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Capital Markets Reform:Malaysia’s Experience
Wong Sau Ngan Securities Commission of Malaysia
20 December 2006Washington D.C.
1
MalaysiaMalaysia
• Introduction
• Approach and consultation process
• Overview of Capital Market Master Plan
• Implementation of Capital Market Master Plan
• Performance Measures
AGENDA
2
CHANGING FINANCIAL LANDSCAPE DEMANDED RE-ASSESSMENT OF BROAD STRATEGIC FRAMEWORK FOR
THE MALAYSIAN CAPITAL MARKET
Internationalisation of financial activity
• Growth in global investment activity
• Increased international fund-raising
• Greater cross-border M&A
Deregulation offinancial markets
• Reform of pension and mutual funds industries
• Removal of barriersto cross-borderactivities
• Removal of marketsegmentation
Rapid advancesIn technology
• Rise of alternative platforms for market activity
• New intermediation channels and processes
3
THERE WAS AN URGENT NEED TO ALLEVIATE FINANCING BURDEN ON BANKING SECTOR…
• Total investment spending expected to double over next 10 years
• Capital market expected to play major role in mobilising cost-effective financing for high-growth and k-economy sectors
1990-1999 2001-2010p
0
200
400
600
800
1000
1200
1400
1600
1800
Inve
stm
ent S
pend
ing
(RM
Bill
ion)
Higher investment spending requirements going forward
4
… THEREFORE REQUIRING MORE EFFECTIVE MOBILISATION AND ALLOCATION OF FUNDS
Need to increase role of capital markets in meeting nation’s financing needs
Need to further diversify holdings of financial assets within financial system
OtherProvident
and pensionfunds
Breakdown of funds managed by the financial services sector as at end-1999
Insurancecompanies
BankingSector
EPF Unit trustcompanies
AssetManagementcompanies
0
100
200
300
400
500
600
RM B
illio
n
5
CONCENTRATION OF FUNDS WITHIN THE PENSIONS AND PROVIDENT FUND INDUSTRY
• Malaysian investment management funds by category as at end-1999
General InsuranceFunds4.81%
Unit Trust Funds14.65%
Asset ManagementCompanies
2.91%
Life InsuranceFunds10.93%
Provident andPension Funds
66.70%
6
• Minister of Finance announced CMP initiative in August 1999
• Capital Market Strategic Committee (“CMSC”) comprising high level SC’s & private sector representatives was set up
• CMSC’s role was to provide views on strategic issues & future direction of Malaysian capital markets
• Chairman of SC appointed as Chair of CMSC
CONCEPTION OF THE CAPITAL MARKET MASTER PLAN (“CMP”)
7
• CMP website was launched in October 1999 to disseminate information & garner public feedback
• Formal requests made by CMSC to solicit views from market intermediaries, market institutions & relevant industry and professional bodies
• Robust consultations with industry participants & professional bodies held over entire course of formulation of CMP
EFFORTS TAKEN TO FACILITATE DIRECT CONSULTATION & WIDE REPRESENTATION OF VIEWS IN FORMULATION OF CMP
8
• Meetings with Ministry of Finance, other government agencies & regulatory bodies including Central Bank of Malaysia, capital market reform experts from other jurisdictions, academics & foreign and domestic users throughout consultation process
• Private consultants retained to provide research & independent assessment
• SC’s own pool of research, analysis and assessment
• By end of 2000, several hundred meetings with market participants, stakeholder groups, independent consultants and experts had been conducted
EFFORTS TAKEN TO FACILITATE DIRECT CONSULTATION & WIDE REPRESENTATION OF VIEWS IN FORMULATION OF CMP
9
CAPITAL MARKET MASTER PLAN HAS AN IMPORTANT ROLE TO PLAY …….
Chart s
trateg
ic
positio
ning &
futu
re
directi
on of
capita
l
mar
ket
Develop capital market that
has ability to nurture competitive environmentand create value-added
opportunities
Provide strategic
clarity of vision &
objectives for
capital market
10
THE VISION FOR THE CAPITAL MARKET IS FOR IT TO BE ...
