Malaysia’s Capital Market Masterplan, 2001-2010: A Case Study
JimWoodsome
WORKINGPAPER–February2016
Thispaper,preparedfortheCapitalMarketAuthorityofRwanda,examinestheprocessMalaysia’sgovernmentundertooktoreformanddevelopitscapitalmarketsinthewakeoftheAsianfinancialcrisisduringtheperiod2001-2010.Thepaperislargelybasedonhistoricalcontextandisintendedtogleanlessonsfromtheprocessitself.ThepapergivesspecialattentiontohowtheMalaysiangovernment
perceivedthechallengesitfacedatthattime,andthepoliciesformulatedtoaddressthem,butdoesnotattempttoassesstheefficacyofthosepolicies.Further,thepaperdoesnotattempttoanalyzerecent
politicalandfinancialdevelopmentsinMalaysia.
ThispaperwaspreparedbyJimWoodsome,seniorprogramresearchanalystfortheMilkenInstituteCenterforFinancialMarkets(CFM).HewouldliketothankLatifahMericanCheong,formerassistantgovernoratBankNegaraMalaysia,StaciWarden,executivedirectorofCFM,LauraDealLacey,executivedirectoroftheMilkenInstituteAsiaCenter,andJacquelineIrving,directorofCFM,forcomments.
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Executive Summary
IntheaftermathoftheAsianfinancialcrisis,theMalaysiangovernmentsetouttostrengthenandbroadenthecountry’sfinancialsector,includingunderdevelopedcapitalmarketswhichwerethenrelativelynarrowandweredominatedbygovernmentdebtandequities.Afteradecade-longeffortguidedbytheCapitalMarketMasterplan(CMP),Malaysia’scapitalmarketsspannedamuchbroaderrangeofproductsandservicestoincludeprivateequity,arobustinvestmentmanagementindustry,andalargerroleforcorporatebonds,especiallyIslamicsecurities.
TheCMPbeganaspartofatwo-prongedapproachdesignedtomeetMalaysia’sneedformorediversifiedsourcesoflong-termfinance.TheFinancialSectorMasterplan(FSMP)focusedprimarilyonstrengtheningbankingandIslamicfinance,alongwithinsuranceandtheventurecapitalindustry.TheseparateCMPsetouttoenhancetheregulatoryframeworkandexpandcapital-marketdevelopmentintonewfinancialinstitutionsandservicessuchasunittrusts,private-debtsecurities,privatepensionfunds,andIslamicsecurities.
ThispaperwillfocusontheprocessthegovernmentfollowedasitcreatedandimplementedCMP,withspecialattentiongiventohowthegovernmentperceivedthechallengesitfacedandwhatstepsittooktoaddressthem.SeveralhighlightsfromMalaysia’sexperienceinclude:
1. SEQUENCINGANDTAKINGACOMPREHENSIVEAPPROACH.TheMalaysiangovernmentbelievedthatastrongbankingsectorwasaprerequisitetocapital-marketdevelopmentandliberalization.FollowingstabilizationofthebankingsectorandthewidereconomyfromtheeffectsoftheAsianfinancialcrisis,BankNegaraMalaysia(BNM,thecentralbank)andtheMalaysianSecuritiesCommission(SC)developedandimplementedten-yearmasterplanstofurtherdevelopthefinancialsectorandthecapitalmarkets,respectively.
2. DESIGN.TheSCprepareditsCapitalMarketMasterplanthroughaconsultationprocessthatlastedoverayearandinvolvedhundredsofmeetingswithrelevantstakeholdersinthepublicandprivatesectors,aswellasinternationalexperts.
3. IMPLEMENTATION.TheSCdevelopedasequencedimplementationprocesswithspecificassignments,performancebenchmarks,andavenuesforfeedbackandmid-courseadjustments.
4. BROADENINGTHEISSUERBASE.Toencourageissuerstoutilizethecorporatebondmarket,theSCstreamlinedtheissuanceprocessandallowedsomeissuerstosignupforshelfregistration.
5. BROADENINGTHEINVESTORBASE.Toencourageinvestorstoparticipateinthedomesticcapitalmarkets,thegovernmentemphasizedimprovingcorporategovernance,withaviewtowardbolsteringinvestors’confidenceincorporatestewardshipoftheirfunds.TheSCalsofocusedonexpandingthemenuofproductsandservicesavailabletoinvestors.
6. IMPROVINGINTERMEDIATION.Toimprovemarketliquidity,theSCpromotedtheconsolidationandliberalizationofmarketinstitutions(principally,theequityandderivativesexchanges)andmarketintermediaries(principally,thestockbrokerageindustry)withtheaimofachievingbettereconomiesofscaleandscope.
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7. CULTIVATINGACOMPETITIVENICHE.Thegovernmenttreatedcapitalmarketsasafacilitatorofeconomicgrowth,notakeydriverofit.TheexceptiontothiswastheIslamiccapitalmarket,wherethegovernmentdeterminedthatithadanopportunitytobuildaninternationallycompetitiveexportservicesector.
8. DEVELOPINGHUMANCAPITAL.Thegovernmentdevotedresourcestotrainingandeducation,bothdomesticallyandinpartnershipwithinstitutionsabroad.
IntroductionPre-CrisisCapital-MarketDevelopmentandtheAsianFinancialCrisisOverthepastfortyyears,Malaysiahastransformedfromapredominantlyrural,commodities-basedeconomytoamanufacturingcenterandtradehub.Beginninginthe1970s,thegovernmentadoptedanexport-ledgrowthstrategy,similartothosepursuedbyJapan,SouthKorea,Taiwan,andothers.Economicdevelopmentincreasinglyfocusedoncreatingastrong,private-sector-driveneconomy.
Thedevelopmentofcapitalmarketsreflectedthisorientation.Initialcapital-marketdevelopmentfocusedonformalizingtheequitymarket,whichdatedtothecolonialera,asasourceofnon-bankfundingforprivatecompanies.ThegrowthofthebondmarketwasfirstdrivenbytheissuanceofMalaysiangovernmentbondsastheprerequisiteforestablishingthesovereignyieldcurveandinvestorbasenecessaryfordevelopmentofthecorporatebondmarket.Subsequently,anactivecorporatebondmarketbegantofacilitateissuesbytheprivatesectortofinancelonger-terminfrastructureandotherpublic-privatepartnershipprojects.
Duringthe1980s,thegovernmentsoughttoshiftmoreeconomicdecision-makingpowertotheprivatesector.Malaysia’sequitymarketgrewsubstantiallyintheearly1990sasstate-ownedenterpriseswereprivatized.However,thecorporatebondmarketremainedunderdeveloped,andmostdebtfinancingcontinuedtobeintermediatedbybanks.
ThedependenceofMalaysia’seconomyonbankfinanceleftitvulnerabletothe1997Asianfinancialcrisis.ThecrisisoriginatedinThailandbutquicklyspreadtoMalaysiaandothercountriesinSoutheastAsia.Malaysia’scurrency,theringgit,wassubjecttowavesofspeculativeattacksin1997,whichledtoportfolioinvestmentoutflowsandexchangeratedepreciation.1Stockandrealestatepricesfellprecipitously,corporateprofitsshrank,andbanks’balancesheetsweakenedasnonperformingloans(NPLs)rose,precipitatingabankingcrisis.2TheMalaysiangovernmentbrieflytightenedfiscalandmonetarypolicyinanefforttowinbackmarketconfidence,butthenreversedcourseinearly1998,optingtoprioritizeeconomicstimulus.3Inthefallof1998,theMalaysiangovernmentpeggedtheringgittotheU.S.dollarandimplementedcapitalaccountcontrolsinanattempttoinsulatethecountryfrom
1BNMintervenedtodefendtheringgitbutsoonabandonedthisapproachinfavorofpreservingMalaysia’sinternationalreserves.SeeBankNegaraMalaysia,1999,pp.570-572.2BankNegaraMalaysia,1999,pp.583-586;seealso,IMF,2001,p.1.3BankNegaraMalaysia,1999,pp.590-593.
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theregionalchaos.Fortunately,Malaysia’slevelofexternaldebtwassmallatthetimeand,asaconsequence,thecountrydidnotexperienceanexternaldebtcrisis.Intheaftermathofthecrisis,thegovernmentfocusedfirstonshoringuptheweakenedbankingsector.(SeeBox1.)Oncethebankingsectorhadbeenstabilized,thegovernmentthenturneditsattentiontothelonger-termdevelopmentofthefinancialsectorandthecapitalmarkets.ImpetusforCapital-MarketMasterPlanOncethecrisishadpassed,aconsensusemergedthatMalaysiawouldhavetostrengthenitsexistingfinancialinstitutions,manyofwhichhadbeenweakenedbythecrisis,aswellasdiversifyandenhancethecompetitivenessofitsfinancialsector.
Twofactorsinparticular—onedomesticandoneforeign—motivatedthedecisiontodrafttheCMP.Thedomesticimpetuswastoreducethematuritymismatchinthedomesticbankingsectorand,concurrently,toreducetheeconomy’srelianceonbankintermediationforlong-termfinancingbyshiftingresponsibilityforsuchfinancingawayfromdepositorsandtowarddirectinvestors.
