Driving the vibrancy agenda

Lessons learnt: According to SC chairman Tan Sri Ranjit Aji Singh, the upcoming Bursa-SGX trading link will be built on lessons learnt from the failure of the ATL.

Lessons learnt: According to SC chairman Tan Sri Ranjit Aji Singh, the upcoming Bursa-SGX trading link will be built on lessons learnt from the failure of the ATL.

Will it be different this time?

That’s what some financial industry players are wondering about a new attempt to link the stock exchanges of Malaysia and Singapore.

After all, it was just less than five months ago when the much-hyped about Asean Trading Link (ATL) – of which Malaysia and Singapore’s stock exchanges were members – was quietly shut down after only five years in operation.

There are undoubtedly benefits for the financial markets of both Malaysia and Singapore if there were a cross-border stock exchange trading link that could actually work well.

For one thing, it could help improve market liquidity and boost trading volumes, and for another, it could encourage greater market participation from a broader swath of investors.

It is with these in mind that many bankers and fund managers are hopeful that the plan to re-establish a Malaysia-Singapore stock-market trading link by the end of this year could work out well – and last – this time around.

According to DBS Bank Ltd analyst Lim Sue Lin, while details remain scant, the new attempt to connect the stock exchanges of both the countries seems to have a higher chance of success, as it is a government-to-government (G-to-G) collaboration.

“This time, we are getting a sense that the arrangement is a government-to-government effort and collaboration. This may imply a higher possibility of success,” Lim says in a recent note.

The Singapore-based analyst adds that lessons drawn from the now-defunct ATL should propel better coordination in reestablishing a cross-border stock-market trading link between Malaysia and Singapore.

Similarly, a market observer says the fact that the agenda is driven from top down makes the upcoming trading link a more credible and viable platform for cross-border transactions.

“This initiative is driven from top down, leveraging on the good relationship between Malaysia and Singapore ... there is a higher chance of success, as the top leadership of both countries are committed to take this agenda forward,” he says.

“So, unlike previous efforts, this is a G-to-G effort, involving all stakeholders in the ecosystems of both countries; for instance, between their capital market regulators, there will be collaboration on supervisory and enforcement arrangements; while their stock exchanges will work on harmonisation in market regulation and rules; and central banks will develop mechanisms to manage stability of fund flows,” he explains.

G-to-G effort

In announcing the plan to establish a cross-border stock market trading link between Bursa Malaysia and Singapore Exchange (SGX), Prime Minister Datuk Seri Najib Tun Razak over the week said “both markets have reached a sufficient level of sophistication and degree of maturity” to establish a trading link “to spur further mutual benefits and harness the economic potential of our two nation”.

The Securities Commission (SC) and the Monetary Authority of Singapore (MAS) are currently working out the details to have the Bursa-SGX trading link up by end-2018.

This initiative is expected to provide investors on both sides of the causeway with easier access to each other’s equity markets, that come with a combined market capitalisation of more than US$1.2 trillion (RM4.7 trillion) and 1,600 public listed companies.

It will allow investors to trade and settle shares listed on Bursa and SGX in a more convenient and cost-efficient manner.

Retail investors notably will benefit from such a link.

A market observer says the upcoming Bursa-SGX trading link is expected to benefit both brokers and investors.

“For investors, they will have more options to invest; for brokers, they will likely see higher income growth, resulting from increased trading volumes when the Bursa-SGX trading link becomes operational,” he explains.

“The link will likely replicate some of the characteristics of Hong Kong-China Trading Link, which has proven to be a success, benefiting both Hong Kong and China stock markets in terms of higher liquidity and trading volumes since its launch,” he says.

The Hong Kong-China Trading Link is cross-boundary investment channel that connects the Hong Kong Stock Exchange with the stock exchanges of Shanghai and Shenzhen.

The Hong Kong-Shanghai Stock Connect was launched in November 2014, while the Hong Kong-Shenzhen Stock Connect made its debut in December 2016.

According to a joint statement by the SC and MAS, the bilateral link between Bursa and SGX will extend beyond trading to cover post-trade arrangements such as the clearing and settlement of the stocks traded.

In relation to this strategic initiative, the SC and MAS will set up cross-border supervisory and enforcement arrangements, and work together with the two exchanges to operationalise the link.

The Association of Stockbroking Companies Malaysia (ACSM) says the reestablishment of the trading link between Bursa and SGX is a positive move.

“The planned linkage will create a new symbiotic relationship between the two exchanges,” says ACSM.

The industry body, which represents stockbrokers in Malaysia, says it stands ready to provide input to help facilitate a win-win outcome for both exchanges.

Meanwhile, UOB Kay Hian Securities (M) Sdn Bhd says while the effects of the proposed Bursa-SGX trading link will likely be neutral in the near term, there are benefits to be had over the longer term.

“We are neutral on the proposed trading link over the near to medium term in driving overall trading volume growth, as the wide proliferation of regional brokerages in both Malaysia and Singapore, coupled with technological advancement have already made the process of investing in both countries’ stock exchanges relatively seamless,” the brokerage says.

“However, under the common trading link, overall transaction cost for investors will be reduced, and with investors able to use a local brokerage without a regional presence to invest in either Malaysia or Singapore, the linkage could help increase overall market velocity over the longer term by widening the pool of potential cross-border investors,” it explains in a recent note.