• Internationally competitive
• Highly efficient
• Supported by a strong and facilitative regulatory framework
11
COMPREHENSIVE APPROACH TO CAPITAL MARKET DEVELOPMENT
Capital MarketMaster Plan
A comprehensive blueprintfor the longer-term strategic
Development of theMalaysian capital market
152 recommendationscovering 11 categories:• Equity market• Bond market• Derivatives market• Stock broking industry• Market institutions• Investment management• Regulatory framework• Corporate governance• Islamic capital market• Technology & e-commerce• Training & education
12
REALISATION OF CMP WILL ULTIMATELY DEPEND ON EFFECTIVE IMPLEMENTATION
Implementation of CMP involved…
prescribing mechanisms for co-ordinating implementation
highlighting skills, capacity and resources
establishing guidelines for monitoring and reporting
formulating communication programme
… through an explicit framework
13
… ACCORDING TO AN EXPLICIT PROCESS …
Implementation process
Approval of CMP
Approval of CMP
Implement Recommendations
Implement Recommendations
Monitor ProgressMonitor Progress
Update CMPUpdate CMP
• Minister of Finance
• SC
• Other relevant Government agencies & regulatory bodies
• Relevant market institutions and other market participants
Report ProgressReport
Progress
14
… INVOLVING VARIOUS PARTIES HAVING A STAKE IN THE PROCESS
Implementation structure
Other Government
Organisations
ExchangeClearing Houses
& DepositoryOther market participants
Implementation Task Force
Implementation Task Force
Various Working
Committees
Various Working
Committees
• Foreign Investment Committee
• Ministry of International Trade & Industry
• Registrar of Companies
• Attorney General’s Chambers
• Employees Provident Fund etc.
Advisory Council
Advisory Council TreasuryTreasury
Bank Negara
Malaysiaand other agencies
Bank Negara
Malaysiaand other agencies
Securities Commission
Securities Commission
Minister of Finance
Minister of Finance
15
IDENTIFYING ENABLERS TO ASSIST IMPLEMENTATION
Facilitative regulationFacilitative regulation• Industry to take greater
responsibility • Further deregulation• Focus on market-based
solutions
EducationEducation• Focus on increasing
intellectual capital• Focus on enhancing skill-sets
to support innovation
Technology Technology • To enhance
connectivity and increase yields from information
16
THE CMP IS TO BE IMPLEMENTED IN THREE PHASES …
PHASE 3PHASE 2PHASE 1
• Further strengthen key sectors and gradually liberalise market access
• Further expansion and strengthening of market processes and infrastructure towards becoming fully-developed capital market
• Enhance international positioning in areas of comparative and competitive advantage
• Strengthen domestic capacity and develop strategic and nascent sectors
2001 2003 2004 2005 2006 2010
17
ROBUST ENGAGEMENT AND DIALOGUE PROCESSES TO ENSURE RELEVANCE OF CMP’S OBJECTIVES &
RECOMMENDATIONS
Feedback from CMAC on Implementation Review
CMP Dialogues
Industry workshops on key/selected areas + Sector/country analysis
Phase I Phase 3Phase 2
Overall review by Capital Market Advisory Council
18
POST IMPLEMENTATION REVIEW MECHANISMS VITAL TO ASSESS & VALIDATE CMP’S RECOMMENDATIONS
Phase 1:• Addressed weaknesses that had emerged during the 1997
financial crisis
• Strengthened domestic capacity for future expansion
• Enhanced microstructure efficiency including enhancement of the Securities Commission’s overall efficiency and effectiveness
PHASE 3PHASE 2PHASE 1
•• Strengthen key Strengthen key sectors and sectors and gradually gradually liberalise market liberalise market accessaccess
•• Strengthen market processes & Strengthen market processes & infrastructure to become fullyinfrastructure to become fully--developed capital market, and developed capital market, and enhance international positioning enhance international positioning in areas of comparative advantagein areas of comparative advantage
•• Strengthen Strengthen domestic capacity domestic capacity and develop and develop strategic and strategic and nascent sectorsnascent sectors