Theforeignimpetuswastoimprovethecapacity,competitivenessandresilienceofthedomesticfinancialsectorinanticipationoffurtherinternationalliberalization.AsasignatorytotheGATSFinancialServicesAnnex,Malaysiawasobligatedtofurtheropenitsfinancialsector.Malaysianofficialswerelookingaheadtoafuturemarkedbyhighervolumesofcross-borderfinancialflowsandheightenedcompetitionfromregionalexchangesandforeignmarketparticipants.Theyfearedthatforeignfinancialmarketparticipantscouldexitthecountryinacrisis.TheythereforesoughttoprepareMalaysianfinancialinstitutionsandmarketsforthiseraofincreasingglobalization.
Asitbecameclearthatthegovernmentwascommittedtosomekindofreform,marketparticipantspushedforclarityonitsprioritiesandtimehorizon,callingfor“anoveralllong-termstrategicplanthatwouldidentifykeyareasandtimeframesformarketenhancementanddevelopment.”4Thegovernmentdecidedthatanexplicitframeworkwasneededtoguidethe“orderlyandeffectivederegulationandliberalizationofthecapitalmarket”andtoidentifyandpursueareasofstrategiccompetitiveadvantagethatcouldbeexploitedinternationally.
Planning and Implementation of Capital-Market DevelopmentOverviewMalaysia’sCapitalMarketMasterplanwasdraftedtoguidethedevelopmentofMalaysia’scapitalmarketsduringthedecade2001-2010.TheCMPlaidoutastructuredandcomprehensivereformplanthatsoughttoestablishnewmarkets,assetclasses,andintermediariesandtostrengthenexistingones.TheCMPwasdevelopedwithaviewtowardestablishingdomesticcapitalmarketsthatwouldbeinternationallycompetitiveandmeettheneedsofdomesticissuersandinvestorsandfacilitatelong-termeconomicgrowthinlinewithMalaysia’snationaldevelopmentplans.
4SecuritiesCommissionofMalaysia,2001,p.5.
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Thisdesignandimplementationprocessdependedonanumberoffactors,includingconsensusamongrelevantpublic-andprivate-sectorstakeholdersontheneedforacomprehensivereformplan;anextensiveconsultationanddraftingprocess;clearlyarticulatedobjectivesandconcreterecommendations;well-definedresponsibilitiesandmeasuresofprogress;and,finally,animplementationprocessthatwassequencedandallowedforregularfeedbackandadjustment.DecisiontoProceedandtheCMPMandateThemandateforthedevelopmentoftheCMPwaspresentedtoandapprovedbytheministeroffinanceinthesummerof1999.5InAugust,theFinanceMinistryandtheSecuritiesCommissionjointlyannouncedthemandatetothepublic,andshortlythereaftertheCMP’stermsofreference(ToR)werereleased.TheToRidentifiedtheCMP’skeytasks,including:
! FormulationofacomprehensivevisionandprogramforthedevelopmentofMalaysia’scapitalmarkets
! Formulationofaframeworkfortheorderlyandeffectivesequencingofderegulationandliberalization
! IdentificationandmappingoutofthestrategicpositioningofMalaysia’scapitalmarkets,bothdomesticallyandinternationally6
TheCapitalMarketStrategicCommittee(CMSC)wasestablishedtooverseeandguidetheCMP’sdevelopmentinSeptember1999.7ItwasheadedbythechairmanoftheSCandincludedprivate-sectorrepresentativesfromlocalandinternationalcapitalmarkets.IntegrationwithOtherPlansandOverarchingVisionWhileundertakenindependently,theCMPwasdevelopedatthesametimeastheFinancialSectorMasterplan.ThedevelopmentoftheFSMPfollowedtherebuildingofthebankingsectorintheaftermathofthecrisis(seeBox1)andwasinitiatedandundertakenbyBNM.TheFSMPcoveredbanking,insurance,domesticdevelopmentfinancialinstitutions,andventurecapitalfinancing.InboththeFSMPandtheCMP,theultimateobjectivewastoestablishacompetitive,stableenvironmentfordomesticfinancialinstitutionstocompetewithforeign-ownedinstitutionsinamoreopenmarket,throughasequencedseriesofreforms.
BoththeCMPandtheFSMPweredevelopedwithreferencetoMalaysia’seconomicdevelopmentgoals,asoutlinedinthecountry’sVision2020planandinitsfive-yearOutlinePerspectivePlans.(SeeFigure1.)AmongMalaysianpolicymakers,therewasageneralconsensusthatthepurposeofthefinancialsectorwastobeanenablerofgrowth.Thatis,capital-marketdevelopmentwouldbepursuedwithaviewtowardsupportingthegrowthoftherealsectorandMalaysia’stransitiontoafullyindustrializedandhigh-incomeeconomy.
5SeeAppendix2forthefullCMPdevelopmenttimeline.6SecuritiesCommissionofMalaysia,2001,p.6.7SeeAppendix3forthefulllistofCMSCmembers.
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FIGURE1.Malaysia’sCMP,FSMP,andEconomicDevelopmentPlans
Source:SecuritiesCommissionofMalaysia
ThevisionforMalaysia’scapitalmarketswasthattheyshouldbe:
! INTERNATIONALLYCOMPETITIVEinallcoreareasnecessarytosupportMalaysia’sbasiccapitalandinvestmentneeds,aswellasitslonger-termeconomicobjectives
! AHIGHLYEFFICIENTconduitforthemobilizationandallocationoffunds! SUPPORTEDBYASTRONGANDFACILITATIVEREGULATORYFRAMEWORKthatenablesthecapital
markettoperformitsfunctionseffectivelyandprovideahighdegreeofconfidenceinitsusers8
ConsultationProcessandInteragencyCoordinationThroughoutthedraftingoftheCMP,theSCsoughttomaintainawideandbroadlyrepresentativeconsultationprocess,onethatengagedthegeneralpublic,relevantgovernmentagencies,electedofficials,andindustryparticipants.9
InOctober1999,theCMPlaunchedawebsitetokeepthepublicabreastofdevelopmentsandasameansofcollectingfeedback.Priortothefinalizationofmanyspecificreformmeasures,theSCdisseminatedconsultationpapersforpubliccommentandindustryfeedback.
8SecuritiesCommissionofMalaysia,2004,p.141.9SecuritiesCommissionofMalaysia,2001,p.7
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TheSCalsoconductedmoretargetedoutreachtodomesticfinancialinstitutions,relevantindustryandprofessionalbodies,marketparticipants,andinternationalacademicsandotherexperts.Inaddition,theSChiredprivateconsultantstoprovideresearchandindependentanalysis.
Suchconsultationswerecritical,notonlyforobtainingthesupportofkeystakeholders,butalsoforensuringthatthefinalplanaccuratelyreflectedandaddressedrealmarketconditions.Meetingswithlegislatorswereespeciallyimportant,giventhatmanyreformswouldrequirenewlawstobepassed.
TheCMPandtheFSMPweredraftedseparately,withlimitedconsultationbetweentheSCandBNM.Ingeneral,itisimportantforfinancialregulatoryauthoritiestocoordinateinthedevelopmentofrelatedplans,toensurethattherearenooverlapsorgapsincoverage.Inthiscase,however,thelegalauthoritiesoftheSCandBNMprovidedacleardemarcationofresponsibilitiesandjurisdictions.10
10Theonlyexceptiontothiswasventurecapital,whichwasinitiallyhandledbyBNM,butisnowregulatedbytheSC.