According to SC chairman Tan Sri Ranjit Aji Singh, the upcoming Bursa-SGX trading link will be built on lessons learnt from the failure of the ATL.

Acknowledging the weaknesses inherent in the ATL, such as its complicated structure and costs, and some issues with the trade settlement process, Ranjit says these issues will be addressed when the SC and MAS work together to develop the new stock-market trading link.

He says the Bursa-SGX trading link will be a “better version” of the ATL.

The ATL made its debut in a high-profile manner in 2012, with a vision to connect seven major exchanges in Asean.

The initiative was driven predominantly by the regional exchanges, not a top-level government effort.

Bursa and SGX were the first two exchanges to join when the ATL went live in September that year.

The Stock Exchange of Thailand (SET) joined a month later.

Bursa, SGX and SET remained the only members through September 2016, when the ATL was terminated, reportedly, due to poor demand for its service.

The ATL’s service was not as convenient or cost-effective as initially hoped, thus rendering its service rather undesirable to many investors.

This is especially so when investors could already trade intra-regionally even before the ATL was established, as stockbroking companies had their own links to their counterparties within the region.

An SC spokesperson notes: “While the ATL only involved trade execution, the new trading link will cover end-to-end value chain to enable frictionless trading, clearing and settlement.

“Investors will essentially be able to trade equities from another stock market, and settle in local currency, as if they are trading in a local market.”

Regional connectivity

An improved link is set be a game changer for regional markets.

Market observers note besides encouraging higher cross-border trading of Malaysian and Singapore equities, the new Bursa-SGX link could potentially form the basis for future connectivity among Asean markets.

“It is a good initiative to sell the Asean growth story.

“The priority now is to get this link up and running, and eventually entice other exchanges in the region to join when the see the benefits,” a market observer says.

According to UOB Kay Hian, deeper connectivity of Asean markets could potentially create a larger liquidity pool to rival other global stock exchanges in attracting investors, and the new Bursa-SGX trading link is a positive step towards that.

Some analysts believe intense competition, especially from the Hong Kong-China Trading Link, has compelled stock exchanges in Asean to form their own regional alliances, hence Malaysia and Singapore’s initiative to reestablish links between their bourses.

Song Seng Wun, an economist at CIMB Private Banking in Singapore, for one, says while the ATL failed, the success of Hong Kong’s links with exchanges in mainland China has put pressure on Asean stock exchanges.

On the new Bursa-SGX link, Song was quoted by Bloomberg as saying, “the two exchanges don’t want to be left behind and have investors flock elsewhere, so now they’re waving a flag and saying, ‘we too will have a trading link.”’

Stimulating Malaysia’s market

From the Malaysian perspective, the Bursa-SGX trading link is expected to help stimulate foreign inflows to the local equity market.

“Overall, we think it is going to be a win-win for both Bursa and SGX, but it is an undeniable fact that the Malaysian equity market is more diverse, in the sense that it offers more sectors in which to invest vis-a-vis its Singaporean counterpart ... so, Malaysia seems to have a better edge at attracting more fund inflows,” a market observer argues.

The initiative to link Bursa with SGX is part of local authorities’ effort to drive vibrancy of the local bourse.

It is noted that the stock market velocity of Bursa has been on a declining trend over the last 10 years from an average of 40% in 2007-2011 and 30% in 2012-2017 to around 25% currently.

Declining retail partipation has been blamed for this.

Continuing from its previous initiatives to energise the market, the SC over the week announced a slew of measures to be implemented in phases between March and April this year.

These measures include:

> a three-year stamp duty waiver on shares of small and mid-cap stocks effective next month;

> a six-month waiver on trading and clearing fees for all new investors;

> liberalising margin financing rules;

> allowing intraday short-selling to all investors;

> introducing a volume-based programme to incentive institutional investors to trade at a higher volume; and

> adding a new category of traders known as “trading specialists” who could trade on their account

A market observer notes that three-year stamp-duty waiver on small and mid cap stocks is apt, as the segment has great potential and offers room to grow in terms of vibrancy, while the six-month waiver on trading and clearing fees for all new investors, targeted primarily at those who have never opened a CDS account is expected to bring in more participants to trade on the equity market.

“New investors tend to look begin with small and mid-cap, rather than big-cap stocks, so both these measures will reinforce each other to enhance vibrancy in the local equity market,” he explains.

On extending intraday short-selling to all investors, the observer says, it will give investors more options in terms of strategy.

At present, only proprietary day traders, such as remisiers, can short sell, a process of selling a security that is not owned by the seller or that the seller has borrowed.

The observer says intraday short-selling can be extended to all given all the safeguards that the SC has put in place to mitigate disruptions.

On margin financing, he says, it will help level the playing field for bank-banked brokerages and standalone institutions.

“This measure will allow them to offer more margin financing (within the prudential limit) to more investors in the hope that this could add more participants into the market,” he explains.

On the volume-based programme for institutional investors and creation of a “trading specialists” group, the observer says it will have a positive impact on increasing frequency and volume of trade, and hance add vibrancy to the market.

With all these latest developments benefitting all participants, it looks like the pace is set for the local market to enter an exciting phase.