20062006 2010201020042004 2005200520012001 20032003
PHASE 3PHASE 2PHASE 1
•• Strengthen key Strengthen key sectors and sectors and gradually gradually liberalise market liberalise market accessaccess
•• Strengthen market processes & Strengthen market processes & infrastructure to become fullyinfrastructure to become fully--developed capital market, and developed capital market, and enhance international positioning enhance international positioning in areas of comparative advantagein areas of comparative advantage
•• Strengthen Strengthen domestic capacity domestic capacity and develop and develop strategic and strategic and nascent sectorsnascent sectors
20062006 2010201020042004 2005200520012001 20032003
19
AREAS OF FOCUS FOR PHASE 2 IMPLEMENTATION
ENHANCELIQUIDITY
ENHANCELIQUIDITY
VALUE CREATION
VALUE CREATION
GLOBAL NETWORKS
GLOBAL NETWORKS
Address structural impediments to enhance liquidity
Assist market intermediaries and institutions to create value for
their customers
Focus upon enhancing the position of Malaysia’s capital
market within a global network
20
IMPLEMENTATION SCORECARD AS AT 31 DECEMBER 2005
• 65% or 99 recommendations completed
• 35% or 53 recommendations are in progress
• Strong CG framework• Surveillance & enforcement• Education
• Diversified sources of financing• Strengthened institutional
structures
• Efficient capital-raising process• Lower cost for investors• Repositioning of market
institutions• Deregulation• Liquidity lab initiatives• Pension reform• Risk Management• Strategic alliance
21
KLCI HAS BEEN A MEDIUM PERFORMER IN THE REGION
Source: Thomson Financial DataStream
% performance of selected benchmark indices (1 Jan – 19 Sept ‘06)
-1.6
-1.5
-0.4
0.8
3.8
3.8
5.1
5.6
6.5
7.0
7.7
8.1
8.5
8.6
16.6
22.3
23.6
27.4
27.8
57.6
-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
Thailand SET
Japan Nikkei 225
Korea KOSPI
US Nasdaq Comp
Malaysia 2nd Board
UK FTSE 100
Taiwan TWSE
S&P Composite Index
Australia ASX All Ord
Malaysia KLCI
US DJIA
Singpaore STI
France CAC 40
Germany DAX 30
Hong Kong Hang Seng
Philippines Pcomp
Malaysia Mesdaq
India Sensex
Indonesia Jakarta
China Shanghai B
22
MALAYSIA’S RECOMMENDED WEIGHTINGS HAS FALLEN SINCE END-05
Source: Dow Jones Newswire Asia Fund Poll
Recommended weightings for Asia ex-Japan and Malaysian equities
0
0.25 0.25 0.25
0 0
-0.5 -0.5
-0.25 -0.25 -0.25
0
-0.25
0
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
Jun-
05
Jul-0
5
Aug
-05
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Wei
ghtin
gs
Slightly underweight
Slightly Overweight
Underweight
23
PRIMARY EQUITY ISSUANCE HAS DECLINED
Funds raised via initial public offering (Jan 2005 – July 2006)
Source: Bank Negara Malaysia
-
200
400
600
800
1,000
1,200
Jan-
05
Feb-
05
Mar
-05
Apr-
05
May
-05
Jun-
05
Jul-0
5
Aug-
05
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr-
06
May
-06
Jun-
06
Jul-0
6
RM
mill
ion
24
NONETHELESS CAPITAL MARKET CONTINUES TO BE IMPORTANT SOURCE OF FUNDING FOR PRIVATE SECTOR
25
DESPITE LACKLUSTRRE MARKET PERFORMANCE, EQUITY FINANCING REMAINS IMPORTANT SOURCE OF FUNDING FOR SMEs
Funds raised via initial public offering (Jan 2005 – July 2006)
Source: Bank Negara Malaysia
-
200
400
600
800
1,000
1,200
Jan-
05
Feb-
05
Mar
-05
Apr-
05
May
-05
Jun-
05
Jul-0
5
Aug-
05
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr-
06
May
-06
Jun-
06
Jul-0
6
RM
mill
ion
26
DIVIDEND YIELDS OF PUBLIC LISTED COMPANIES HAS BEEN RISING
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
Jan-
05
Feb-
05
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Perc
enta
ge (%
)
• Malaysia’s dividend yield (4.0%) is higher than region’s average (approx. 3.2%) and is among the region’s highest
Dividend yield for Malaysia
Source: I/B/E/S Global Aggregates27
AVERAGE M&A DEAL SIZE HAS BEEN INCREASING
Number of announced M&A deals and total announced value for Malaysia*
Source: Bloomberg
Note: *Data captures announced deals among public companies
**For period 1 Jan – 19 Sept 2006
0
1000
2000
3000
4000
5000
6000
7000
8000
2004 2005 2006YTD**
USD
mill
ion
0
10
20
30
40
50
60
70
No.