BOX1:RecapitalizingandReformingtheBankingSectorintheWakeoftheCrisisBailingOuttheBankingSystemandOtherReformsIntheinitialaftermathofthecrisis,theMalaysiangovernmentfocusedonrebuildingthebankingsectorthroughtheestablishmentofinstitutionstoresolvethehighlevelofNPLs,torecapitalizethebanks,andtorestructurecorporatedebt.Todealwithnonperformingloans(NPLs),thegovernmentsetupanasset-managementinstitution,theAssetManagementCorporation(knownasDanaharta).Danaharta’smandatewastotakeoverNPLsandthentomanageandmaximizetheirrecoveryvalue.RemovingNPLsfrombanks’balancesheetsenabledthebankstofocusonrebuildingtheircapitalandrestructuring,aswellastoundertakenewlendingtosupporttherevivalofeconomicgrowth.Duringthecrisis,theNPLraterosefrom3.8percentoftotalloansin1996to13.6percentin1998.DanahartawasmodeledaftertheKoreaAssetManagementCompany(KAMCO)andtheIndonesianBankRestructuringAgency(IBRA)(Randhawa,p.397).Danaharta’smandatewastofirstbuyNPLsfrombanks(withatargetofbuyingatleast70percentofallNPLsheldbyMalaysianbanks),therebyfreeingupthebanks’balancesheets,andthenattempttomaximizetheirrecoveryvalue(Sivalingam,p.396).Danahartaachievedafinalloanrecoveryrateof58percentandwasclosedin2005(Sivalingam,p.396),andtheNPLratewasreducedto9.5percent(Sivalingam,p.396).Torecapitalizethebankingsystem,thegovernmentestablishedtheDanamodalNasionalBerhad(Danamodal).Banks’risk-weightedcapital(RWC)hadbeenseriouslyerodedbythecrisis,downto10.1percentin1998.TheDanamodalinjectedRM7.1billionintothebankingsystem,andbythetimeitwasclosedin2003,theRWCratioforMalaysia’sbankingsectorwasbackupto13.2percent.Torestructurecorporatedebt,thegovernmentcreatedtheCorporateDebtRestructuringCommittee(CDRC).OutofrecognitionthatMalaysia’sbankruptcycodewasoutofdateandnotuptothetaskathand,theCRDC’smandatewastoserveasamediatorbetweencreditorsanddebtors.BythetimetheCDRCwasclosedin2002,ithadfacilitatedRM52.5billionofdebtrestructuring(Sivalingam,p.397).Thedirectcostsofthebailoutwereestimatedat5percentofGDP(Randhawa,p.397).Inadditiontothesemeasures,thegovernmentalsoundertookotherreformsofthebankingsector,includingconsolidation(Malaysia’shighlyfragmentedbankingsystemwasreducedfrom71institutionsto30,organizedin10bankinggroups),theadoptionoftheprinciples-basedregulatorysystempromulgatedbytheInternationalAccountingStandardsBoard(IASB),andtheintroductionofdepositinsurance(previously,bankdepositshadenjoyedonlyanimplicitgovernmentguarantee)(Sivalingam,p.398).
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Duringthisstage,interagencycompetitioncouldbechanneledeffectivelytowardmotivatingeachplanningteamtodoitsbest.CoordinationbetweentheSCandBNMbecamemoreimportantduringtheimplementationphase,particularlyforreformsthatinvolvedinternationaltransactions.FormulationandApprovalTheCMPsetoutsixobjectives,fromwhichflowed24strategicinitiativesand152specificrecommendations.(SeeTable1.)Fiveofthesixobjectivesfocusedonkeyaspectsofthecapitalmarkets,includingissuers,investors,marketinstitutions,marketintermediaries,andtheregulatoryframework.Thesixthobjectivefocusedondevelopingaparticularmarketsegment—Islamicfinance—whereMalaysiabelieveditcouldestablishaninternationalcompetitiveadvantage.Source:Cheong,Slide16
Withtheexceptionofthesixthobjective,thefocusoftheCMPwasondevelopingthecapitalmarketstocomplementMalaysia’seconomicgrowth,nottobeadriverofgrowthitself.OnlyinthecaseofIslamicfinancedidMalaysiaseektoestablishaninternationallycompetitiveservicesector.
TheCMPwaspresentedtoandapprovedbyFinanceMinisterY.B.TunDaimZainuddininOctober2000andreleasedtothepublicin2001.
BOX2:SummaryofKeyElementsofCMPDraftingProcessThekeyelementsoftheCMPdraftingprocesscanbesummarizedasfollows:
§ Relevantresearch
§ Countrycomparatorstudies
§ Consultationwiththeindustry
§ Consultationwithsubject-matterexperts
§ Considerationsoftaxincentivestosupportcertainmarketsandtransactions
§ Whererelevant,pilottestingofmeasures
§ Atappropriatetimes,submissionofoutputandrecommendationstosteeringcommittee
§ Disseminationofconsultationpapersbeforeimplementationofspecificmeasures
§ Securingbuy-inofstakeholderspriortofullimplementation
§ PresentationtotheMinistryofFinanceandlatertablinginParliamentinthecaseoflawsandregulations
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TABLE1:CapitalMarketMasterplan:ObjectivesandStrategicInitiativesObjectives StrategicInitiatives1.Issuers:Tobethepreferredfund-raisingcenterforMalaysiancompanies
1.1.Enhancetheefficiencyofthefund-raisingprocess1.2.Implementacomprehensiveprogramtodevelopthecorporatebondmarketasacompetitivesourceoffinancing1.3.Facilitatethedevelopmentoftheventurecapitalindustrytofinanceemerginghigh-growthcompanies1.4.Fosteraliquidandefficientmarketforthesecondarytradingofsecurities
2.Investors:Topromoteaneffectiveinvestmentmanagementindustryandamoreconduciveenvironmentforinvestors
2.1.Developastrongframeworkforcorporategovernanceandshareholdervaluerecognition2.2.Heighteneffortstoestablishavibrantandcompetitiveinvestmentmanagementindustry2.3Enhancetheroleofinstitutionalinvestorsintheprovisionandmanagementoffunds2.4Facilitateeffectiveriskmanagementbyactivelydevelopingthederivativesindustry2.5Facilitatetheintroductionofabroadrangeofcapitalmarketproductscateringtovariousrisk-returnprofiles
3.Institutions:Toenhancethecompetitivepositionandefficiencyofmarketinstitutions
3.1.RestructureMalaysianexchangesandclearinginstitutionstostrengthentheirefficiencyandcompetitiveness3.2.EnsureMalaysianexchangesarewellpositionedtorespondtochangingmarketdynamicsthroughtheadoptionofflexiblebusinessstructuresandcommercially-orientedstrategies3.3.Enhancetheefficiencyofthetrading,clearing,andsettlementstructure
4.Intermediaries:Todevelopastrongandcompetitiveenvironmentforintermediationservices
4.1.Fosterconstructivecompetitionthroughthederegulationofservices,products,andfixedfeestructures4.2.Developstrongfull-servicebrokerstoprovideacompetitivemarketforintegratedfinancialservices4.3.EnsureMalaysianintermediationservicesareanchoredonappropriateprudentialstandards,withhighlevelsofbusinessconductandprofessionalskills4.4.Adoptapragmaticprogramforliberalization,supportedbyappropriatesafeguards
5.Regulation:Toensureastrongerandmorefacilitativeregulatoryregime
5.1.Movetowardamarket-basedsystemofregulationforcapitalmarketactivities5.2.Ensureregulatoryparityandconsistencybetweenallinstitutionsandparticipantsconductingsimilarcapitalmarketactivities5.3.Ensurestrongenforcementofregulationsgoverningthecapitalmarket5.4.Enhancecapacityformaintainingsystemicandfinancialstability
6.CompetitiveAdvantage:ToestablishMalaysiaasaninternationalIslamiccapital-marketcenter
6.1.FacilitatethedevelopmentofawiderangeofcompetitiveproductsandservicesrelatedtotheIslamiccapitalmarket6.2.CreateaviablemarketfortheeffectivemobilizationofIslamicfunds6.3.Ensurethereisanappropriateandcomprehensiveaccounting,tax,andregulatoryframeworkfortheIslamiccapitalmarket6.4.EnhancethevaluerecognitionoftheMalaysianIslamiccapitalmarketinternationally
Source:SecuritiesCommissionofMalaysia
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SequencingTheSCchosetosequencethereforms(asopposedtotakinga“bigbang”approach),withtheCMPbrokendownintothreephasesover2001-2010.(SeeTable2.)Inthefirstphase,reformsfocusedonenhancingdomesticcapacity.Inthesecondphase,theyworkedtointensifycompetitionamongdomesticplayers.Inthethirdphase,themarketswerefurtheropenedtoforeigncompetition.
TABLE2:SequencingFramework
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Strengthendomesticcapacityanddevelopstrategicandnascentsectors
Furtherstrengthenkeysectorsandgraduallyliberalizemarketaccess
Furtherexpandandstrengthenmarketprocessesandinfrastructurewiththegoalofbecomingafullydevelopedcapitalmarketandenhancinginternationalpositioninginareasofcomparativeandcompetitiveadvantage
Phase 1 Phase 2 Phase 3 Source:SecuritiesCommissionofMalaysia,CapitalMarketMasterplan,p.272
Thesequencingframeworkwasintendedtotakeintoaccountthecurrentstatusofmarketparticipantsandinstitutionsandtoensurethattheywerereadyforliberalizationandderegulation,toaccountformarketstability,toensurethatderegulationdidnotcompromisetheintegrityofthemarkets,andtorespecttheavailabilityofresources.11Somereformsthatweredeemedespeciallyurgent(suchastheconsolidationofthestockbrokingindustry)wereinitiatedbeforetheCMPwasfinalized.Specificreformmeasureswereassignedtargetsandtimelines,withanunderstandingthatsometargetsweresequentialwhileotherswereinterrelatedandneededtobedevelopedconcurrently.Implementation,ProgressMonitoring,Reporting,andFeedbackTheCMPspecifiedclearlinesofauthorityandresponsibilityforimplementationandmonitoringoftheplan.(SeeFigure2.)TheSC,whichboreultimateresponsibilityfortheCMP’simplementation,incorporatedtheCMP’sobjectivesandstrategicinitiativesintoitsownbusinessplan.ThereformprocesswasmonitoredbyanImplementationTaskForcewithintheSC,whichservedasthesecretariatfortheentirereformprocess.Itspurposewastooverseeandfacilitatecoordinationamongtheworkingcommitteesandotherstakeholders,resolveissuesofdisagreement,monitortheprogressandeffectivenessofnewmeasures,andmanagethecommunicationsprogram.
