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Cai Jin

Weighing the merits of hiving off SGX's policing job

Setting up a regulatory arm may quell gripes on conflict of interest, but will it help improve bourse?

In recent months, the Singapore Exchange (SGX) has made significant strides in raising the governance bar to further reinforce investors' confidence in the local stock market and protect their interests.

These have included commissioning a study aimed at raising the disclosure standards of listed firms, as well as a 32-page guide for investment banks on what to look out for when they screen potential new listings.

But the best is yet to be.

The rumour mill suggests that the SGX may be planning to set up a separate unit to house its regulatory functions.

If that turns out to be true, this will put its regulatory practices in line with other major markets such as New York and London. The New York Stock Exchange, for instance, has a not-for-profit arm, NYSE Regulation, whose job is to police the markets it operates and make sure that NYSE-listed firms comply with listing standards.

To make any revamp count, there ought to be a streamlining of the overlapping regulatory functions performed by the SGX and the Monetary Authority of Singapore.

It should also help to mollify some of the criticism levelled at the SGX for the perceived conflicts that arise between its role as a profit-making body accountable to shareholders and its function as a front-line market regulator - a controversy that has dogged its heels since day one as a listed firm 15 years ago.

As matters stand, the current model combining both roles puts the SGX in a no-win situation and this makes some wonder why the bourse operator persists with it.

If things are humming along smoothly, as they do generally, the SGX gets no pat on the back as it is seen to be doing what is expected of it. But if things go wrong, the knives are out with accusations flying that it is a conflicted regulator, cutting corners for commercial reasons.

Still, before we examine the merits of the SGX establishing a subsidiary for its regulatory functions, let's look more closely at what sort of roles it plays in the regulatory realm. Like other well-established stock exchanges, the SGX is a "self-regulatory organisation", or SRO. That makes it the front-line watchdog in guarding against share-price rigging with its market surveillance activities and making sure that listed firms abide by its rule book.

The SGX also functions as a listing authority which vets applications from companies which want to list here, before passing the prospectuses submitted by these firms to the Monetary Authority of Singapore (MAS), which is also its regulator, for review.

And because of the important policing role it plays, questions have surfaced as to whether its quest to make money will hurt its ability to discharge its role as a regulator. But as MAS deputy managing director Ong Chong Tee once observed, the SRO function performed by the SGX is not "uniquely Singapore". Most other major stock exchanges such as the NYSE and the London Stock Exchange are also SROs, and they also perform tasks such as policing the markets in which they operate.

Stripping the SRO status from the SGX means that it will not need to undertake market surveillance or regulate listed firms. And even merely taking away its listing authority runs the risk that it may lose the synergy this role gives it to develop a viable, credible marketplace, enabling it to regulate accordingly.

So back to the question: Will putting the regulatory functions into a separate subsidiary help? Any change will be more form than substance and handing over the regulatory function to a non-profit subsidiary may not guarantee a tighter ship on regulations. But yes, it may reduce the constant refrain of comments about the potential conflicts associated with its dual role as a profit-making firm and a market regulator.

To make any revamp count, there ought to be a streamlining of the overlapping regulatory functions performed by the SGX and the MAS. As it is, the SGX may be in charge of the market surveillance activities mounted against the manipulation of stock prices, but it has no enforcement power to bring wrongdoers to justice.

Instead, it has to pass any suspicious findings to the MAS and the Commercial Affairs Department and rely upon them to take action. So one substantive reform would be to centralise the market surveillance activities under one regulator in order to better look after investors' interests and bring any share manipulators more swiftly to justice.

Similarly, establishing an at-arm's-length subsidiary for regulation will give investors a big boost in the quality of initial public offerings (IPOs). But in order to give the IPO market a big shot in the arm, more will need to be done.

Some merchant bankers complain that there is simply too much red tape when submitting an IPO application and this becomes a drawback in trying to draw blue-blooded IPO candidates spoilt for choices on where to list to consider Singapore as their listing destination.

One merchant banker said: "IPO applicants now have to go through the SGX internal IPO committee plus the external listing committee, and then the MAS."

This is unlike in the United States, where the Securities Exchange Commission (SEC) is responsible for vetting all IPO applications, and Britain, where the Financial Conduct Authority performs the same role as the SEC.

"In times of volatility, good luck to you when you have to deal with so many regulators. The window for launching an IPO is very narrow and if you miss it, you may have to wait quite a long while before another opportunity crops up," the merchant banker added.

This may help to explain why there is a dearth of mainboard IPOs here in the past two years.

Instead, the bulk of new listings has gone to the SGX's second board, Catalist, where the listing time frame is considerably shorter as the task of vetting the offer documents is not done by the SGX but is left to professional sponsors from merchant banks, law firms or accountancy practices.

As such, one suggestion is to have a single regulator to review the prospectus and approve the listing. This will help to ensure proper accountability and avoid duplication of work and resources.

The wish list goes on, but you get the picture. Even if the SGX puts its regulatory functions into a separate subsidiary, there will be a clamour for more changes. All for a good cause - raising the bar to get good companies to list here and to protect investors' interests.

A version of this article appeared in the print edition of The Straits Times on July 18, 2016, with the headline 'Weighing the merits of hiving off SGX's policing job'. Print Edition | Subscribe