SGX Regco needs backing from better enforcement

The Singapore Exchange's new regulatory unit SGX Regco - known as Singapore Exchange Regulation Pte Ltd in full - commences operations in about a month's time. Its incorporation represents the latest step in an evolutionary process that began some 17 years ago when SGX was first formed and floated on the stock market as a listed regulator, an arrangement that has not sat comfortably with the market and, it would be fair to say, one that the exchange itself has struggled to justify.

So it is that the formation of SGX RegCo was announced in April, the intention being that it will be a separate, independent body to oversee listing and regulatory issues as well as conduct surveillance and enforce market discipline.

Since then, there have been calls to make SGX RegCo, which will be a wholly owned SGX subsidiary, truly independent of the exchange and not influenced in any way by profit-driven objectives. This is a valid goal as it is important not only for SGX RegCo to be operationally independent of its parent but also seen to be independent.

As things stand now, SGX RegCo will have an independent board of directors not drawn from listed companies. This is a useful first step but it should not be the last and it is hoped that over time, other measures will be implemented.

In the meantime, there is one area where SGX RegCo and all those associated with enforcing market discipline can help signal independence and therefore confidence in the new unit, and that is in surveillance and enforcement of penalties.

This is because over the years, a perception has built up that SGX as a listed, profit-driven company with regulatory functions tends to be too soft in its policing of the market because it may be reluctant to take actions that could hurt its bottom line.

This view is somewhat misguided as SGX as the frontline regulator actually has always lacked the authority or powers to come down hard on transgressions - when breaches occur, existing rules limit it to issuing queries, Trade With Caution notices and public reprimands.

Harsher action, in the meantime, can only be taken by others within the regulatory ecosystem such as the Disciplinary Committee - which is independent of SGX and also SGX RegCo and consists of industry professionals - and others like the Monetary Authority of Singapore and the Commercial Affairs Department. So even when the new unit starts its work next month, these bodies will continue to play their current roles.

In other words, SGX RegCo will still be limited to issuing queries, trade with caution notices and public reprimands and the view that it is too lenient in market policing that plagued SGX might still persist.

Here, others in the system can play a part since there is no doubt that investors would welcome faster resolution of alleged crimes or transgressions - for example, it took more than three years to bring charges against the parties alleged to be behind October 2013's infamous penny stock crash and now, almost another year later, the case has still not been resolved.

Granted, such cases are very complex and take time to construct and bring to trial - there were reportedly millions of emails to comb through - and similar cases in other jurisdictions can take just as long, but the system here should ideally be geared to delivering swifter answers to the investing public in order to properly support the country's status as a premier financial hub and to aid in enhancing the perception of RegCo's independence.

Another area which needs addressing is a widely-held belief that when it comes to rigging and/or manipulation, the authorities tend to pursue "low hanging fruit" or smaller fry in the shape of retail trading representatives but prefer to avoid foreign institutions which may be equally culpable in fixing of manipulating prices every day.

Greater even-handedness is therefore required in order to convey the message that the rules apply equally to all players, big and small. If the regulatory system manages to accomplish this, it would go a long way towards addressing concerns of true independence surrounding SGX RegCo.

R Sivanithy

30 August 2017