Workingcommitteesboreresponsibilityforimplementationattheoperationallevel.ThesecommitteescomprisedmarketparticipantsandrepresentativesofindustryassociationsaswellasstafffromtheSC.
11SecuritiesCommissionofMalaysia,2004,p.146.
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MinisterofFinance
BankNegaraMalaysia
SecurijesCommission
ImplementajonTaskForce
VariousWorkingCommikees
ExchangesClearinghouses&DepositoryInsjtujons
OtherMarketParjcipants
CapitalMarketAdvisoryCouncil
Treasury
Inthecaseofcorporatebondmarketdevelopment,thealreadyexistingNationalBondMarketCommitteewastapped.
ACapitalMarketAdvisoryCouncil(CMAC),whichincluded15prominentmarketparticipantsandbusinesses,wasappointedtoprovidetheSCwithindependentprogressassessmentsandrecommendationsforwheretheCMPneededtobeadjustedbasedonmarketdevelopments.12
FIGURE2:ImplementationStructure Source:SecuritiesCommissionofMalaysia,CapitalMarketMasterplan,p.266
Finally,theCMPoutlinedameansfortrackingprogressandadjustingplansbasedonfeedbackandonnewmarketdevelopments,bothdomesticallyandabroad.(SeeFigure3.)Beforetransitioningfromonephasetoanother,itwasseenasimportantthattheprerequisitetargetsbemet—orelsethetransitionwouldbedelayed,lesttheplanbeimplementedoutofsequence.Thiswasdonetoensurethattheliberalizationprocessdidnotcompromisemarketintegrityorinvitefinancialinstability.
Further,itwasanticipatedthatthecapitalmarketswouldcontinuetoevolveoverthecourseoftheten-yearimplementationschedule,sopolicymakerswereencouragedtoperiodicallycheckthatthereformstheywereimplementingwerestillrelevantanduseful.
12SeeAppendix3forthefulllistofCMACmembers.
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FIGURE3:CMPImplementationProcess
Source:SecuritiesCommission,Malaysia,CapitalMarketMasterplan,p.265
Source:Cheong,Slide17
Issuers: Improving Access to Capital Markets, With a Focus on Domestic Corporate Bond Market DevelopmentOverviewInordertomakeMalaysia’seconomylessdependentonbankfinancing,akeyfocuswastoenhancetheattractivenessofthecapitalmarketstopotentialissuersbystreamliningtheissuanceprocess,andenablingtheintroductionofnewproductcategoriesandtypesofissuers.TheCMPwasespeciallyfocusedondevelopingthedomesticcorporatebondmarket,whichhadgrownonlyslowlyinthe1990s.
ApprovalofMasterplan
ImplementRecommendations
MonitorProgress UpdateMasterplan
ReportProgress
-MinisterofFinance -SC-Othergovt.agencies-Relevantmarketinstitutionsandparticipants
BOX3:SummaryofCMPImplementationSuccessFactors§ Asafirstpriority,meetpre-conditionsbeforestartingtoimplementtheCMP.Marketsmustcontinue
tofunctionreasonablywellwhileplanisbeingimplemented§ Introducestructuredimplementationmechanism,withafull-timetaskforceintheSCandbegin
consultationprocesses§ MasterPlanimplementedinstages,withcheckpoints.Successateachstageisaprerequisitebefore
movingontothenextstage§ Provisioninlawdoesnotrequireimmediateimplementation;implementwhenmarketreadinessis
established§ Controltheimplementationprocess.Donotlosesightofoveralleconomicdevelopmentandwork
withincountry’sspecificsocio-economiccontext§ Throughoutimplementation,understandthefinanciallandscape,identifywhatisbestforthecountry
inthechangingenvironment:• Seekviewsofstakeholdersthroughdiscussionsandworkshops• Highlightareasofweaknessthatrequirefurtherdevelopment• Identifyimprovementsincapitalmarketinfrastructureforneedsofthetransforming
economy• Buildconsensusandbuy-inofindustry• Externalconsultantbroughtintoassistininformationgatheringanddevelopingacoherent
thinkingmethodology
§ Studyexperiencesofothercountriesonthedifferentissues
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TheChallengeThroughthe1980s,Malaysia’scapitalmarketsweredrivenprimarilybygovernmentdebtissuestofundpublicdevelopmentexpenditurethatcouldnotbemetfromgovernmentrevenues.13Atthistime,governmentdebtaccountedforthree-quartersofthefundsraisedinMalaysia’scapitalmarkets.14Theprivatizationprogramofthelate1980sandearly1990shelpedtodeepentheequitymarkets.However,Malaysia’scorporatebondmarketwasslowtodevelop.WhentheAsianfinancialcrisishit,Malaysia’sprivatesectorwasstillalmostwhollyreliantonthebankingsystemfordebtfinancing.DeepeningtheIssuerBasebyImprovingAccess:CentralizingRegulatoryAuthorityTostreamlinetheissuanceprocessandreducethetimetoissue,thegovernmentcentralizedresponsibilityforregulatingthecorporatebondmarketwiththeSC,givingitsoleapprovalandregisteringauthority.15Previously,regulatoryresponsibilityhadbeenspreadoutoveranumberofagencies.Centralizingregulatoryauthorityalsoservedtoinstillasenseofownershipinoneagency,whichthegovernmenthopedwouldenable“greaterfocusonthedevelopmentofafacilitativeregulatoryframeworktoaddresstheurgentfundingneedsoftheprivatesector.”16DeepeningtheIssuerBasebyImprovingAccess:ReformingtheIssuanceApprovalProcessToencouragecorporationstoraisedebtfinancinginthecapitalmarkets,theMalaysiangovernmenttookstepstosimplifytheissuanceprocess.AtthetimeoftheCMP’spublication,thetime-to-marketforbondissueswasninetotwelvemonths.17Raisingfundsinthecapitalmarketsistime-sensitive,andsuchlongdelays,especiallywhencoupledwithuncertaintyaboutapproval,canmakethisavenueunacceptable.
InJuly2000,theSCreleasedtheGuidelinesontheOfferingofPrivateDebtSecurities(PDSGuidelines).Theguidelinesremovedand/orreducedanumberofrequirements,includingunderwritingrequirements,minimumcreditrequirements,andrestrictionsontheuseofproceeds.Italsoshiftedtoapost-vettingapprovalsystem,underwhich“theissuerandtheprincipaladvisorneededonlytofileadeclarationofcompliancewiththePDSGuidelines.”Thisreducedtheapprovalbottleneck,allowingtheSCtoreducethetimetomarketforbondissuestofourteenworkingdays.Lastly,theSCalsointroducedashelf-registrationscheme,whichgavecertainapprovedissuersevenmorecontroloverthetimingofissuance.BroadeningtheIssuerBase:IntroducingNewProductCategoriesInadditiontodeepeningtheissuerbasethroughstepped-upissuanceofgovernmentsecuritiesandprivatedebtsecurities,Malaysiaalsodevelopedframeworksthatencouragedthedevelopmentofnewproductcategories,includingrealestateinvestmenttrusts(REITs)andothermortgage-backeddebt
13SecuritiesCommissionofMalaysia,2001,p.9.14SecuritiesCommissionofMalaysia,2001,p.9.15SecuritiesCommissionofMalaysia,2004,p.163.16SecuritiesCommissionofMalaysia,2004,p.163.17SecuritiesCommissionofMalaysia,2004,p.163.
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instruments;Islamicbonds(includingtheworld’sfirstconvertibleIslamicbond);andasset-backedsecurities(ABS).
Toencouragethedevelopmentofadomesticsecuritizationandstructuredproductsmarkets,theSCpublishedGuidelinesontheOfferingofAsset-BackedSecurities(2001)andGuidelinesontheOfferingofStructuredProducts(2003).Theguidelinesweredisclosure-basedandintroducedframeworksformorestreamlinedissuanceprocedures.18
TheMalaysiangovernmentalsointroducedtaxincentivestopromoteABS,includingtaxdeductionsforexpensesincurredintheissuanceofABSandtaxneutrality(e.g.,ABSwouldbetaxedthesameasothersecurities).Intheensuingthreeyears,theSCapproved13issuesvaluedatRM7billion.19BroadeningtheIssuerBase:ForeignIssuersMultilateraldevelopmentbankswerepermittedtoissuelocalcurrencybondsin2004andmultinationalcorporationsin2006.Malaysiahasbeensuccessfulinencouragingforeigncorporationstoissuedebtonitsdomesticmarket.SouthKoreanfirmswerethefirsttoraisefinancingontheMalaysianbondmarket—theywouldusuallyswaptheissuanceproceedsintoU.S.dollarsandthenintoKoreanwon.
