Quality of listings vital for demutualised exchange


BY KATHY FONG

CONFLICT of interest is a major concern among the investing public when an exchange undertakes a demutualisation exercise and has itself listed as a profit-driven entity. 

A potential area of conflict is in listing regulations. The public may ask if the exchange would grant new listings more readily in order to attract more listings, or be less diligent in enforcing compliance with listing rules to retain more listings. 

Mark Blair

Broker supervisory conflict is another issue as to whether the exchange would ease up on its scrutiny of brokers because these brokers will be the customers of the exchange and also shareholders after demutualisation.  

And what would happen if the exchange ventured into new areas of business, which competed with the brokers' businesses? Investors may also ponder whether a 'for-profit' organisation will allocate sufficient resources for regulatory activities. 

Hong Kong Exchanges and Clearing Ltd (HKEx) chief executive K.C Kwong admitted that there would be a short-term conflict of interest when an exchange became a profit-driven entity, and at the same time, it was playing its regulatory role of monitoring the listed companies. 

However, in the long term, both commercial and public interests would be taken care of. By creating an environment that is conducive for listed companies and investors, the exchange will earn more profits. 

“I don’t think it is doing the exchange any good if it (the demutualised exchange) were to lower the quality of the market and allow poor performing companies to continue on the exchange,” Kwong told StarBiz in an interview. 

“For the demutualised exchange, public and commercial interests should be identical in the long term,'' he added. Indeed, fulfilling the public interest would help the demutualised exchange to achieve its profit goal. 

Alan Shaw, executive vice-president of Singapore Exchange Ltd, pointed out that conflicts of interests had always existed even before demutualisation. Certain conflicts disappear after demutualisation and some may continue. New conflicts will also arise. 

He noted that demutualisation and flotation of the stock exchange had placed this issue of conflict of interest into the spotlight. 

K.C. Kwong

“People tend to think about it more when demutualisation comes and particularly with the listing exercise,'' he added. 

In Singapore, public interest is given priority. In addition, two specific regimes were introduced when Singapore Exchange Ltd was listed on the Singapore exchange in 1999.  

Power was granted to the Monetary Authority of Singapore (MAS) to give direction to the demutualised exchange. The authority's powers extends to obligation on individual employees. 

The island republic has also established a conflict committee which reports to MAS on any conflicts that arise as a consequence of the listing of the Singapore exchange.  

In Hong Kong, the HKEx is regulated by the Securities and Futures Commission (SFC) as a way to prevent any conflict of interests.  

To ensure a level playing field, HKEx as a listed company, has to comply with rules governing the listed securities on the Stock Exchange of Hong Kong Ltd.  

Kwong said several layers of checks and balances had also been put in place to address any conflict of interest that may arise. These include the establishment of a conflict committee, restriction on shareholding and placing the SFC as an approving authority over the fees on HKEx's products and services that are offered on a de facto monopoly basis. 

HKEx was listed on the stock exchange on June 27, 2000. Prior to that, the Stock Exchange of Hong Kong, Hong Kong Futures Exchange Ltd demutualised, and together with Hong Kong Securities Clearing Company Ltd, merged under a single holding company called HKEx. 

Under the demutualisation exercise, allocation of the HKEx's assets, prior to listing, was only among members, that is, stockbrokers. After the listing, about 50% to 75% of the HKEx's assets are in the hands of non-brokers. The demutualisation model adopted in Hong Kong is rather similar to that in Australia.  

In terms of asset allocation, Malaysia uses a model similar to that in Singapore, where assets are allocated to non-members prior to listing. Under a formula, 30% of the assets are allocated to stockbrokers, 10% to remisiers, 30% each to the Capital Market Development Fund and Ministry of Finance Inc. 

Alan Shaw

In 1998, the Australian Stock Exchange Ltd demutualised to become one of the first exchanges in the world to list on its own market.  

Mark Blair, Australian Stock Exchange Ltd national manager of international affairs, finds that a demutualised exchange has more flexibility in decision-making. 

In addition, it becomes more customer focussed, compared with a mutualised exchange which tended to focus largely on a particular group, namely, the members. 

“Demutualised structures will also be more responsive to customers' needs. This will help prepare an exchange to compete more readily domestically or overseas,'' he said. 

Shaw pointed out that with the ready movement of capital and improvement in technology, competition can come from other exchanges in other jurisdictions.  

“The fact that there isn't another exchange set up on your jurisdiction doesn't mean that you are not exposed to competition. We are all competing for international capital,'' he added.  

Introduction of new products and establishing alliances and linkages with other exchanges are important when competition heats up. Shaw observed that these could be implemented more smoothly under a demutualised structure. 

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