IS THE SET BITING THE HAND THAT FEEDS IT?
There has been a lot of talk in the media lately about the public hearing being conducted by the Finance Ministry and the Securities and Exchange Commission (SEC) on the proposed separation of the Capital Market Development Fund (CMDF) from the Stock Exchange of Thailand (SET) into a separate legal entity.
The latest Capital Market Master Plan (2017-21) reflects the ministry’s view that the SET is not firing on all cylinders and has too much on its plate, with responsibility for the smooth functioning of the exchange as well as trying to develop the capital market at the same time. By carving out the long-term development functions, it is argued, the SET is likely to be more successful in running the exchange, especially amid the continuous onslaught of globalisation.
The proposed seed capital to be taken out of the SET to establish the CMDF is 8 billion baht plus 90% of the exchange’s future annual net profit. Not surprisingly, there has been an outcry from brokers and the senior management of the SET itself about the proposal by the Finance Ministry.
Personally, I see merits in the ministry’s initiative, but execution will be the key. A half-baked measure is likely to end up with the SET achieving neither of its two stated objectives. A better way to reach full efficiency of the stock exchange, as well as to really promote capital market development, is to go back to the number one measure in the Capital Market Master Plan of 2009, which is to demutualise the SET and convert it into a public company (The Exchange Company).
Traditionally, stock exchanges around the world have operated as “members only” clubs that confer rights of ownership and trading. But during the past two decades, exchanges have been under increasing pressure from market competition, cross-border listings and portfolio flows as well as technological innovation. The latter has led to the rise in alternative trading systems, chiefly privately operated computerised systems that perform many of the functions of an exchange by centralising and matching buy and sell orders. These systems are often operated by exchange members.
Together these developments have eroded the significance of physical national stock exchanges and their trading floors. Consequently, global exchanges have evolved to adopt new corporate, legal and business models to face new competition. This process of transformation from members’ associations into for-profit corporations is referred to as demutualisation.
The number of exchanges that have been privatised or listed has been increasing since the Stockholm Stock Exchange demutualised in 1993. In 1999, 11 exchanges had been privatised or listed and this number rose to 21 by early 2002. Among them were the Australian Stock Exchange (ASX), Tokyo Stock Exchange (TSE), Singapore Exchange and the Hong Kong Stock and Futures Exchanges.
According to the World Federation of Stock Exchanges, demutualised exchanges now account for around 52% of stock market capitalisation. In Asia, demutualised exchanges now account for 76% of the region’s market capitalisation.
Does it make sense for the SET to follow this demutualisation trend? Historically, brokers and stock exchanges were locally focused. But modern telecommunications have enabled issuers and investors to access foreign capital markets. As nationality has become less of a defining characteristic of capital markets, the relevance of national exchanges is being challenged.
This challenge is more acutely felt in relatively small home markets such as Thailand. Today in Asia, Hong Kong and Singapore are the major markets for new initial public offering listings; even our own Thai Beverage is listed in Singapore.
Strategic alliances and consolidations are also affecting capital markets and exchanges globally. Mergers among stock and derivatives exchanges in the United States and Europe are redefining the new competitive landscape and creating super-exchanges.
Scale is increasingly important, particularly in leveraging technology costs and other investment opportunities. Through alliances, exchanges seek to attract more investors by offering greater product variety and pursuing the conventional wisdom that “liquidity attracts liquidity”.
As the SET has already moved towards full liberalisation and negotiable commissions, a number of questions about regulatory oversight needed to be addressed. When a demutualised exchange is listed on its own board, some regulatory oversight needs to be transferred to a government regulator. In many countries, demutualisation of the main national stock exchange has been accompanied by general securities regulatory reform.
But we should be aware that demutualisation is not necessarily a cure-all for the SET. Critics of demutualisation have argued that the process simply serves to substitute one private interest group for another. The brokers and later retail investors, who would be shareholders of the exchange, are likely to pursue profit maximisation goals that may not be consistent with regulatory steps, or in the best public interest.
In my opinion, standing still is no longer an option for the SET. Inefficiency must be rectified, the investor base enlarged and privatisation of state enterprises revived; otherwise the continuous onslaught of globalisation will surely separate the men from the boys. At the end of the day, the SET must be competitive to survive. Even if it does not go public, it must exercise self-discipline to make it as competitive as the private sector.