Investors TheChallengeAsof1999,Malaysia’sinstitutionalinvestors,whichincludedpensionfunds,insurers,andunittrusts,managedarelativelysmallshareofthecountry’ssavings.TheycontrolledjustRM280billion—halfofthebankingsector’sRM560billion.Investmentmanagementfundswereheavilyconcentratedtoo,bothinstitutionally(morethanhalfwasmanagedbyasingleinstitution—thegovernment’sEmployeeProvidentFund)andintermsofassetdiversification(mostfundswereinvestedingovernmentbondsandbankdeposits).
TheSCperceivedthatastheeconomygrewandsavingsrose,institutionalinvestors’assetswouldgrowtoo.(Malaysiathenenjoyedoneofthehighestsavingsratesintheworld.)TheSCwantedtofacilitatetheirgrowthtobenefitthenation’scapitalmarkets.Atthesametime,theSCworriedthatthisgrowthwouldput“increasedpressure”onthecapitalmarketstoprovideattractivereturnsandtoofferawiderandmoresophisticatedarrayofproductsandservices.20Withfallingtransactioncostsandreducedbarrierstocross-borderfinancialflows,domesticinvestorsmightincreasinglyturntomarketsabroadiftheirneedsandpreferencescouldnotbemetathome.21
TheSCbelievedthatMalaysia’scapitalmarketscouldremainattractivetodomesticinvestorsifdomesticcompanieswereseenasgoodinvestmentsandifinvestorshadawiderarrayofproductsand
18SecuritiesCommissionofMalaysia,2004,pp.165-167.19SecuritiesCommissionofMalaysia,2004,p.165.20SecuritiesCommissionofMalaysia,2001,p.32.21SecuritiesCommissionofMalaysia,2001,p.32.
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servicestochoosefrom.Tothisend,theCMPfocusedonregulationsmeanttoenhancecorporategovernanceandshareholderprotectionandonliberalizingtheinvestmentmanagementindustry.CorporateGovernance,ShareholderProtection,andShareholderActivismPoorcorporategovernancewaswidelyseenasoneofthecausesoftheAsianfinancialcrisis.22Assuch,theMinistryofFinanceinitiatedcorporategovernancereformin1998,beforetheCMPwasdrafted.TheFinanceCommitteeonCorporateGovernance,whichtheSCheaded,wasformedin1998.In1999,itreleasedasetofmorethan70recommendationsforimprovingcorporategovernance,includingthedraftingofaprescriptivecodeofbestpractices,modeledontheUK’sHampelCommittee;measurestomakecorporateboardsmoreresponsivetoshareholders;bettertrainingandeducation;andlawstobetterprotectminorityshareholders.23Thecommitteealsomaderecommendationstoimprovedisclosureandtransparency,includingguidelinesonprospectusregulationandenablingcivillawsuitsforinsufficientormisleadingdisclosure.24
TheCMPfurtherstrengthenedminorityshareholders’rightsanddisclosurerequirements.TheMalaysiangovernmentpassedadditionalcorporategovernancelegislationinthefollowingyears,includingtheAnti-CorruptionCommissionBill(2008)andtheWitnessProtectionBill(2004).
TABLE3:CorporateGovernanceReformsinMalaysia
1999-2000 2001 2004 2007 2009 2010 High-levelFinanceCommitteeReportonCGCodeonCGCreationofMinorityShareholderWatchgroup
CMP1CGrequirementsinKLStockExchangeListingRequirements
Whistle-blowingprovisionintroducedinSecuritiesLaw
Qualificationcriteriafordirectors'auditcommitteestrengthenedEnforcementpowersforcivilandadministrativeactionsexpandedMSWGguideforbestpracticesforinstitutionalstakeholders
SC'senforcementpowersstrengthenedbyamendmentstotheCompaniesActof1965
AuditOversightBoardcreatedSecuritiesIndustryDisputeResolutionCenterestablished
Source:OECD,p.162
Atthesametime,becauseinstitutionalinvestorscontrollargepoolsofmoney,theirparticipationwasseenascrucialtopromotinghigherstandardsofcorporategovernance.25TheSCsoughttopromoteshareholderactivismamonginstitutionalinvestorsthroughtrainingandthedevelopmentofasetofbestpractices,publishedin2007.
22Randhawa,p.388.23SinghandYusof,pp.26-27.24SinghandYusof,p.27.25SecuritiesCommissionofMalaysia,2001,p.50.
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BOX4:Malaysia’sUnitTrustIndustryMalaysia’sassetmanagementindustrywasintroducedin1959,anearlybeginningcomparedwithothermarketsatsimilarstagesofdevelopment.However,onlyfivenewcompanies,withatotalofeighteenfunds,wouldbeestablishedoverthenexttwentyyears(SinghandYusof,p.12).Anumberofreformswereintroducedtoacceleratethedevelopmentoftheasset-managementindustry,includingtaxincentives,theliberalizationofforeignownershipinstockbrokingandfund-managementcompanies,easingoflimitsthatpensionandprovidentfundscaninvestinequities,openingtoforeignfundlistingandinvestments.First,theywidenedaccesstounittrustsbyexpandingdistributionchannels.Originally,unittrustsweremarketedanddistributedbyagentsoftheunit-managementtrustcompanies,whichwereconcentratedinthecities.Thismeantmanymarkets,especiallyinsmalltowns,lackedaccesstounittrusts.In2000,bankswereauthorizedtodistributeunittrusts,aswerepostoffices.Regulationswerepassedtoallowunittruststobesoldonline.In2007,theSCallowedlicensedcorporateunittrustadviserstodistributeunittrusts(SC,p.20).Second,theintroductionofShariah-compliantunittrustfundsmadetheseinvestmentsacceptabletoabroaderrangeofpeople.Third,fundswereallowedtoinvestabroadstartingin2005,givingMalaysianinvestorstheabilitytodiversifytheirportfolios.Finally,theyallowedforeignassetmanagementfirmstocompeteintheMalaysianmarket.Since2009,foreignfirmshavebeenallowedtoestablishwholesalefundmanagementcompanieswith100percentforeignownership;intheretailsector,theforeignownershipceilingwasraisedto70percent(OECD,p.224-25).
ExpandingtheRangeofProductsandServicesInstitutionalinvestorsweregivengreaterflexibilityinhowtheymanagedtheirinvestments.Theywouldbeabletoinvestinunlistedfundsintheexpectationthatthiswouldservetodeveloptheprivateequityandventurecapitalindustries;theywouldbeallowedtouseexchange-tradedderivatives;andtheywouldbeallowedtooutsourcefundmanagementtothirdparties.
ForeignInvestorsandInternationalIntegrationMalaysiade-internationalizedtheringgitduringtheAsianfinancialcrisis.Itmovedbacktowardaflexibleexchangerateregimein2005andhasgraduallyliberalizedtheforeignexchangeadministrationrules,whichfacilitatelargertradeandFDIflows.ForeignparticipationroseintheMalaysianequitiesandbondmarkets.Foreigninvestorsheld18.5percentofsecuritieslistedonBursaMalaysiaasof2011.26
Market Institutions: Modernizing Equity and Derivatives ExchangesTheChallenge:StagnationintheEquitiesandDerivativesMarketsMalaysia’sstockmarketdatesbacktothecolonialera,butthemodernexchange,theKualaLumpurStockExchange,wasestablishedin1973.Inthe1980sand1990s,theexchangesawitsinfrastructure
26OECD,p.223.
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modernized.Inthelate1990s,MalaysiaalsointroducedMesdaq,anOTCmarketexchange,topromotehigh-growthtechnologycompanies.
AmongthecountriesofSoutheastAsia,Malaysiawasearlytodevelopmarketsinderivatives.TheKualaLumpurCommodityExchange(KLCE)wasestablishedin1980—thefirstsuchexchangeinSoutheastAsia.TheKualaLumpurOptionsandFinancialFuturesExchange(KLOFFE)wasestablishedin1990.Finally,theMalaysiaDerivativesClearingHouse(MDCH)wasestablishedin1995.
Malaysia’sequitymarketgrewsubstantiallyintheearly1990s.Severalmajorprivatizationscontributedtotheequitymarket’squintuplinginfiveyears,fromRM132billionin1990toRM807billionin1996.27However,duringthefinancialcrisis,Malaysia’sstockmarketcapitalizationfellbyhalf,andmarketliquiditywasalsodramaticallyreduced:Fromapre-crisispeakof230percentofGDPin1993,tradingfellto40percentin1998andonlyslowlyrecovered.Foreignportfolioflowsalsofelldramatically.
TheSCwasconcernedwiththeimpactofthecrisisontheequitymarket,aswellastheexchange’sbroadercompetitiveness.TheSCnotedthat“aslargeissuersseekgreaterliquidityandeaseofaccesstonewcapital,exchangesareincreasinglycompetingamongsteachothertoincreasetheirmarketshare.”28ConsolidationoftheExchangesAfocusoftheCMPwastoimprovethecompetitivenessandefficiencyofmarketinstitutionsandtoenhanceliquidityandefficiencyinthesecondarymarket.
LookingatMalaysia’sownexchanges,theCMPexpressedconcernthat“thecurrentexistenceofseveralmarketinstitutionsasseparateentitiesresultsinafragmentationofliquidityanddispersestheoverallcapacity,efficiency,andmarketingpositionofMalaysianmarketinstitutions.”29TheCMPnotedthatmanyexchangesabroadwererespondingtocompetitionthroughconsolidationand/orstrategicalliances.
