Capital Markets Reform:Malaysia’s Experience

Wong Sau Ngan Securities Commission of Malaysia

20 December 2006Washington D.C.

1

MalaysiaMalaysia

• Introduction

• Approach and consultation process

• Overview of Capital Market Master Plan

• Implementation of Capital Market Master Plan

• Performance Measures

AGENDA

2

CHANGING FINANCIAL LANDSCAPE DEMANDED RE-ASSESSMENT OF BROAD STRATEGIC FRAMEWORK FOR

THE MALAYSIAN CAPITAL MARKET

Internationalisation of financial activity

• Growth in global investment activity

• Increased international fund-raising

• Greater cross-border M&A

Deregulation offinancial markets

• Reform of pension and mutual funds industries

• Removal of barriersto cross-borderactivities

• Removal of marketsegmentation

Rapid advancesIn technology

• Rise of alternative platforms for market activity

• New intermediation channels and processes

3

THERE WAS AN URGENT NEED TO ALLEVIATE FINANCING BURDEN ON BANKING SECTOR…

• Total investment spending expected to double over next 10 years

• Capital market expected to play major role in mobilising cost-effective financing for high-growth and k-economy sectors

1990-1999 2001-2010p

0

200

400

600

800

1000

1200

1400

1600

1800

Inve

stm

ent S

pend

ing

(RM

Bill

ion)

Higher investment spending requirements going forward

4

… THEREFORE REQUIRING MORE EFFECTIVE MOBILISATION AND ALLOCATION OF FUNDS

Need to increase role of capital markets in meeting nation’s financing needs

Need to further diversify holdings of financial assets within financial system

OtherProvident

and pensionfunds

Breakdown of funds managed by the financial services sector as at end-1999

Insurancecompanies

BankingSector

EPF Unit trustcompanies

AssetManagementcompanies

0

100

200

300

400

500

600

RM B

illio

n

5

CONCENTRATION OF FUNDS WITHIN THE PENSIONS AND PROVIDENT FUND INDUSTRY

• Malaysian investment management funds by category as at end-1999

General InsuranceFunds4.81%

Unit Trust Funds14.65%

Asset ManagementCompanies

2.91%

Life InsuranceFunds10.93%

Provident andPension Funds

66.70%

6

• Minister of Finance announced CMP initiative in August 1999

• Capital Market Strategic Committee (“CMSC”) comprising high level SC’s & private sector representatives was set up

• CMSC’s role was to provide views on strategic issues & future direction of Malaysian capital markets

• Chairman of SC appointed as Chair of CMSC

CONCEPTION OF THE CAPITAL MARKET MASTER PLAN (“CMP”)

7

• CMP website was launched in October 1999 to disseminate information & garner public feedback

• Formal requests made by CMSC to solicit views from market intermediaries, market institutions & relevant industry and professional bodies

• Robust consultations with industry participants & professional bodies held over entire course of formulation of CMP

EFFORTS TAKEN TO FACILITATE DIRECT CONSULTATION & WIDE REPRESENTATION OF VIEWS IN FORMULATION OF CMP

8

• Meetings with Ministry of Finance, other government agencies & regulatory bodies including Central Bank of Malaysia, capital market reform experts from other jurisdictions, academics & foreign and domestic users throughout consultation process

• Private consultants retained to provide research & independent assessment

• SC’s own pool of research, analysis and assessment

• By end of 2000, several hundred meetings with market participants, stakeholder groups, independent consultants and experts had been conducted

EFFORTS TAKEN TO FACILITATE DIRECT CONSULTATION & WIDE REPRESENTATION OF VIEWS IN FORMULATION OF CMP

9

CAPITAL MARKET MASTER PLAN HAS AN IMPORTANT ROLE TO PLAY …….

Chart s

trateg

ic

positio

ning &

futu

re

directi

on of

capita

l

mar

ket

Develop capital market that

has ability to nurture competitive environmentand create value-added

opportunities

Provide strategic

clarity of vision &

objectives for

capital market

10

THE VISION FOR THE CAPITAL MARKET IS FOR IT TO BE ...

