Earlier this month, on February 6, the Monetary Authority of Singapore (MAS) and Securities Commission Malaysia (SC) jointly announced that both countries will work to establish a trading link to connect their respective stock exchanges by the end of the year.
This bilateral link between Bursa Malaysia (BM) and Singapore Exchange (SGX) will allow investors to trade and settle shares listed on each other’s stock market more conveniently and cost effectively. Investors from both countries will enjoy “seamless access” to a combined market of 1,600 listed companies, worth more than USD $1.2 trillion in total value.
This trading link extends beyond trading to cover post-trade arrangements, such as clearing and settlement of stocks traded. Towards this end, MAS and SC will set up cross-border supervisory and enforcement arrangements.
As a retail investor in Singapore, what does this mean for you?
What Will This Trading Link Do?
Speaking about the establishment of the trading link, Malaysian Prime Minister Najib said: “This exciting initiative will widen investment options for investors and contribute towards greater activity and vibrancy in both markets.”
With this new trading link, Singaporean investors will not need a Malaysian broker to execute their trades on the BM, and vice versa. This should reduce time needed to complete transactions, as well as bring down fees and other costs. Investors will be able to trade equities from each other’s stock market and settle in local currency as if trading in the local market.
Lower trading costs should encourage more cross-border investments and increase liquidity of both country’s stocks, since there is a larger pool of potential investors.
Wait, Sounds Familiar?
ASEAN countries have tried to link their capital markets for years to improve financial connectivity of the region.
In 2012, the ASEAN Trading Link was launched with Malaysia, Singapore and Thailand as the initial participants. The vision was that the ASEAN Trading Link will eventually connect the stock exchanges of Malaysia, Vietnam, Indonesia, The Philippines, Thailand and Singapore by 2015. However, the initiative failed to attract significant investor interest. Trading volumes have not been significant and institutional investors have not switched from their existing brokerage relationships with individual markets.
In October last year, the ASEAN Trading Link was quietly decommissioned. Authorities have acknowledged issues with the prior system, including its complicated structure, costs, and trade settlement issues, and assured investors that these will be addressed in the new trading link.
Armed with the wisdom of past lessons and the resolve of both governments to make it work should give the new effort a higher degree of success.
What Does It Mean For Investors?
For institutional investors in both countries, theoretically the new trading link will allow transactions to take less time and cost less. However, trading volume will need to be of a certain level before switching away from their existing stockbroking arrangements will be worth the trouble. The fact that the previous trading link was shuttered in a mere five years does not inspire confidence that initiatives that come from the national-level rather than market forces will have longevity.
In recent years, retail investors have increasing options to get exposure to international stock markets. Most of the large brokerages in Singapore and Malaysia already have a regional, or even global footprint, and offer customers the option of trading overseas securities. Mutual funds and index funds are another way to get exposure to overseas stocks. For the Malaysian market, even a Monthly Investment Plan from Maybank Kim Eng allows you access to some stocks on the Malaysia Bursa.
For the trading link to fulfil its objective of improving the vibrancy of both stock exchanges and increase trading activity, efforts needs to be made to ramp up cross-border research and analysis. Perhaps an investor education and engagement campaign to share with investors about the unique laws and business operations of each country so that investors will feel confident in trying their hand at purchasing stocks from across the causeway.