Tighter rules to curb shady trading practices and restore trust

BETWEEN June 2008 and November 2009, John Chionh and Kiew Yoon Seng engaged in false trading in the shares of Keda Communications (Keda) by crossing 52 trades with each other using trading accounts held with Phillip Securities Pte Ltd (PSPL). Chionh also conducted six wash trades in Keda shares that did not involve a change in beneficial ownership.

On top of creating a false appearance of active trading, the cross trades and wash trades artificially raised the price of Keda shares, with hikes ranging from 11 to 146 per cent from the previous traded price. The two were slapped with civil penalties of S$100,000 each for contraventions under the Securities and Futures Act (SFA).

It is such unlawful practices that the Monetary Authority of Singapore (MAS) wants to clean up. The regulator believes that with better enforcement and swifter actions against abusers, investor confidence in the Singapore stock market will be restored.

Hence, it is galvanising financial institutions (FIs) and brokers to help eradicate market abuse through its consultation paper on requirements on controls against market abuse and joint practice guide on trade surveillance with the Singapore Exchange (SGX).

Between July 2017 and Dec 2018, the MAS secured one criminal conviction for false trading, issued 19 prohibition orders and imposed fines totalling S$16.8 million, according to its first enforcement report for July 2017 to Dec 2018. It also issued 37 reprimands, 31 letters of advice, 223 warnings and 444 supervisory reminders. On Dec 31, 2018, insider trading and false trading are the top two types of financial services misconduct being investigated (more than 70 per cent), followed by corporate disclosure and fraud.

Such practices that disrupt genuine price discovery and undermine market integrity are frowned upon by the MAS.

A major complaint by investors has been the length of time taken by authorities to realise that something is amiss, identify the actual cuplrit and bring him or her to task. The average time taken - when the case is opened for review to the time the case is closed - for crimininal prosecutions is around 33 months; civil penalties 30 months; and regulatory actions six months.

MAS wants to shorten the time needed to investigate market abuse, take swift actions and punish those responsible when it uncovers instances of trading accounts being used with written authorisation from account holders, or used for illicit activities such as insider trading and manipulation.

To achieve this, it needs to identify the ultimate beneficial owners of orders and trades in accounts held in foreign intermediaries, and have quick access to information that does not reside in Singapore. If not, MAS has to use its normal enforcement channels and write to the foreign regulator supervising that foreign FI to seek out the information. Under the proposed initiative, FIs must be able to provide such information to the MAS and other law enforcement agencies within five business days upon request in future.

With self-directed trading and mobile applications on the rise, the regulator wants proper record-keeping. FIs must record all communications between their trading representatives and the person instructing the orders and trades in customers' accounts as well as to capture the unique client device identification for orders and trades over mobile trading applications. FIs must maintain a centralised electronic register containing cash and third party payments to prevent people from exploiting the system and hiding the trail of illicit trading acitivities.

Clearly, client and beneficial owner identification and verification, know your client, as well as the keeping of the related data are considered the Client Due Diligence process (CDD process), which most FIs already have in place. MAS wants it set out in a new Notice on Controls against Market Abuse, which will take effect six months from date of issuance.

Key component

The CDD process is a key component of securities regulatory requirements to aid investigations into abuse cases, protect investors by ensuring that markets are fair, efficient and transparent and prevent the illegal use of the securities industry.

With investor confidence in Singapore's stock market rattled by the S-chip saga where malfeasance in some China-listed firms on SGX tainted the entire lot, and the penny stock saga, which saw billions wiped out from the market value of Blumont Group, Asiasons Capital and LionGold Corp, the initiatives are welcome enhancements.

They are not exactly cost-free, but neither are they costly to implement. Many FIs already have the controls in place. The proposals mostly require just a one-time amendment to either terms and conditions, and proper record-keeping.

MAS has identified the gaps it needs to fill. But as with any rules it comes up with, if someone is out to cheat and defraud the market, he or she will find ways to go around them.

All in all, the initiatives will help MAS in its investigations to ultimately find and identify the person behind the suspicious trade, but each on its own, the judgment is still out there.

Take for example, in the penny stock case where John Soh and Quah Su-Ling are accused of orchestrated a manipulation scheme from August 2012 to October 2013 by placing hundreds of thousands of trades through an extensive web of 189 trading accounts in the names of 60 individuals (including Quah herself) and corporations related in one way or another to the duo.

In such nominee accounts, whether the party named as the owner is acting for somebody else, no rules can cater for that.