Thetheorywasthatmergingexchangescouldenhanceliquidity,lowercosts,andmakeiteasiertointroduceandsupportnewproducts.AsRajitSingh,theexecutivechairmanoftheSC,hasnoted,consolidationcan“improveeconomiesofscaleandscopebysharingmarketinfrastructureandintegratingcommonoperationfunctionsacrossthemergedinstitution.”30Asingleexchangewillfinditeasier,throughitsenhancedprominenceandnegotiatingstrength,to“pursuestrategicalliancesandotherinternationalbusinessstrategies.”31
27SecuritiesCommissionofMalaysia,2001,p.10.28SecuritiesCommissionofMalaysia,2001,p.37.29SecuritiesCommissionofMalaysia,2001,p.39.30SinghandYusof,p.20.31SinghandYusof,p.20.
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BursaMalaysia
BursaMalaysiaSecurijes100%
BursaMalaysiaDerivajves75%
BursaMalaysiaDerivajvesClearing100%
LubuanFinancialExchanges100%
BursaMalaysiaSecurijesClearing100%
BursaMalaysiaDepository100%
BursaMalaysiaNominees100%
BursaMalaysiaInformajon100%
BursaMalaysiaBonds100%
BursaMalaysiaIslamicServices100%
Finally,theSCbelievedthatasingleexchangewouldmakeiteasiertointroducenewproductsandservicesandtodevelop“marketsegmentsthatdonotpresentlyhavesufficientdepthtosupportseparateexchanges.”32
In2001,BursaMalaysiawasformedfromthemergerofthetwoequitiesexchanges(KLSEandMesdaq),threederivativesexchanges(KLOFFE,COMMEX,andMME),threeclearinghouses,andonecentraldepository.33Today,BursaMalaysiaisaholdingcompanyforallMalaysianinstitutionsoperatingintheMalaysianequityandderivativesmarkets(IMF,MarketInfrastructure,p.8).BursaMalaysiahastwomainsubsidiaries:BursaMalaysiaSecurities(BMS)isawhollyownedsubsidiaryandisthestockexchangewhereallequities,ETFs,warrants,andREITsaretraded,alongwithcommercialpaperandIslamicsecurities.34Theothersubsidiary,BursaMalaysiaDerivatives,inwhichtheChicagoMercantileExchangemaintainsa25percentequitystake,isthefuturesandoptionsexchange.
FIGURE4:BursaMalaysiaOrganizationStructure(Current)
Source:BursaMalaysia
32SinghandYusof,p.20.33SecuritiesCommissionofMalaysia,2004,p.136.34Withtheexceptionofcommercialpaper,allotherfixed-incomesecuritiesaretradedontheBNM-managedsystem,theFullyAutomatedSystemforIssuing/Tending(FAST).
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DemutualizationofExchangesAfterconsolidatingtheexchangesunderoneorganization,theCMPturnedtothedemutualizationoftheexchanges.Demutualizationistheprocessofconvertingamember-owned(mutual),nonprofitexchangeintoaninvestor-owned,for-profitcorporation.35Demutualizationwasseentoofferseveralpotentialbenefits.First,thesaleoftheexchangecouldbringincapitalwhichcouldbeusedtoinvestinnewtechnologyandexpandthecapacityoftheexchange.Second,demutualizationcouldleadtoenhancedcorporategovernance,astheexchangewouldnowberesponsibleforcreatingvalueforitsshareholders.Finally,andrelatedly,beingprofit-drivencouldpotentiallyincentivizetheexchangetofocusonservingtheinterestsofallitsstakeholdersand“notsimplyreflectthemajorityvoteamongdifferent-sizedbrokers.”36
TheMalaysianParliamentpassedtheDemutualization(KualaLumpurStockExchange)Act2003,whichcameintoforceonJanuary5,2004.BursaMalaysiawaslistedonMarch18,2005.
Strengthening Intermediaries: Consolidating and Reforming the Stockbrokerage IndustryTheChallenge:LackofCompetitionandLowLiquidityMarketmakerscontributetothesmoothfunctioningofbothprimaryandsecondarymarketsbyprovidingliquidityservicesandreducingsearchcosts.37Marketmakersincludesecuritiesdealers,whomaintaininventoriesofsecuritiesandstandreadytobuyorsellatquotedprices(andprofitfromthespread)andbrokers,whoactonbehalfofbuyersandsellers(andprofitfromcommissions).
InMalaysia,the“limitedintensityofcompetition”withinthestockbrokingindustrywasseenasacauseoflowliquidityandalsoofalackofinnovationinproductsandservices.38Theproblem,astheSCsawit,wasabrokerageindustrythatwasfragmentedandoverlyprotected.Asof2000,Malaysiahad62licensedstockbrokerages,32futures-brokingcompanies,and735futuresbrokers’representatives.39Firmswerewidelydispersed,owingtoagovernmentpolicythatlimitedtheconcentrationofbrokeragefirmsbygeographicregion.40Theindustrywasalsoshelteredbyanumberofbarrierstoentry,includingstrictlicensinganddomesticownershiprequirementsandfixedbrokeragecommissions.41
ThecrisishadrevealedthefragilityofMalaysia’sstockbrokerageindustry.Manywerepoorlygovernedanddidnothaveproperriskcontrolsinplace.TheSCdeemedtheindustrytobetooinflexibleand,becauseofitsdependenceonbrokeragefees,tooexposedtomarketdownturns.42Itdeterminedthattheindustryneededtobeconsolidatedandliberalized.
35Ferhani,p.30.36SinghandYusof,p.21.37CarmichaelandPomerleano,p.10.38SecuritiesCommissionofMalaysia,2004,p.223.39SinghandYusof,p.5.40SinghandYusof,p.13.41SinghandYusof,p.24.42SecuritiesCommissionofMalaysia,2001,p.34.
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ConsolidationandLiberalizationConsolidationwithinthestockbrokingindustry,theSCbelieved,“wouldincreaseeconomiesofscaleandscope;createlarger,better-capitalized,andbetter-managedinstitutions;andultimatelyprovideinvestorswithhigher-qualityservicesatreasonablecost.”43In2000,theSCreleasedthePolicyFrameworkforStockbrokingIndustryConsolidationandtheReductionofTransactionCosts,whichoutlinedthestrategyforfosteringmergersandacquisitionsintheindustry.Italsoestablishedincentivesforthecreationofanewclassoffull-service“universalbrokers”(UBs).Universalbrokerswouldbeallowedtoofferamuchwiderrangeofintermediationservices,including“corporatefinanceservices,futuresbroking,fundmanagement,futuresfundmanagement,anddealingindebtsecurities.”44TheSCbelievedthatsuchfirmswouldbebetterpositionedtostanduptointernationalcompetitionasMalaysia’scapitalmarketswereliberalized.FirmsthatwishedtobecomeUBswererequiredtomergewithatleastthreeotherbrokerages.45FirmsthatdidnotintendtobecomeUBswerestillrequiredtomergewithatleastoneotherfirm.Bytheendof2003,sixUBshadbeenestablished.46
TheSCalsoderegulatedthestockbrokingindustry’sfixed-feestructure,aswellasthegeographicrestrictionsonbranching.Finally,inanefforttofurtherspurcompetition,theSCliberalizedforeignparticipationinthestockbrokingindustry.
43SinghandYusof,p.25.44SecuritiesCommissionofMalaysia,2004,p.229.45SinghandYusof,p.25.46SecuritiesCommissionofMalaysia,2004,p.230.
BOX5:ForeignCompetitionAllowingforeignentrymaybenefitcapitalmarketdevelopmentthrough:
§ Accesstoforeignexpertise§ Accesstoforeigncapital§ Risksharing§ Enhancedcompetition(Carmichael,p.213)
Thisapproachalsoposesrisks,oneofwhichisthatforeignfirmswillutterlydominatelocalfirms,andsolocalinstitutionswillneverdevelop(Carmichael,p.213).Further,ifforeignfirmsdonotemploydomesticresidents,thedesiredskillstransferwillnottakeplace(Carmichael,p.213).Somecountriesacceptforeigndominanceofatleastsegmentsoftheircapitalmarkets,reasoningthathavingdevelopedcapital-marketinstitutionsismoreimportantthanwhetherthoseinstitutionsaredomesticorforeign.Whetherornottoopenupdomesticcapitalmarketstoforeigncompetitionissubjecttogovernmentdiscretionregardingthetrade-offsmentionedabove.Inkeepingwiththemultilateralcommitmentsithadenteredinto(includingthegeneralAgreementonTradeinServicesandtheASEANFrameworkAgreementonServices),Malaysiabegantoliberalizerulesonforeigninvolvementinfinancialservicesbeginninginthemid-1990s.TheCMPhelpedMalaysiatofurthermoveawayfromprescribedhardlimitsonforeignownershipandtowardassessmentsthatemphasizedprudentialandbest-interest-of-Malaysiacriteria.Malaysiahasnowsubstantiallyincreasedforeigninvolvementinassetmanagementandstockbroking.
