Greater regulatory independence: a difficult but necessary road
When the possibility of having a listed regulator was first
raised as a suitable model for the local stock market in the late 1990s, not
only was it novel - it appeared to have plenty of appeal. After all, not only
had other markets adopted it, but who better to police the universe of listed
entities than one of its own?
Comments
Business Times
03 August 2016
When the possibility of having a listed regulator was first raised as a suitable model for the local stock market in the late 1990s, not only was it novel - it appeared to have plenty of appeal. After all, not only had other markets adopted it, but who better to police the universe of listed entities than one of its own?
The reasoning at the time was that a commercially-driven exchange vested with frontline regulatory powers would have its ear so close to the ground that it would be able to respond swiftly to the demands of the market, as well as detect transgressions and governance lapses quickly. This was to prove fine only in theory. As is often the case, theory is difficult to put properly into practice. For the 15 years the Singapore Exchange (SGX) has existed, following its formation and listing after the demutualisation of the Stock Exchange of Singapore and the Singapore International Monetary Exchange, it has struggled against a tide of mounting public scepticism over its ability to juggle its dual roles and to manage its conflicts of interest.
It didn't help that other jurisdictions, quoted as worthy of emulation when the market regulator model was implemented here in 2000, gradually shifted away from it and towards a model in which the regulator was independent of profit motives and, most importantly, seen to be independent. Faced with growing pressure to overhaul the local model, the authorities have responded. Separate, independent committees have been set up for listings and disciplinary purposes, and the SGX last month announced that it will, in the middle of next year, house all its regulatory functions in a wholly-owned subsidiary to be called RegCo, which will have its own directors who are not on SGX's board or that in any listed company.
This is similar to the OMX Nordic Exchanges, which have also established a separate structure responsible for monitoring issues related to self-listing and market surveillance. However, although these are all important and welcome moves, many observers have pointed out that as long as RegCo is tethered to SGX - and will presumably draw its budget from the for-profit SGX - in the eyes of the market, it may not be viewed as being completely independent, even with strong Chinese walls in place.
RegCo's birth should therefore be taken as only the first step in a process that must culminate in total independence, both actual and perceived. But although desirable, this will not be easy, as the experience of other jurisdictions suggests that there is no simple solution. For example, outsourcing all regulatory functions to a completely independent third party may address some concerns, but the problem would be to ensure that the third-party regulator is accountable and will perform its functions effectively to avoid harm to the reputation and brand name of the exchange.
In North America, certain regulatory functions of exchanges have been delegated or contracted to third-party non-governmental regulators - FINRA in the United States and IIROC in Canada - while others, notably in the area of listing, have been retained by exchanges themselves. In Australia, the Australian Securities and Investment Commission wields most regulatory powers, while the Australian Stock Exchange enforces its listing rules.
All these models should be studied carefully before any changes are made here. It may take time, but the road towards greater regulatory independence, though difficult, must be embarked upon.