• Internationally competitive

• Highly efficient

• Supported by a strong and facilitative regulatory framework

11

COMPREHENSIVE APPROACH TO CAPITAL MARKET DEVELOPMENT

Capital MarketMaster Plan

A comprehensive blueprintfor the longer-term strategic

Development of theMalaysian capital market

152 recommendationscovering 11 categories:• Equity market• Bond market• Derivatives market• Stock broking industry• Market institutions• Investment management• Regulatory framework• Corporate governance• Islamic capital market• Technology & e-commerce• Training & education

12

REALISATION OF CMP WILL ULTIMATELY DEPEND ON EFFECTIVE IMPLEMENTATION

Implementation of CMP involved…

prescribing mechanisms for co-ordinating implementation

highlighting skills, capacity and resources

establishing guidelines for monitoring and reporting

formulating communication programme

… through an explicit framework

13

… ACCORDING TO AN EXPLICIT PROCESS …

Implementation process

Approval of CMP

Approval of CMP

Implement Recommendations

Implement Recommendations

Monitor ProgressMonitor Progress

Update CMPUpdate CMP

• Minister of Finance

• SC

• Other relevant Government agencies & regulatory bodies

• Relevant market institutions and other market participants

Report ProgressReport

Progress

14

… INVOLVING VARIOUS PARTIES HAVING A STAKE IN THE PROCESS

Implementation structure

Other Government

Organisations

ExchangeClearing Houses

& DepositoryOther market participants

Implementation Task Force

Implementation Task Force

Various Working

Committees

Various Working

Committees

• Foreign Investment Committee

• Ministry of International Trade & Industry

• Registrar of Companies

• Attorney General’s Chambers

• Employees Provident Fund etc.

Advisory Council

Advisory Council TreasuryTreasury

Bank Negara

Malaysiaand other agencies

Bank Negara

Malaysiaand other agencies

Securities Commission

Securities Commission

Minister of Finance

Minister of Finance

15

IDENTIFYING ENABLERS TO ASSIST IMPLEMENTATION

Facilitative regulationFacilitative regulation• Industry to take greater

responsibility • Further deregulation• Focus on market-based

solutions

EducationEducation• Focus on increasing

intellectual capital• Focus on enhancing skill-sets

to support innovation

Technology Technology • To enhance

connectivity and increase yields from information

16

THE CMP IS TO BE IMPLEMENTED IN THREE PHASES …

PHASE 3PHASE 2PHASE 1

• Further strengthen key sectors and gradually liberalise market access

• Further expansion and strengthening of market processes and infrastructure towards becoming fully-developed capital market

• Enhance international positioning in areas of comparative and competitive advantage

• Strengthen domestic capacity and develop strategic and nascent sectors

2001 2003 2004 2005 2006 2010

17

ROBUST ENGAGEMENT AND DIALOGUE PROCESSES TO ENSURE RELEVANCE OF CMP’S OBJECTIVES &

RECOMMENDATIONS

Feedback from CMAC on Implementation Review

CMP Dialogues

Industry workshops on key/selected areas + Sector/country analysis

Phase I Phase 3Phase 2

Overall review by Capital Market Advisory Council

18

POST IMPLEMENTATION REVIEW MECHANISMS VITAL TO ASSESS & VALIDATE CMP’S RECOMMENDATIONS

Phase 1:• Addressed weaknesses that had emerged during the 1997

financial crisis

• Strengthened domestic capacity for future expansion

• Enhanced microstructure efficiency including enhancement of the Securities Commission’s overall efficiency and effectiveness

PHASE 3PHASE 2PHASE 1

•• Strengthen key Strengthen key sectors and sectors and gradually gradually liberalise market liberalise market accessaccess

•• Strengthen market processes & Strengthen market processes & infrastructure to become fullyinfrastructure to become fully--developed capital market, and developed capital market, and enhance international positioning enhance international positioning in areas of comparative advantagein areas of comparative advantage

