also embarked on closer monitoring of all brokers’ financial and exposure positions to curtail any untoward trading activities and found no undue exposure.

The Exchange undertook regular engagements with brokers of higher risks via thematic reviews on their financials and exposure positions in view of the current global financial crisis.

On the intermediaries’ part, they are subjected to prudential financial requirements and are adequately capitalised. For the Participating Organisations (POs), the minimum capital adequacy ratio requirement for non-investment banks is more than 1.20 times but the industry average is 11.12 times. The Average Risk Weighted Capital Ratio (RWCR) for the 14 investment banks was 38.5%, substantially higher than the minimum requirement of 8%. As for the Trading Participants (TPs), the industry average Adjusted Net Capital for derivatives brokers was RM11.9million, which is above the minimum requirement.

Selvarany said, “The Exchange’s supervision of the brokers through inspection and surveillance helped in ensuring the maintenance of standards of conduct, investor protection and orderly trading. The high level of capital adequacy achieved by brokers further fosters confidence in the Malaysian market.”

In addition to the capital adequacy requirement, the Exchange also monitors brokers’ liquidity and their ability to fulfill their settlement obligations, and it was found that they fulfilled all the settlement obligations.
On broker’s trading conduct, whilst there were global concerns on short selling activities, this concern was well contained in Bursa Malaysia. There were no unusual trends of short selling observed under the Exchange’s intensified monitoring efforts.

Bursa Malaysia has adopted a new soft enforcement approach in April 2008 which involves engaging with senior management of brokers to address trading concerns swiftly. Trading concerns are communicated by the market surveillance staff of Bursa Malaysia to the key management of the brokers concerned in order to enable them to manage their dealers’ activities and risk management.

This approach enables the tackling of trading concerns in a swift manner whilst creating awareness amongst key management on questionable trading behaviours. In 2008, 73 soft enforcement actions were carried out involving 25 POs and 150 Dealer Representatives on trade concentration and unusual trading activities. 71 of the 73 soft enforcement actions resulted in the ceasing of the unusual trading activities wherein a 97% success rate was achieved.

3. Enforcement actions on Public Listed Companies (PLCs) for breach of Listing Requirements (LR)

As a frontline regulator, Bursa Malaysia has measures that are aimed at increasing levels of transparency among the listed companies. Bursa Malaysia vigilantly monitors for compliance and where there is non-compliance, the Exchange will take the necessary actions.

The majority of enforcement actions pertain to failure in adhering to disclosure obligations. The Exchange takes a serious view of breaches pertaining to disclosure obligations as it believes that adequate information to investors in a timely manner is key to allowing investors to make informed investment decisions.

* The table shows sanctions imposed on PLCs, and Directors and Principal Officers in 2008. Please note that one Director or PLC may have more than one breach committed.

Bursa Malaysia places great emphasis on Boards of Directors in discharging their obligations effectively and efficiently, and in ensuring that good corporate governance is practiced in their organisation. In 2008, 14 directors from four listed companies were publicly reprimanded while 25 directors from nine listed companies were publicly reprimanded and fined.

Selvarany stressed the important role of Board of Directors as they are ultimately tasked with the responsibility of inculcating strong governance culture in their organisations.

“Board of Directors must understand their roles and responsibilities clearly so that they are able to discharge their obligations competently. One of the areas the Exchange places emphasis on is the role Board of Directors play in ensuring their company’s financial statement represents a true and fair view of the financial affairs of the company, and that it is issued in a timely manner. This would include Board of Directors to have adequate focus and vigilance over matters that may impact financial performance and operations of the company, and ensure the practice of effective risk management.

“Directors must also place great importance on complete, accurate and timely disclosures which are essential in aiding investors to assess a company’s performance and corporate governance practices,” she added.

The total number of sanctions imposed in 2008 was 160 which included reprimand and fines amounting to RM1.3million.

4. Enforcement actions on market participants for breach of Business Rules

The breaches of Business Rules by intermediaries in 2008 amounted to 127 enforcement actions which were initiated and completed, with priority given to market offences. These offences spanned infringements relating to lapses in supervisory and compliance functions, contract amendment breaches, day trading breaches, market offences and inaccurate financial reporting.

Strict enforcement actions were taken for breaches pertaining to participants’ supervisory functions, contract amendments requirements and market offences. Severe enforcement actions were also taken against two POs and a TP for breaching the minimum financial resources requirement.

The enforcement actions which include caution, reprimand, fines and suspension resulted in imposition of fines amounting to RM610,000.