Malaysia
Publication of Financial Sector Assessment Program Documentation—Detailed Assessment of Implementation of IOSCO Objectives and Principles of Securities Regulation
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International Monetary Fund. Monetary and Capital Markets Department
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The article is an account of the assessment of implementation of IOSCO principles of securities and regulations in Malaysia. This assessment was conducted by the International Monetary fund (IMF) and the World Bank. The Securities Commission Malaysia has developed its supervisory network. The rules of the governing bodies such as issuers, auditors, collective investment schemes, and markets have widened their roles. The Executive Board conducted the assessment to ascertain whether the legal securities are able to meet the standards set by the IOSCO.

Abstract

The article is an account of the assessment of implementation of IOSCO principles of securities and regulations in Malaysia. This assessment was conducted by the International Monetary fund (IMF) and the World Bank. The Securities Commission Malaysia has developed its supervisory network. The rules of the governing bodies such as issuers, auditors, collective investment schemes, and markets have widened their roles. The Executive Board conducted the assessment to ascertain whether the legal securities are able to meet the standards set by the IOSCO.

I. Summary, Key Findings, and Recommendations

1. The Securities Commission Malaysia (SC), as the supervisor of the capital markets, has developed a robust supervisory framework that exhibits high levels of implementation of the International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) in most areas. The regimes governing the regulation of issuers, auditors, collective investment schemes, market intermediaries and secondary markets, and with respect to enforcement, co-operation and information sharing, are extensive.

2. There are, however, some areas where enhancements are advisable. The SC’s independence would be buttressed by some changes to the legal provisions on removal of commission members and to protections given to the members of the Commission and to its staff. The disclosure deadlines for issuers and their substantial shareholders should be adjusted to reflect international best practices. The new frameworks for oversight of credit rating agencies (CRAs) and the Federation of Investment Managers Malaysia (FIMM) should be implemented in full by carrying out on-site inspections as presently planned.1 At this stage in the jurisdiction’s development, consideration should also be given to putting in place the pre-conditions that will enable the SC to ease up gradually on the intensity of its direct involvement in the day-to-day operations of the capital market and its participants.

A. Introduction

3. The assessment was conducted during the IMF/World Bank Financial Sector Assessment Program (FSAP) mission to Malaysia during the period April 4 to 20, 2012, by Tanis MacLaren, an external technical expert employed for this purpose by the IMF.

4. The assessment was carried out using the 2011 IOSCO Methodology for Assessing Implementation of the IOSCO Principles (the Assessment Methodology). The Assessment Methodology was published in final form by IOSCO in 2011 and superseded an earlier version published in 2003. The final version of this revised Assessment Methodology is expected to be endorsed at the IOSCO annual meeting in 2012. In using the Assessment Methodology, the assessor sought to focus on the substance of the regulatory outcomes of the key requirements under each Principle.

5. The assessment relies on information from a detailed self assessment submitted by the authorities, as well as extensive interviews with the staff of the SC, a review of legislation, regulations, guidelines and related materials, along with interviews with the staff of Bank Negara Malaysia (BNM), Bursa Malaysia, market participants and other stakeholders.

6. The assessor is very grateful to the staff of the SC for their extensive cooperation and assistance in the conduct of this assessment. The staff was informed, forthright and helpful throughout. The assessor would also like to thank the regulated entities, market participants and other stakeholders who generously provided their time and honest insights. The industry participants with whom the assessor met spoke extremely highly of the quality of the staff at the SC and this assessor shares those views.

B. Institutional and Market Structure—Overview

7. The Malaysian financial system is regulated by two main authorities: the SC and BNM. Each of these supervisors has clearly delineated areas of oversight and accountability set out in legislation. There are formal arrangements in place to govern areas of joint responsibility, such as investment banks, and to give the SC authority to approve capital markets products designed, operated and offered by institutions licensed by BNM.

8. The SC is a regulatory authority with broad powers to regulate the capital markets in operation in Malaysia. The SC has regulatory authority over equity securities, debt securities and derivatives2, whether traded over-the-counter (OTC) or on organized markets, as well as other capital markets activities such as discretionary portfolio management and the management of collective investment schemes (CIS—or unit trusts). The SC reports to the Minister of Finance (Minister).

