Trading in SIPs: fine-tuning needed
In last week’s ‘Trading in SIPs: all concerned have to raise their game’ (BT, Hock Lock Siew, Jan 25), we made the point that new rules governing the trading of Specified Investment Products (SIPs) that require investors as well as dealers to pass exams before trading in SIPs could do with a bit of fine-tuning in order to be truly useful in safeguarding investors’ interests. Two areas spring to mind - the present inclusion of stocks that are listed on foreign exchanges as SIPs and the people who are exempt from the exams.
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By R SIVANITHY
31 January 2012
In last week’s ‘Trading in SIPs: all concerned have to raise their game’ (BT, Hock Lock Siew, Jan 25), we made the point that new rules governing the trading of Specified Investment Products (SIPs) that require investors as well as dealers to pass exams before trading in SIPs could do with a bit of fine-tuning in order to be truly useful in safeguarding investors’ interests. Two areas spring to mind - the present inclusion of stocks that are listed on foreign exchanges as SIPs and the people who are exempt from the exams.
In its ‘Safeguards When Purchasing Specified Investment Products - A Quick Guide for Consumers’, the Monetary Authority of Singapore (MAS) states on its website that the rationale for the new rules is to ensure investors understand the features of less-established products because the latter may possess ‘features and risks that may be more difficult to understand’.
As many observers have highlighted in their feedback to us, buying a foreign blue chip listed on the New York Stock Exchange is no more risky or unsafe and requires no extra special knowledge or understanding when compared to buying stocks listed on the Singapore Exchange.
Yet the MAS states that in addition to various complex products that are correctly classified as SIPs, ‘any investment product that is only listed on an overseas exchange is classified as a SIP’.
Taken literally, this means that a retail investor who wishes to buy IBM or Apple Corp’s shares on Wall Street must first study the workings of derivative contracts like exchange-traded notes, options, futures and various certificates and then pass an exam on these instruments before being allowed to buy those shares - even if that investor has no interest in trading those derivatives to begin with.
Also, as a reader noted in her feedback to BT, when SGX eventually links up with Asean exchanges to create a pan-Asean market, does this mean all retail investors will first have to take the necessary SIP exam before being allowed to participate in the expanded universe of shares on offer?
Note that a literal interpretation of the phrase ‘only listed on an overseas exchange’ raises the possibility that if the foreign company’s shares have a dual listing on SGX, it would not be an SIP and so could be freely traded. Or would it? Since nobody knows for sure, this is obviously an area which could do with greater clarity.
If the authorities insist on including stocks ‘only listed on an overseas exchange’ because of worries that local investors might end up wasting their money on low-quality, unfamiliar names, then perhaps the rule should be tweaked to try and ensure foreign stocks are screened for quality. In this connection, perhaps allowing purchases of counters that constitute the main benchmark index of that overseas exchange offers a possible solution.
The reason is that it is relatively safe to assume that regulators and index guardians in overseas markets have, at the very least, exercised the same degree of diligence relating to quality and liquidity when appointing stocks as index members in their market as have those who look after the Straits Times Index.
So if the main index components in the foreign market were to be excluded as SIPs, ie, these stocks can be freely traded without having to take the SIP exams, investors and regulators would be assured that some safeguards are already in place, safeguards that are at least on a par with those in the local market.
The other area which would benefit from more clarity is the identities of who exactly has to abide by the new rules and who does not.
For example, brokers have to now pass the new Module 6A of the CMFAS (Capital Markets and Financial Advisory Services) exam to either deal in SIPs for their clients, or provide advice on SIPs or both.
As in the case of the stocks listed overseas which should be be SIP-exempt, there is surely scope for improvement on this front because as things stand now, dealers and investors may have to waste unnecessary effort in preparing for and taking tests that they may not really need.