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COUNTRY REPORT-MALAYSIA INTERNATIONAL INVESTMENT FUNDS ASSOCIATION ANNUAL CONFERENCE 2016

1. Economic and financial background

The Malaysian economy grew moderately with Gross Domestic Products (GDP) increased 4.2% in the first quarter of 2016 and then further to 4.0% in the second quarter, bringing the average growth rate to 5.1% for the 12-month period ended 30 June 2016. Private sector expenditure remained the key driver of growth amid a slowdown in export growth and gross fixed capital formation. On the monetary front, Malaysia maintained the benchmark Overnight Policy Rate (OPR) at 3.25% during the second quarter of 2016 amid the prolonged weak crude oil prices and global recovery. Malaysian equities fell over the period, weighed down by the protracted controversy on a national development fund and a weak ringgit. External headwinds also hurt market sentiment, including volatile commodity prices, China’s slowing economy and UK’s shock vote to leave the European Union that rattled global markets towards the end of the period.

2. Funds under management and portfolio

(a) Funds Under Management

Total Net Asset Value as at 30 June in RM (billion)

2015 (Jun)

2015 (Dec)

2016 (Jun)

2016 (Jun) US$ (billion)*

Total Net Asset Value (NAV)** 355.75 346.57 349.48 86.88

Gross Domestic Products 1,128.90 1,157.14 1,186.03 294.85

Source : Securities Commission Malaysia and Bank Negara Malaysia. *USD1 = RM4.0225 as at 30/6/2016 ** Includes private and government-sponsored funds.

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(b) Fund Portfolio as at 30 June

Fund Type 2015 (Jun) 2015 (Dec) 2016 (Jun)

RM (billion) RM (billion) RM (billion) US$ (billion)*

Conventional 306.76 294.45 295.02 73.34

Islamic** 48.99 52.12 54.46 13.54

Total 355.75 346.57 349.48 86.88 Source : Securities Commission Malaysia. * USD1 = RM4.0225 as at 30/6/2016 ** Islamic funds include funds of all types of fund that are managed in accordance with Shariah principles.

3. Key trends in flows and assets under management

Equity funds were among types of funds well received by investors followed by bond funds and mixed asset funds. Majority of the newly launched equity funds were investing in regional and global markets such as Asia Pacific Region, Europe and United States of America. Such funds augur well with a growing desire among investors for better potential returns amid prolonged low interest environment, weakening ringgit and poor local stock markets performance.

4. Product development

Please refer to Section 3 above. 5. Regulatory and Self-regulatory development

(a) ASEAN capital market regulators roll out initiatives under ASEAN Capital Markets Forum (ACMF)’s new 5-year roadmap

On 25 March 2016, the ACMF approved the ACMF Annual Implementation Plan 2016. This annual plan is part of ACMF Action Plan 2016-2020 (Action Plan) that was endorsed by ASEAN Finance Ministers. The Action Plan will drive the ACMF’s objective of achieving an inter-connected, inclusive and resilient ASEAN capital market, to help realise the ASEAN Economic Community Vision 2025 of deepening economic integration over the next ten years. Key component of the Action Plan includes the followings:

i. Capacity building for members.

With the assistance from the Asian Development Bank (ADB), the ACMF launched the ASEAN Young Regulators Programme as the first programme to be rolled out under the ACMF Market Development Programme. This new

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programme aims to foster mutual sharing and exchange of expertise and experiences among capital market regulators in building a continuous pipeline of talent and to promote cooperation amongst ASEAN securities regulators through secondment opportunities at ASEAN capital market regulators;

ii. Accelerating the cross-border offering of collective investment schemes, cross-

border fundraising and ASEAN stock exchange connectivity

3 specific industry consultative panels were formed under the auspices of ACMF, drawing representation from key industry participants from ASEAN member countries. In addition, the ACMF has partnered with ADB to commission a study to provide input on the ASEAN stock exchange connectivity.

iii. Elevating the profile of ASEAN as an investment destination and promote ASEAN as an asset class

The ACMF will also work with the industry panels to further engage domestic and international stakeholders to elevate the profile of ASEAN as an investment destination and promote ASEAN as an asset class whilst raising the visibility of ACMF initiatives to generate wider participation.

iv. Enhancing the mobility of capital market professionals within the region

An important element of greater regional integration is the mobility of capital market professionals within the region. The ACMF has agreed to explore efforts towards facilitating the movement of capital market professionals in consultation with industry players in the region.

(b) Introduction of regulatory framework to facilitate peer-to-peer (P2P) financing

The P2P financing is part of Securities Commission Malaysia (SC)’s on-going effort to provide greater access to market-based financing through the application of technology solutions. P2P financing enables small business organisations such as sole proprietorships, partnerships, private limited and unlisted public companies to access market-based financing to fund their projects or businesses, via an electronic platform. The P2P framework was introduced as new Chapter 13 in the Guidelines on Recognized Markets (Guidelines). The regulatory framework sets out requirements for the registration of a P2P platform that include duty and responsibility of a P2P operator, type of issuer and investor who can participate in P2P. In addition to on-going obligations are imposed on the P2P operator such as ensuring compliance with platform rules, having in place an efficient and transparent risk scoring system for issuer and contingency arrangement to ensure business continuity, a P2P operator is also required to ensure that, among others, monies belong to investors are to be kept in a separate trust account. Additionally, P2P operator must make available all the relevant information to the investor to

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enable them to understand the risks involved and make informed investment decision.