9. The regulator’s responsibilities, powers and authority with respect to the capital market are established by statute. SC draws its powers from several laws, including the Securities Commission Act 1993 (SCA), Capital Markets and Services Act 2007 (CMSA) and Securities Industry (Central Depositories) Act 1991 (SICDA). Further, under the CMSA, the SC has authority to make binding regulations, as well as issue guidelines and practice notes on products and services offered in both the conventional and Islamic segments of the capital market (s. 377 and 378). The statutes have been supplemented with detailed secondary legislation in almost every area of the SC’s authority.

10. BNM is the central bank and the supervisory authority for a broad array of financial institutions operating in Malaysia. The statutory responsibilities and objectives of BNM are stated in the relevant statutes, such as the Central Bank of Malaysia Act 2009 (CBA) and the Banking and Financial Institutions Act 1989 (BAFIA), supported by internal governance arrangements. It is responsible for supervision of banks, insurance companies, Islamic banks, takaful operators, reinsurance companies and other participants in the financial markets. BNM also has oversight over the foreign exchange and money markets. The BNM reports to the Minister.

11. The SC is led by a nine member Commission headed by an Executive Chairman. The Commission meets monthly to deliberate on matters such as appeals and Commission policies. Other than administrative and day-to-day matters (the responsibility for which rests with the Chairman), all functions of the SC, including approvals associated with its gatekeeping authority and oversight of the capital market are vested with the Commission. Some of the Commission’s functions are delegated to committees established by the Commission under the SCA3 or to the Chairman.

12. SC is organized into eight divisions to ensure the full scope of its mandate is carried out effectively. The eight divisions are: Chairman’s Office, Compliance & Examination, Corporate Finance & Investments, Corporate Resources, Enforcement, Islamic Capital Market, Market Oversight and Strategy and Development. Two affiliated agencies also have been established to complement SC’s core functions, namely the Securities Industry Dispute Resolution Centre (SIDREC) and the Securities Industry Development Corporation (SIDC). SIDC was formed from the SC’s training department and now is a separate corporation with its own board. Its mandate is to assist in building the skills of market intermediaries and providing investor education through its training programs.

13. SIDREC is a specialized dispute resolution body in place to facilitate prompt settlement of claims against certain licensed market intermediaries. It provides dispute resolution services for any dealing or transaction involving capital market products or services between clients and their stock brokers, futures brokers, fund management companies (FMCs) and unit trust management companies (UTMCs). The process involves both mediation and, where necessary, adjudication by SIDREC. It is offered as a free service to investors. The decision and award granted by SIDREC are binding on the intermediary. However, the claimant is free to pursue his claim in court if he is dissatisfied with the mediator’s decision.

14. The SC also includes the Audit Oversight Board (AOB) that was established to provide independent audit oversight of public interest entities (PIEs). Its mandate also extends to protect the interests of investors by promoting confidence in the quality and reliability of audited financial statements of PIEs. While the AOB is part of the SC, it is governed by a separate board made up of representatives from the accounting profession, regulators including the SC, BNM and the Companies Commission Malaysia, as well as the private sector.

15. The SC currently is prescriptive in how it executes its mandates with respect to regulating and developing the capital markets. As a result, the SC as a regulator is very involved in most aspects of how the capital markets and their participants operate. While this level of control may have been necessary and appropriate under the Capital Market Masterplan 1 (CMP1) that was issued in 2000, it risks having an impact on innovation in the marketplace and leaving the Malaysia markets somewhat constrained when they face competition in the region, both for capital and market share. Nevertheless, there are clear indications that the SC is starting to take a less prescriptive approach to regulating and developing the market. The SC has issued two documents recently—the Capital Market Masterplan 2 (2011–2020) (CMP2), which sets out SC’s strategic direction in structurally reforming and developing the market, and the Corporate Governance Blueprint 2011, a plan designed to raise standards of corporate governance in Malaysia. CMP2 was launched in 2011, with the theme ‘Growth with Governance’. This 10-year plan outlines SC’s strategy to develop the capital market and support the establishment of a robust culture of governance throughout the market. Similarly, the thrust of the Corporate Governance Blueprint 2011 is to complement regulatory discipline with self- and market-discipline. Given the overall thrust of these plans, the SC appears to be giving due consideration to moving a less directive mode of regulation. For example, it has a strategy in place to give more emphasis on disclosure and less emphasis on merit reviews of new issues. These efforts should be encouraged.