of d
eals
Value (LHS) No of deals (RHS)
28
103
142
117
161
125
153
149
179
175
188
191
207
050
100150200250300350400
RM b
illio
n
2000 2001 2002 2003 2004 2005
Total bonds outstanding
Public Sector Private Sector
SIZE OF MALAYSIAN BOND MARKET
29
PRIVATE SECTOR DEBT MARKET HAS GROWN DRAMATICALLY
Issuance of debt securities by the private sector* •
Source: Bank Negara Malaysia
*Includes issuance of Cagamas bonds
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
Jan-
05
Feb-
05
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
RM
mill
ion
New Issuance Redemption Net issuance
30
WIDENING RANGE OF BOND PRODUCTS
Range of products in 2005
Source : BNM
Some new products in 2006
• Public Bank’s RM1b hybrid debt securities
• ADB’s USD10b Asian currency note programme
• Khazanah’s USD750m Islamic exchangeable bond
31
TURNOVER OF DEBT SECURITIES (JAN-DEC 2005)
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Listed ABS CagamasBonds
KH GII PDS MGS
0.10% 2.30%5.10% 5.70%
12.10%
24.20%
50.40%
32
PERFORMANCE OF DERIVATIVES MARKET AS AT DEC 2005
Products 2005
Average daily volume
Share of total volume in Bursa Malaysia Derivates
in 2005 (%)
CPO Futures
Open interest position
4,709 47.1
KLCU Futures
Open interest position
4,519 45.2
3-months KLIBOR Futures
Open interest position
661 6.6
3-year MGS Futures 40 0.4
5-year MGS Futures
Open interest position
70 0.7
Source: Bursa Malaysia Derivatives Berhad
33
PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET
Number of approved funds 94
Shariah-based 392
Total Industry
NAV of approved funds
Shariah-based RM8.91 billion
Total Industry RM108.90 billion
% of Shariah-based to total industry 8.18%
Shariah-based unit trust fund
As at end August 2006
34
PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET
Number of Shariah-complaint securities – Oct 2006
886
% of Shariah-complaint securities to total listed securities
86%
Market capitalization (Oct. 2006)
Shariah-complaint securities RM 494.24 billion
Total market capitalization RM769.08 billion
% of Sharia-complaint securities to total market capitalization
64.26%
Shariah-complaint securities on Bursa Malaysia
35
Size of outstanding Sukuk RM102.85 billion
% of outstanding Sukuk to total outstanding bonds
46.7%
Sukuk approved by SC in Q3 2006
Number of Sukuk 16 issues
Size of Sukuk RM12.39 billion
Size of total bonds approved RM20.69 billion
% of size of Sukuk to total bonds approved
28.8%
Sukuk
PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET
36
KEY MEASURES INTRODUCED AS AT 31 DECEMBER 2005
• Measures to enhance market liquidity in bond market
• Market access liberalised for intermediaries, issues and investors
• Institutional and regulatory reforms including demutualisedsecurities exchange and corporate governance
• Deregulation in investment management industry
• Broad fiscal incentives
• Vast improvements in market infrastructure
36
THANKThank YOU
37