(c) Renminbi Qualified Foreign Institutional Investor (RQFII)

The People’s Bank of China has recognised Malaysia as an RQFII jurisdiction, with an aggregate quota of RMB50 billion. With this, Malaysia-based institutions are now able to invest directly into the Chinese capital market using Renminbi funds. The RQFII programme creates opportunity for qualified Malaysian institutions to offer a wider range of Renminbi investment products and will serve as an avenue for greater utilisation of offshore Renminbi funds. A Guidance Note to facilitate applications to the China Securities Regulatory Commission (CSRC) for an RQFII licence has been jointly issued by SC and Bank Negara Malaysia (BNM). The Guidance Note outlines the criteria and eligible entities that may apply for the RQFII licence as well as additional requirements by SC and/or BNM prior to any application submission to CSRC.

(d) Self-regulatory development

In formulating FIMM’s regulatory strategic plans for 2016/2017, its key priority areas include enhancing FIMM’s registration requirements to promote growth of the unit trust schemes and private retirement schemes industries. In its regulatory efforts, FIMM had implemented its Consolidated Rules effective 1 June 2016. As a Self-Regulatory Organisation (SRO), FIMM had carried out a review exercise on its present guidelines, rules, by-laws, circulars and guidance note, including revisions, where applicable, and consolidating all these into a single document, named Consolidated Rules. FIMM’s Consolidated Rules applies to all registered distributors and their consultants in the unit trust schemes and private retirement schemes industries. FIMM will also continue to take a holistic approach to regulate and supervise its registered distributors and consultants. FIMM plans to intensify its supervisory framework by adopting a risk-based approach on its registered distributors and consultants in the unit trust schemes and private retirement schemes whilst ensuring timely enforcement actions to enhance the level of compliance of its registered distributors and consultants in the unit trust schemes and private retirement schemes industries. In order to enhance its regulatory capacity and effectiveness, FIMM aims to improve its gate-keeping, supervision and enforcement capabilities through enhancement of its technology and strengthening its resources to ensure the interest of investor is protected at all times. On the other hand, FIMM continues to promote the growth of the unit trust schemes and private retirement schemes industries by:

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• developing best practices and standards to enhance industry efficiency; • acting as a focal point to serve industry needs, e.g. representing and resolving

industry challenges, and promoting industry development; and • enhancing investor awareness of the unit trust schemes and private retirement

schemes industries. 6. Corporate Governance

On 18 April 2016, the SC released the proposed draft Malaysian Code on Corporate Governance 2016 (MCCG 2016) for public consultation. The MCCG 2016 aims to encourage progression and emphasises on conduct and outcomes from corporate governance practices.

Recognising the need for enhancement to corporate governance practices, the MCCG 2016 streams corporate governance practices into two categories – Core and Core+. Companies are expected to disclose their adherence to the Core practices on an ‘apply or explain an alternative’ basis, which encourages greater thought process in undertaking the practices, and in making disclosures. While Core+ practices are voluntary, companies are strongly encouraged to adopt them and disclose in the annual report how these practices are being undertaken or implemented.

7. Fund governance

(a) Guidance on Simple Language and Effective Drafting Practices for Prospectus

FIMM had issued Guidance on Simple Language and Effective Drafting Practices for Prospectus (Guidance) on 30 November 2015. The Guidance serves as reference for a drafter to use simple language and adopt effective practices when drafting prospectuses. The prospectuses shall be written and presented in a clear, concise and effective manner. The Guidance is part of the FIMM’s initiatives to assist investors to understand the information disclosed in the prospectuses easily.

(b) Lodge and Launch Framework for wholesale funds

The SC had launched the Lodge and Launch framework with the objective to shorten time-to-market by enabling wholesale products to be launched once the required information is lodged with the SC, as compared to the current 14-21 days approval timeframe. Wholesale products that are covered under the framework include wholesale funds, structured products, bonds, sukuk and asset-backed securities. This liberalisation allows SC to increase its focus on conduct regulation and product surveillance to ensure that those who are involved in the wholesale market will discharge their due diligence and disclosure obligations as well as uphold the principle of fair treatment of investors.

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(c) Expedited authorisation framework for non-complex funds The SC had introduced an expedited authorisation framework for non-complex funds that will reduce time to market. With the expedited authorisation, processing time for authorisation for non-complex retail funds have been shortened markedly to 10 days upon making the submission. The existing authorisation framework will continue to apply for all other types of retail funds

(d) Removal of annual renewal requirement for prospectuses by the SC

With the removal of the 12-month validity period for prospectuses, issuers are no longer required to revise and reissue the prospectus on an annual basis. In addition to cost savings, the measure enable material changes in the prospectuses to be updated expeditiously via websites, supplementary prospectuses or where appropriate, replacement prospectuses. Certain information previously disclosed in prospectuses such as information on fund performance will be reflected in the Product Highlights Sheets that are provided for investors to enable them to make an informed investment decision.

8. Other major issues and developments Not applicable.