•• Strengthen Strengthen domestic capacity domestic capacity and develop and develop strategic and strategic and nascent sectorsnascent sectors

20062006 2010201020042004 2005200520012001 20032003

PHASE 3PHASE 2PHASE 1

•• Strengthen key Strengthen key sectors and sectors and gradually gradually liberalise market liberalise market accessaccess

•• Strengthen market processes & Strengthen market processes & infrastructure to become fullyinfrastructure to become fully--developed capital market, and developed capital market, and enhance international positioning enhance international positioning in areas of comparative advantagein areas of comparative advantage

•• Strengthen Strengthen domestic capacity domestic capacity and develop and develop strategic and strategic and nascent sectorsnascent sectors

20062006 2010201020042004 2005200520012001 20032003

19

AREAS OF FOCUS FOR PHASE 2 IMPLEMENTATION

ENHANCELIQUIDITY

ENHANCELIQUIDITY

VALUE CREATION

VALUE CREATION

GLOBAL NETWORKS

GLOBAL NETWORKS

Address structural impediments to enhance liquidity

Assist market intermediaries and institutions to create value for

their customers

Focus upon enhancing the position of Malaysia’s capital

market within a global network

20

IMPLEMENTATION SCORECARD AS AT 31 DECEMBER 2005

• 65% or 99 recommendations completed

• 35% or 53 recommendations are in progress

• Strong CG framework• Surveillance & enforcement• Education

• Diversified sources of financing• Strengthened institutional

structures

• Efficient capital-raising process• Lower cost for investors• Repositioning of market

institutions• Deregulation• Liquidity lab initiatives• Pension reform• Risk Management• Strategic alliance

21

KLCI HAS BEEN A MEDIUM PERFORMER IN THE REGION

Source: Thomson Financial DataStream

% performance of selected benchmark indices (1 Jan – 19 Sept ‘06)

-1.6

-1.5

-0.4

0.8

3.8

3.8

5.1

5.6

6.5

7.0

7.7

8.1

8.5

8.6

16.6

22.3

23.6

27.4

27.8

57.6

-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Thailand SET

Japan Nikkei 225

Korea KOSPI

US Nasdaq Comp

Malaysia 2nd Board

UK FTSE 100

Taiwan TWSE

S&P Composite Index

Australia ASX All Ord

Malaysia KLCI

US DJIA

Singpaore STI

France CAC 40

Germany DAX 30

Hong Kong Hang Seng

Philippines Pcomp

Malaysia Mesdaq

India Sensex

Indonesia Jakarta

China Shanghai B

22

MALAYSIA’S RECOMMENDED WEIGHTINGS HAS FALLEN SINCE END-05

Source: Dow Jones Newswire Asia Fund Poll

Recommended weightings for Asia ex-Japan and Malaysian equities

0

0.25 0.25 0.25

0 0

-0.5 -0.5

-0.25 -0.25 -0.25

0

-0.25

0

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Wei

ghtin

gs

Slightly underweight

Slightly Overweight

Underweight

23

PRIMARY EQUITY ISSUANCE HAS DECLINED

Funds raised via initial public offering (Jan 2005 – July 2006)

Source: Bank Negara Malaysia

-

200

400

600

800

1,000

1,200

Jan-

05

Feb-

05

Mar

-05

Apr-

05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr-

06

May

-06

Jun-

06

Jul-0

6

RM

mill

ion

24

NONETHELESS CAPITAL MARKET CONTINUES TO BE IMPORTANT SOURCE OF FUNDING FOR PRIVATE SECTOR

25

DESPITE LACKLUSTRRE MARKET PERFORMANCE, EQUITY FINANCING REMAINS IMPORTANT SOURCE OF FUNDING FOR SMEs

Funds raised via initial public offering (Jan 2005 – July 2006)