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Developing an Internationally Competitive Islamic Financial CenterTheOpportunity:EarlyDevelopmentoftheIslamicCapitalMarketMalaysia’sIslamiccapitalmarkettracesitshistorybacktothePilgrimsFundBoard.Establishedinthe1960stohelpMalaysianMuslimssavefortheirpilgrimagetoMecca,thefundalsoofferedinvestmentstailoredforMusliminvestors.
TheIslamicBankingAct(1983)andtheTakafulAct(1984)establishedthelawsthatwouldgovernIslamicbankingandinsuranceinMalaysia,layingthefoundationsforthebroaderdevelopmentofMalaysia’sIslamicfinancialcenter.
TheIslamiccapitalmarketsweregivenamajorpushwiththeestablishmentoftheSCin1993,whichwasgivenamandatetosuperviseanddevelopthem.Throughthe1990s,theSCworkedwithIslamicjuristsandmarketpractitionerstoidentifypubliclylistedcompaniesthatadheredtoIslamicprinciples(buildingoffofearlierworkbytheBNM),aswellastodevelopaseriesofguidelinesrelatedtothedevelopmentofIslamicfinancialreportingandaccountingprinciples,investorguidance,andsoon.By1997,25percentofcorporatebondsissuedwereShariah-compliant,andIslamicunittrustsaccountedfor12percentoftheindustry’sassetsundermanagement.MorethanhalfofthecompanieslistedonMalaysia’sstockexchangewerelistedasincompliancewithIslamicprinciples.Finally,bythelate1990s,fourconventionalstockbrokerageshadIslamicwindowsandonenewIslamicstockbrokeragehadbeenestablished.TheOpportunity:IdentifyingaCompetitiveAdvantageObservingthatmarkets“areincreasinglyfocusingonnicheandvalue-addedmarketsegments,”theCMPidentifiedtheIslamiccapitalmarketasanareawhereMalaysiahadapotentialinternationallycompetitiveadvantage.47
Thisassessmentwasbasedonthefollowingobservations:
! Asaresultofstrongeconomicgrowth,Malaysia’spopulation,whichwasroughly60percentMuslim,wascharacterizedbyrisingaffluenceandahighsavingsrate,whichprovidedthecountrywithastrongdomesticbaseonwhichtoestablishIslamiccapitalmarkets.
! MalaysiaislocatedinthemostpopulousMuslimregionintheworld(therearetwiceasmanyMuslimsinSouthandSoutheastAsiaasintheMiddleEastandNorthAfrica),whichmeantithadalargepoolofprospectivecustomersinthenear-abroad.
! Furtherabroad,risingoilpriceswereleadingtoanincreaseinMuslim-controlledwealthintheMiddleEast.
! Finally,Malaysia’sdevelopmentofitsdomesticIslamiccapitalmarketgaveitacriticalmassofexistingfundsandexpertise,nottomentionalargepooloffinancialservicesprofessionalswhowerebothMuslimandEnglish-speaking.
47SecuritiesCommissionofMalaysia,2001,p.53.
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Developinga“viableparallelmarketforfinancingandinvestment”wouldbeamajorchallenge,theCMPnoted,as“thecurrentrangeofavailableandliquidIslamic-basedproductsissmallincomparisonwiththebroaderconventionalcapitalmarket.”48However,thelimitedsupply,incombinationwiththeestimated“latent”demand,presentedanattractiveopportunityfor“localindustryplayerstoestablishtheirnicheinthebusiness,aswellasparticipateinalargeglobalmarketwithrelativelyfewplayers.49Intheearly2000s,MusliminvestorshadanestimatedUS$800billioninvestedgloballyinconventionalbanks.BuildingontheMomentumofthePreviousDecadeTheCMPissued13recommendationsdesignedtobuildonthemomentumofthepreviousdecade.ThisincludedfurtherstrengtheningthefinancialreportingandaccountingtreatmentsofIslamicsecuritiesandinvestmentproducts,whichledtothedevelopmentoftheworld’sfirstIslamicaccountingstandards.TheCMPalsocalledfornewregulationsonIslamicbondsandunittrusts.
TheseeffortswerecomplementedbychangestotheMalaysiantaxcodein2003,whichprovidedtaxincentivestofurtherdeveloptheIslamicbondmarket.
Ontheinternationalfront,theMalaysiangovernmentestablishedtheMalaysiaInternationalIslamicFinancialCenter(MIFC),whichwasdesignedtostrengthenlinkagesbetweenKualaLumpurandotherIslamicfinancecenters.ThecenterfocusesonIslamicbondorigination,Islamicwealthmanagement,internationalIslamicbankingandinsurance,andeducationandtraining.50In2007and2009,Malaysiaenteredintomutual-recognitionagreements(MRA)withtheUAEandHongKongonthecross-bordermarketinganddistributionofIslamicfunds.51
TheMalaysianIslamicfinancialsector’sshareofnationalGDPincreasedfrom0.3percentin2000to2.1percentin2009.52Malaysia’sIslamiccapitalmarketsgrewatanannualrateof13.6percentfrom2000to2010,triplinginsize—theyarenowthelargestintheworld.53AnumberofinternationalissuershaveraisedfundsinMalaysia’sIslamicbondmarket,includingtheInternationalFinanceCorporation,theGulfInvestmentCouncil(basedinKuwait),andtheNobleGroupinHongKong.54
Cultivating Human Capital Asfinancialsectorsdevelop,theyrequireworkerswithmorespecializedskillssets.Inmanycountries,insufficienthumancapitalremainsthebiggestobstacletofurthercapital-marketdevelopment:“Oneofthemostpressingchallengesconfrontingemergingmarketsisthelimitedavailabilityoffinancialsector
48SecuritiesCommissionofMalaysia,2001,p.53.49SecuritiesCommissionofMalaysia,2001,p.53.50SecuritiesCommissionofMalaysia,2014,p.68.51SecuritiesCommissionofMalaysia,2014,p.68.52OECD,p.217.53OECD,p.217.54SecuritiesCommissionofMalaysia,2014,p.65.
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skillsandtheurgentneedtodevelophumancapitalbyestablishingabaseofcapableprofessionalssuchasbankers,accountants,lawyers,appraisers,analysts,andinsolvencyexperts.”55
TheCMPincludedafocuson“thedevelopmentofhumancapitalthroughtheintroductionofinstitutionalarrangementstoprovidecomprehensiveeducationandlearningprogramsforthefinancialservicesindustry.”56Programswereestablishedwiththegoalofdevelopingdifferentskillssets,rangingfromentryleveltomiddlemanagementtotheexecutivelevel.TheseincludedtheFinancialSectorTalentEnrichmentProgram;theInternationalCenterforLeadershipinFinance(ICLIF),establishedin2003;andINCEIF,theglobaluniversityofIslamicFinance.
ConclusionOverthe2001-2010periodcoveredbytheCMP,Malaysiaachievednotablesuccessesinbroadeninganddeepeningitscapitalmarkets.Italsohasfallenshortinkeyareas,however,andinthepastseveralmonthshasbeenmarredbypotentiallyseriousfailures.
AmongthenoteworthysuccessesthatMalaysiahascontinuedtoachieveinfurtherdevelopingitscapitalmarketsoverthisten-yearperiodarethedevelopmentofthecorporatebondmarketandsolidificationofMalaysia’sstatusasagloballeaderinIslamicfinance.OverthedecadesincetheSCinitiatedreforms,thecorporatebondmarketgrewsteadily.Today,Malaysia’scorporatebondmarketismuchlargerthanthoseofmostotheremerging-marketcountriesandiscomparableinsizetothoseinmanydevelopedcountries.57TheIslamicbondmarkethasbeenakeydriverofthisgrowth:Today,about60percentofMalaysia’sbondissuanceisShariah-compliant,andMalaysia’smarketnowaccountsfor60percentofIslamicbondsissuedworldwide.58
Effortstoenhancetheuseoftheequitymarkethaveyieldedmoremixedresults.ThenumberofcompanieslistedonBursaMalaysiahasdeclinedslightlyduringthepastdecade.Althoughthemarket’scapitalizationhadbeenrisingsteadilysincetheglobalfinancialcrisis,ithasfallensubstantiallyoverthepastyear.
Moreover,theIMFandWorldBankobservedintheirmostrecentfinancialsectorassessment,publishedin2013,thatthelegalbasisfortheSC’sindependenceneedstobebolstered.TheyalsoexpressedconcernthattheMalaysiangovernmentremainsa“majorplayerinthefinancialsystem”andexercises“substantialdefactoownershipinthefinancialsector,”largelythroughtheequityholdingsofgovernment-linkedinvestmentcompanies(GLICs),suchasthestate-ownedpensionfund,EPF.59
Theongoingpoliticalcrisis,sparkedbyallegationsofcorruptionatoneofMalaysia’ssovereignwealthfunds,hasmorerecentlyhighlightedthedangersoffailingtoputinplaceandfostertherequisite
55Carmichael,p.199.56Aziz,p.3.57WorldBankandIMF,2013a,p.4.58WorldBankandIMF,2013a,p.4.59WorldBankandIMF,2013d,p.6.
