Published November 11, 2009

Can SGX manage the conflict?

By MICHELLE QUAH

	Email this article
	Print article
	Feedback

IT HAS been reassuring to learn how the Singapore Exchange's (SGX) Regulatory Conflicts Committee (RCC) reviews perceived and actual conflicts that could arise from the exchange's status as a self-regulated organisation and its dual role as a listed company and a market regulator.

Among various things, the committee looked into how SGX handled the recent lapses at S-chips here and scrutinised deals sponsored by the Prime Partners Group, which is linked to outgoing SGX chief executive Hsieh Fu Hua, committee chairman Robert Owen told BT recently in an interview.

But, as reassuring as it has been to hear of how such conflicts are dealt with, it has (to some) served to further drive home the point that Singapore needs a separate regulator to police the market.

For one thing, a committee of just three independent directors - none of whom is full-time on the task - may not be enough to stay on top of all the regulatory issues SGX has to deal with and all the conflicts of interest it may run into.

Then there's the perception issue. In a marketplace, integrity and reputation count for everything - a point highlighted by Mr Owen: 'It is in the interest of the exchange and its shareholders that the exchange maintains its reputation for regulatory integrity and high standards.'

Such a need becomes more urgent in times of crisis - when the incidence of corporate scandals and failures increases, making for a riskier marketplace and a more challenging regulatory environment. To this end, the perception of having a truly independent and forceful market regulator is vital.

A committee of just three independent directors might be sufficient for handling issues on the scale of reviewing deals sponsored by the Prime Partners Group, for instance, but it is scarcely enough to stay on top of bigger issues.

Already, critics have pointed to the slew of S-chip debacles that have occurred here: China Aviation Oil, China Sun Bio-Chem, China Printing & Dyeing, Oriental Century, FibreChem Technologies and Sino-Environment, to name the most recent.

And, with the market continuing to grow and develop - as the exchange courts more new listings, enters into more tie-ups with other exchanges and launches innovative products to keep abreast of the competition - will the RCC be able to stay on top of it all?

According to SGX's annual report for the financial year ended June 30, 2009 (which covered the period in which the global financial crisis was in full swing), the RCC met a grand total of two times that year. One wonders if that was sufficient to look into all the regulatory issues and conflicts, and if a dedicated regulatory organisation would be better able to devote the time and resources needed to field the pressing issues that occurred during that difficult period.

There's also the perception of just how independent this conflicts committee is. Mr Owen, while he sits on several boards such as IB Daiwa Corp and Crosby Asset Management, is not connected to any SGX member or listed company and can be deemed independent.

But another member Euleen Goh, ex-CEO of Standard Chartered Bank Singapore, now sits on the boards of listed companies Singapore Airlines and DBS Group Holdings. The third member, Liew Mun Leong, is chief executive of CapitaLand (a company listed on SGX) and deputy chairman of the various CapitaLand trusts listed on SGX.

While the Monetary Authority of Singapore (MAS) deems a director independent as long as he is free from any business and management relationships involving SGX as well as being free from any relationships with SGX member firms or its related companies, these members of the committee could end up looking into issues involving or connected to their companies or even rival companies.

The Code of Corporate Governance (which is a best practices guide for listed companies) states that a director is deemed independent only if he is not linked to the company or a related company in any way. Perhaps a leaf could be taken out of the Code's book in determining the independence of SGX directors. While it doesn't specifically state that an SGX independent director cannot come from a company listed on the exchange, the spirit of the Code suggests that there's enough of a relationship to deem the director to be not independent.

Having RCC members abstain from their duties, when their companies are involved, is not the solution either, as that would leave the committee with just two people - or even one - to resolve the issue.

It would be preferable to have the entire committee made up of truly independent members, or to have a separate independent body in charge of regulating the market.

Having a separate market regulator would also mean that the exchange gets to operate purely as a commercial entity. While SGX has done well for itself, one has to realise that the competition among stock exchanges is very real. Before the current crisis hit, global exchanges were upping the ante by launching alternative markets and innovative products, and by taking stakes in each other or joining forces with other exchanges - and one can be sure that they'll continue to do so once the worst is over.

It's about time MAS, which is ultimately responsible for the regulatory framework here, considers setting up a separate, well-manned and authoritative body to regulate the market. At the very least, the perception of having a strong, independent regulator will count for much.