Last month, the Singapore Exchange (SGX) issued a release announcing their intention to set up a separate subsidiary company to undertake all front-line regulatory functions that it currently performs.
The Dual Role That SGX Plays
For those who are wondering what this news means, we first need to understand the main roles that SGX currently plays.
Promoting The Stock Exchange Of The Country
The top financial cities around the world all have thriving capital markets. Capital markets are where companies turn to for raising funds. Typically, this occurs through a stock exchange.
These financial cities would all have their own stock exchange to support their status as a financial hub.
In New York, we have the New York Stock Exchange (NYSE) and the NASDAQ. In London, we have the London Stock Exchange Group. In Hong Kong, we have the Hong Kong Stock Exchange.
In Singapore, the Singapore Exchange (SGX) represents our capital market. It’s where companies can turn to when they want to raise money for their business expansion.
SGX actively seeks to promote Singapore as a preferred choice among companies looking to raise funds from the capital market.
This is an important role. As a retail investor, we want to have the option to invest in as many good companies as possible across different sectors. This is made easy when good, reputable companies are listed on the SGX. Investing in stocks overseas brings with it uncertainty, such as foreign exchange risk.
Size Of SGX Compared To The Rest Of The World
To get a sense of just how big the SGX is compared to the rest of the world, here is a table of market capitalisation among the top exchanges in the world, and how the SGX stacks up against it.
|New York Stock Exchange||New York||USD 19.2 Trillion|
|NASDAQ||New York||USD 6.8 Trillion|
|London Stock Exchange||London||USD 6.1 Trillion|
|Japan Exchange Group||Tokyo||USD 4.5 Trillion|
|Shanghai Stock Exchange||Shanghai||USD 3.9 Trillion|
|Hong Kong Stock Exchange||Hong Kong||USD 3.3 Trillion|
|Singapore Exchange||Singapore||USD 672 Billion|
It’s not difficult to see how much smaller the SGX is compared to its peers in other major financial cities around the world.
Stock exchanges are where consolidation does happen. The bigger guys get bigger, while the smaller guys slowly become obsolete, and eventually, get taken over by the bigger exchanges.
Hence, SGX main role is to promote the capital market in Singapore, and ensure that our country continues to remain competitive as an option for good companies to list on our stock market.
The Importance Of Regulation In The Exchange
When financial activities in a country grow, it is important to ensure that regulation continues to keep up. Just imagine if banks were allowed to sell their products without any form of regulations, or with weak regulations.
It isn’t that hard to imagine the chaos that can be created as a result of poor regulation. The global financial crisis in 2008 caused by the toxic products from the US is a good example of what can go wrong when regulations are poor, and when financial institutions are allowed to do what they want without worrying about regulations.
The same logic applies to the stock exchange. Regulation is key to ensuring that listed companies in the exchange are adhering to the rules set in place, and that retail investors are getting accurate and timely information so that they can make sound investment decisions for the companies they are investing in.
In every country, there is a designated organisation whose task would be to regulate the exchange(s) in the country.
In the US, the U.S. Securities and Exchange Commission (SEC) performs this role. In the UK, the Financial Services Authority (FSA) regulates the operations of the London Stock Exchange.
In Singapore, the role of the regulating the exchange falls upon SGX itself.
Separating The Two Roles
It’s easy to see why there is a perceived conflict of interest situation that could be present. On one hand, the SGX needs to promote itself as a favourable place for companies to list themselves.
On the other hand, regulating the exchange could lead to additional compliance cost and restrictions for listed companies in the short-run.
The setting up of a separate company in 2017 by SGX, which would be operationally independent of the commercial activities of SGX, would help reduce the conflict of interest situation
The team that is in-charge of regulation would focus directly on it, with its own separate CEO and Board of Directors to report to. They would not be concerned about the other commercial activities that SGX have, and will ensure that the interest of retail investors is kept protected.
Only time would tell how the operations of this separate company would pan out, and whether it would impact the SGX. However, we believe this is a big step in the right direction for retail investors in Singapore.
Top Image Credit: DollarsAndSense.sg