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institutionalgovernancestructuresatkeymarketinstitutions.Italsohighlightstheimportanceofanecosystempromotinggoodgovernance,includinganindependentjudiciaryandintegrityinthecivilservice.60WhileMalaysiahascontinuedtomakerealprogressinbroadeninganddeepeningitscapitalmarketsoverthepastfifteenyears,institutionalweaknessesunfortunatelythreatentounderminethatprogress.Regulatoryandtechnicalreformsareessentialtocapital-marketdevelopment,butinstitutionalintegrityiscriticalinthelongrun.
601MalaysiaDevelopmentBerhad(1MDB),setuptoattractforeigninvestmentthatwoulddrivelong-termeconomicdevelopment,isaccusedoffunnelingover$675million,possiblyfromtheMiddleEast,tothepersonalbankaccountsofNajibRazak,Malaysia’sprimeministerandfinanceminister.Atthesametime,1MDBaccumulatedasignificantamountofdebt.Thepoliticalcrisishasexacerbatedtheeconomicdownturnnowunderway(Malaysia,anetcommoditiesexporter,hasbeenhithardbythedownturninoilprices),andhasalsosparkedstreetprotestsandraisedthepossibilityofwidersocialunrest.
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SourcesBinIbrahim,Muhammad,andAdrianWong.2006.“TheCorporateBondMarketinMalaysia.”
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Appendix 1.1: Malaysia Financial Sector
MalaysiaFinancialSectorAssetstoGDP(%) CentralBankAssetstoGDP(%)
Source:WorldBankGlobalFinancialDevelopmentDatabase
Source:IMFInternationalFinancialStatisticsDatabase
DepositMoneyBanksAssetstoGDP(%)
InsuranceCompanyAssetstoGDP(%)
Source:IMFInternationalFinancialStatisticsDatabase
Source:WorldBankGlobalFinancialDevelopmentDatabase
MutualFundAssetstoGDP(%)
PensionFundAssetstoGDP(%)
Source:WorldBankGlobalFinancialDevelopmentDatabase
Source:WorldBankGlobalFinancialDevelopmentDatabase
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Appendix 1.2: Malaysia Outstanding Debt Securities
OutstandingDomesticPublicDebtSecuritiestoGDP(%)
OutstandingIntlPublicDebtSecuritiestoGDP(%)
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
OutstandingDomesticPrivateDebtSecuritiestoGDP(%)
OutstandingIntlPrivateDebtSecuritiestoGDP(%)
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
MalaysiaOutstandingDebtSecuritiestoGDP(%)
MalaysiaOutstandingDebtSecuritiesComposition
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase
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Appendix 1.3: Malaysia Stock Market
StockMarketCapitalizationtoGDP(%)
MarketCapitalizationExcludingTop10Companies
toTotalMarketCapitalization(%)
Source:Standard&Poor’s,viaWorldBank’sGlobalFinancialDevelopmentDatabase
Source:WorldFederationofExchanges,viaWorldBank’sGlobalFinancialDevelopmentDatabase
NumberofListedDomesticCompanies(Total)
NumberofListedCompaniesper1,000,000People
Source:Standard&Poor’s,viaWorldBank’sWorldDevelopmentIndicatorsDatabase
Source:Standard&Poor’s,viaWorldBank’sGlobalFinancialDevelopmentDatabase
StockMarketTotalValueTradedtoGDP(%)
ValueTradedexcludingTop10TradedCompaniestoTotalValueTraded(%)
Source:BIS,viaWorldBank’sGlobalFinancialDevelopmentDatabase
Source:WorldFederationofExchanges,viaWorldBank’sGlobalFinancialDevelopmentDatabase
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Appendix 1.3: Malaysia Stock Market (continued)
StockMarketTurnoverRatio(%)
StockPriceVolatility
Source:Standard&Poor’s,viaWorldBank’sGlobalFinancialDevelopmentDatabase
Source:Bloomberg,viaWorldBank’sGlobalFinancialDevelopmentDatabase
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Appendix 2: CMP Development Timeline
1999 August6 TheCMPisannounced.
September TheCapitalMarketStrategicCommittee(CMSC)isestablished.
October TheCMPwebsiteislaunchedbytheSC.
2000 February SChostsacolloquiumoncorporatebondmarketdevelopment.
March SCinvitespubliccommentonelectroniccommerceconsultationpaper.
AprilSCpresentsframeworkforstockbrokingindustryconsolidationandreductionintransactioncosts.
May SCissuesnewguidelinesonprospectuscontents.
May SCissuesCodeofConductformarketinstitutions.
June SCannouncescommitmenttoashortersettlementcyclebyend-2000.
JuneSCannouncesmodificationstotheframeworkforstockbrokerageconsolidation.
October TheCMPispresentedtotheministeroffinance.
December TheCMPisapprovedbytheministeroffinance.
2001 February22 TheCMPisreleasedandputintoeffect.
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Appendix 3: Committee Members
CapitalMarketAdvisoryCouncilMembers
Member Sector/Industry Type DatukAliAbdulKadirChairman,SecuritiesCommission
Government
DatinZarinahAnwarDeputyChiefExecutive,SecuritiesCommission Government
TanSriDato’FrancisYeohManagingDirector,YTLCorporationBhd Infrastructure
RajaDatukArshadRajaTunUdaExecutiveChairman,PricewaterhouseCoopers Accounting
DatukMohaiyaniShamsudinManagingDirector,MohaiyaniSecuritiesSdnBhd Stockbroking
Dato’AbdulAzimMohdZabidiChairman,BankSimpananNasional DepositoryInstitution(government-owned)
Dato’AzmanYahyaChairman,PengurusanDanahartaNasionalBhd FinancialCompanySpecializinginNPLs
Dato’MegatNajmuddinMegatKhasChairman,PernasInternationalHoldingsBhd
Conglomerate
Dato’Dr.AbdulHalimHajiIsmailExecutiveChairman,BIMBSecuritiesSdnBhd Stockbroking
Dato’SeriHwangSingLueManagingDirector,Hwang-DBSSecuritiesBhd
Stockbroking
Dr.R.ThillainathanFinanceDirector,GentingBhd
Conglomerate
JeyaratnamTomotharamPillaiChiefExecutiveOfficer,AllianceMerchantBankBhd
DepositoryInstitution
IskanderIsmailExecutiveDirector,AmanahSSCMManagementBhd FundManagement
HamzahMahmoodChiefExecutiveOfficer,MaybanSecuritiesSdnBhd
Bank
ChokKweeBeeExecutiveDirector,BIWaldenManagementSdnBhd VentureCapital
StephenM.TaranManagingDirector,CorporateBondResearchSalomonSmithBarney,NewYork
U.S.InvestmentBank
DaisukeTakeuchiHeadofAsiaOceania,NomuraCo.Ltd.,Japan
JapaneseFinancialHoldingCompany
CapitalMarketStrategicCommitteeMembers
1. DatukAliAbdulKadirChairman,SecuritiesCommission
2. YBhgTanSriDatoFrancisYeohManagingDirector,YTLCorporationBhd
3. YBhgDatoAzlanHashimExecutiveChairman,KualaLumpurStockExchange
4. YBhgDatoMegatNajmuddinMegatKhasChairman,Asian-PacHoldingsBhdandChairman,FederationofPublicListedCompanies
5. DatukMohaiyaniShamsudinManagingDirector,MohaiyaniSecuritiesSdnBhdandChairpersonoftheAssociationofStockbrokingCompaniesinMalaysia
6. Mr.Jeyaratnama/lTamotharamPillaiChiefExecutive,AmanahMerchantBankBerhad
7. Mr.StephenTaranManagingDirector,CorporateBondResearch,SalomonSmithBarney(M)SdnBhd
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About the Author JimWoodsomeisaseniorprogramresearchanalystwiththeMilkenInstituteCenterforFinancialMarkets,whereheconductsresearchandhelpsmanageinitiativesrelatedtothecenter’sCapitalMarketsforDevelopmentprogram.
About the Center for Financial MarketsBasedinWashington,D.C.,theMilkenInstituteCenterforFinancialMarketspromotesfinancialmarketunderstandingandworkstoexpandaccesstocapital,strengthen—anddeepen—financialmarkets,anddevelopinnovativefinancialsolutionstothemostpressingglobalchallenges. About the Milken Institute TheMilkenInstituteisanonprofit,nonpartisanthinktankdeterminedtoincreaseglobalprosperitybyadvancingcollaborativesolutionsthatwidenaccesstocapital,createjobsandimprovehealth.Wedothisthroughindependent,data-drivenresearch,action-orientedmeetingsandmeaningfulpolicyinitiatives.©2016MilkenInstituteThisworkismadeavailableunderthetermsoftheCreativeCommonsAttribution-NonCommercial-NoDerivs3.0UnportedLicense,availableatcreativecommons.org/licenses/by-nc-nd/3.0/
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