Source: Bank Negara Malaysia

-

200

400

600

800

1,000

1,200

Jan-

05

Feb-

05

Mar

-05

Apr-

05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr-

06

May

-06

Jun-

06

Jul-0

6

RM

mill

ion

26

DIVIDEND YIELDS OF PUBLIC LISTED COMPANIES HAS BEEN RISING

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Perc

enta

ge (%

)

• Malaysia’s dividend yield (4.0%) is higher than region’s average (approx. 3.2%) and is among the region’s highest

Dividend yield for Malaysia

Source: I/B/E/S Global Aggregates27

AVERAGE M&A DEAL SIZE HAS BEEN INCREASING

Number of announced M&A deals and total announced value for Malaysia*

Source: Bloomberg

Note: *Data captures announced deals among public companies

**For period 1 Jan – 19 Sept 2006

0

1000

2000

3000

4000

5000

6000

7000

8000

2004 2005 2006YTD**

USD

mill

ion

0

10

20

30

40

50

60

70

No.

of d

eals

Value (LHS) No of deals (RHS)

28

103

142

117

161

125

153

149

179

175

188

191

207

050

100150200250300350400

RM b

illio

n

2000 2001 2002 2003 2004 2005

Total bonds outstanding

Public Sector Private Sector

SIZE OF MALAYSIAN BOND MARKET

29

PRIVATE SECTOR DEBT MARKET HAS GROWN DRAMATICALLY

Issuance of debt securities by the private sector* •

Source: Bank Negara Malaysia

*Includes issuance of Cagamas bonds

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

RM

mill

ion

New Issuance Redemption Net issuance

30

WIDENING RANGE OF BOND PRODUCTS

Range of products in 2005

Source : BNM

Some new products in 2006

• Public Bank’s RM1b hybrid debt securities

• ADB’s USD10b Asian currency note programme

• Khazanah’s USD750m Islamic exchangeable bond

31

TURNOVER OF DEBT SECURITIES (JAN-DEC 2005)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Listed ABS CagamasBonds

KH GII PDS MGS

0.10% 2.30%5.10% 5.70%

12.10%

24.20%

50.40%

32

PERFORMANCE OF DERIVATIVES MARKET AS AT DEC 2005

Products 2005

Average daily volume

Share of total volume in Bursa Malaysia Derivates

in 2005 (%)

CPO Futures

Open interest position

4,709 47.1

KLCU Futures

Open interest position

4,519 45.2

3-months KLIBOR Futures

Open interest position

661 6.6

3-year MGS Futures 40 0.4

5-year MGS Futures

Open interest position

70 0.7

Source: Bursa Malaysia Derivatives Berhad

33

PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET

Number of approved funds 94

Shariah-based 392

Total Industry

NAV of approved funds

Shariah-based RM8.91 billion

Total Industry RM108.90 billion

% of Shariah-based to total industry 8.18%

Shariah-based unit trust fund

As at end August 2006

34

PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET

Number of Shariah-complaint securities – Oct 2006

886

% of Shariah-complaint securities to total listed securities

86%

Market capitalization (Oct. 2006)

Shariah-complaint securities RM 494.24 billion

Total market capitalization RM769.08 billion

% of Sharia-complaint securities to total market capitalization

64.26%

Shariah-complaint securities on Bursa Malaysia

35

Size of outstanding Sukuk RM102.85 billion

% of outstanding Sukuk to total outstanding bonds

46.7%

Sukuk approved by SC in Q3 2006

Number of Sukuk 16 issues

Size of Sukuk RM12.39 billion

Size of total bonds approved RM20.69 billion

% of size of Sukuk to total bonds approved

28.8%

Sukuk

PHENOMENAL GROWTH IN ISLAMIC CAPITAL MARKET

36

KEY MEASURES INTRODUCED AS AT 31 DECEMBER 2005

• Measures to enhance market liquidity in bond market

• Market access liberalised for intermediaries, issues and investors

• Institutional and regulatory reforms including demutualisedsecurities exchange and corporate governance

• Deregulation in investment management industry

• Broad fiscal incentives

• Vast improvements in market infrastructure

36

THANKThank YOU

37