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SGX to hive off regulatory functions

MAS must approve and can also appoint members to board of new independent unit; some say move may sieve out lower-quality listings initially

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In a move welcomed by market watchers as long overdue, the Singapore Exchange (SGX) said on Monday that it is hiving off its regulatory arm from its commercial activities.


IN a move welcomed by market watchers as long overdue, the Singapore Exchange (SGX) said on Monday that it is hiving off its regulatory arm from its commercial activities.

A new company temporarily dubbed RegCo will be set up as an SGX subsidiary by the second half of next year. It will house SGX's current regulatory team of around 100 people.

RegCo will be run by current SGX chief regulatory officer Tan Boon Gin, who reports directly to a board separate from the exchange. Central bank and regulator Monetary Authority of Singapore (MAS) will ensure SGX gives RegCo adequate resources for its duties.

Asked about the timing and rationale behind the move, an SGX spokeswoman said the exchange regularly considers developments in the industry and possible enhancements.

"Any change comes only after careful and thorough deliberation, including discussions with MAS. Today's announcement was no different," she said.

SGX CEO Loh Boon Chye said in a statement that together with its introduction of independent listings committees last October, the exchange has demonstrated its commitment "to do all that we can within the self-regulatory organisation framework to address potential conflicts between our commercial objectives and our regulatory responsibilities".

Market players hailed SGX's move as a crucial one to resolve the long-running perception that the exchange was conflicted in having to regulate its clients, which include China-related S-chips and penny stocks that had been the focus of extreme speculative activity.

David Smith, head of corporate governance at Aberdeen Asset Management Asia, said the move resolves a "damned-if-they-don't" situation for the exchange.

Otherwise, SGX will continue to draw flak for corporate governance failures in spite of the improvements it has made to its regulatory framework. "The direction is positive, but we have to wait and see the details," he said.

Ernest Kan, chief of operations for clients and markets at Deloitte Singapore, said: "You always enhance regulations to make sure they are up to date. So from the reputation point of view, certainly, you'll score."

While some might still gripe that the regulatory unit is not totally independent of the SGX, others countered that RegCo's board, at least, will be separate and the majority of its members independent of SGX.

David Gerald, president of investor lobby group Securities Investors Association (Singapore), said: "The devil is in the details and it is better for MAS to be the appointing body of this new regulatory body to give it complete independence."

In response, the SGX spokeswoman said the exchange can only appoint members of the RegCo board subject to MAS approval, and MAS can also directly appoint members of the board. In a statement on Monday, MAS said the independence of the subsidiary will be an important factor for its success. It requires the chairman of RegCo as well as a majority of its directors to be independent of SGX and its subsidiaries. All directors also have to be independent of SGX-listed companies.

The central bank added that it will continue to directly regulate SGX in terms of its obligations as a listed company and market operator. It will also maintain oversight of RegCo's responsibilities.

SGX might improve market perception with the move, but on the flip side, observers wondered if there will be more and unnecessary regulation.

Stefanie Yuen Thio, joint managing director of TSMP Law Corporation, said the crux of the matter for the Singapore market was not the quality of SGX's regulation, but whether the exchange can attract new listings. SGX continues to face difficult challenges of companies trading at low price-earnings ratios, along with a slew of ongoing privatisations, she said.

The exchange must thus take a "holistic and commercial" approach to regulation and avoid over-regulating. "It needs to assure the market that the new RegCo will not increase compliance costs and submission time," she said.

For its part, SGX said the move will "not add to the requirements of the current initial public offering listing process".

Corporate governance advocate Mak Yuen Teen, an associate professor at the National University of Singapore Business School, said that in the short term, the move might lead to lower-quality listings shunning the market.

"This is not a bad thing. In the long term, this should improve the quality of listings and will improve investor confidence," he said.

Looking ahead, the next big change in the offing might be around quarterly reporting, said Deloitte's Dr Kan.

"I believe something will come. Exactly in what form or shape, I do not know. It has become a time and cost burden especially for smaller counters."

SGX closed at S$7.80, up six cents or 0.8 per cent.