Regulators take aim at contra trading, errant listed firms

Singapore

BY early next year, companies that commit a series of related breaches in listing rules can be fined up to S$1 million, as part of a slew of rules linked to market discipline that were nailed into place yesterday by the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX).

Even as the regulators took aim at contra and speculative trading with new regulations due within the next two years, they will also improve retail investors' access to securities, with the board lot size being reduced to 100 shares from 1,000 shares by the start of next year.

This follows a consultation paper in February that proposed these regulatory tweaks, and that came in the wake of the penny-stock collapse last year.

The regulators decided to impose a minimum trading price of 20 Singapore cents for only mainboard listings, after earlier suggesting a threshold range of 10-20 Singapore cents.

This is in line with regulations in the US markets, where a minimum bid price of US$1 is required, and is targeted at losses from speculative trading.

A small decline in the share price of a penny stock in absolute terms translates to a high percentage of loss that is usually borne by retail investors, as they punt on such counters.

More than 200 listed companies have shares that trade under 20 Singapore cents; they will have about 18 months from now to meet this new criterion - mainly through a share consolidation - before they are put on a watch-list.

Market watchers do not expect this to prompt a wave of delistings, with one noting that delistings are usually a result of shaky business fundamentals.

Also, there would be muted impact on market turnover from imposing a minimum trading price, an analysis by BT in February showed.

By the middle of 2016, contra trades will need to be backed by collateral that represents 5 per cent of the trades' daily open-position on a net basis.

This leveraged trade is available only in Singapore and Malaysia, and allows traders to buy and sell shares within the settlement period - set to be shortened to two days from three by SGX at a later time - without cash upfront.

The trader either gets paid for the profit he made off the trade, or pays the brokerage for the loss he made.

In their written responses to industry feedback, the regulators noted concerns on both ends of the spectrum: some worried that tweaks to contra trading would hurt trading liquidity; others said that a 5 per cent minimum would mitigate little credit risk. This has weighed heavily on remisiers - if customers default on their losses, brokerages call on remisiers' posted collateral to recover losses.

MAS and SGX stuck to their guns, but noted that traders can use shares they own as collateral, and that these securities can be more easily monitored once SGX completes an ongoing systems upgrade. Brokerages can also collect a greater sum of collateral from contra traders, if they wish, the regulators added.

They clarified that when there is a shortfall in collateral, the onus is on brokerages to decide if they can force-sell their clients' existing securities. In the meantime, the client cannot buy more shares through contra trading.

Singapore will also establish disciplinary, advisory and appeals committees for listings here by early next year.

The new disciplinary committee - which effectively will be made up of members of the existing SGX disciplinary committee - will be empowered to impose fines of up to S$250,000 on listed companies for each breach of the listing rules, and restrict activities such as fund-raising. The fine is capped at S$1 million for any series of linked breaches that can include the failure to announce material information.

The move is meant to address concerns over SGX's dual role as a stock market operator, and a regulator. For example, the advisory committee will look at issues such as unusual features or structures of proposed listings. It will comprise members in the investment banking, accounting and legal professionals, among others, though no names have been put up yet.

The regulators will also implement aggregated short-position reporting, which will be released weekly. This will be in place by the middle of 2016.