16. There is one securities exchange (Bursa Malaysia Securities) and one derivatives exchange (Bursa Malaysia Derivatives) operating in Malaysia under authorization granted by the Minister. Both exchanges, along with the securities and derivatives clearing houses, central securities depository and the operator of an electronic trading platform for the trading and reporting of bonds are subsidiaries of the Bursa Malaysia Berhad, a holding company also authorized by the Minister under the CMSA. The holding company is listed on the securities exchange. The securities exchange has two equity markets for listings—the Main Market and the ACE Market. The Main Market is for established companies with a profit track record of three to five full financial years or companies with a sizeable business. The ACE Market is an alternative, sponsor-driven market designed for companies of all business sectors that have good growth potential but insufficient history to qualify for the Main Market. Bond trading takes place OTC but all trades must be reported to Bursa Malaysia Bonds for transparency purposes. At the time of the assessment, there were 35 securities broking firms that are participating organizations (POs) in Bursa Malaysia Securities and 20 futures broking firms that are trading participants (TPs) in Bursa Malaysia Derivatives.

17. The number of listed companies and listed securities on Bursa Malaysia Securities has not grown over the past six years. On both the Main Market and the ACE Market the number of listed companies has declined by 8.6 percent and 7.0 percent respectively, while the number of issues listed has declined 14.2 percent on the Main Market and increased 10.6 percent on the ACE Market. The one area of substantial growth is the number of structured warrants listed, which has increased from 33 in 2006 to 304 in 2011, an increase of over 800 percent. Under CMP1 (covering the period from 2000–2010), the emphasis was placed on growth in market capitalization, rather than on the number of companies listed. The result was an 8.6 percent compound annual growth rate in market capitalization, but a decline in number of listed companies.4

18. There has been substantial growth in the equity market capitalization and trading activity at Bursa Malaysia Securities over the last six years. Total market capitalization has increased 51.4 percent (from RM 849 billion to RM 1,285 billion), with annual trading volumes up 53 percent (from 215 billion to 329 billion shares) and annual trading values up 57.6 percent (from RM 278 billion to RM 438 billion). The growth in the value of new issues listed5 has been equally substantial—up over 400 percent (from RM 7.2 billion to RM 36.8 billion). RM12.6 billion was raised through new issues of shares and warrants in 2011.

Bursa Malaysia Securities Trading (Including trading on the Main Market and ACE Market)

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Note: In August 2009, the Main Board and the Second Board were merged to become the Main Market and the MESDAQ Market became the Ace Market Source: Securities Commission

19. There has been substantial growth in the activity on Bursa Malaysia Derivatives over the last six years, primarily in two key futures contracts. The trading in Kuala Lumpur Composite Index (KLCI) futures has increased 52.5 percent from 2006 to 2011. The trading in KLCI futures reached a high volume mark in 2007 before falling during the crisis and its aftermath. It resumed growing in 2011. The trading in Crude Palm Oil (CPO) futures is up 163.2 percent (by number of contracts), exhibiting growth in each year over the whole period. The overall trading on the exchange doubled over the period. The participation of foreign investors and retail investors is increasing.

Bursa Malaysia Derivatives – Number of Contracts Traded

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MGS–Malaysian Government Securities

Source: Securities Commission

20. To improve accessibility, Bursa Malaysia Derivatives entered into a strategic partnership with Chicago Mercantile Exchange (CME) in 2010. This arrangement includes the licensing of CPO futures settlement prices and global distribution of Bursa Malaysia Derivatives’ products through the CME’s Globex electronic trading platform. The U.S. Commodity Futures Trading Commission also exempted Malaysian brokers from the requirement to be registered as futures commission merchants in the U.S. before they could transact with U.S. customers to trade on Bursa Malaysia Derivatives.

21. The number and aggregate market capitalization of foreign-incorporated issuers listed on Bursa Malaysia Securities are not significant. As at 30 November 2011, out of 945 listed issuers with a total market capitalization of RM 1,228 billion on Bursa Malaysia Securities, there are only 8 foreign-incorporated listed issuers with an aggregate market capitalization of RM3 billion (representing less than 1 percent of the total market capitalization of all listed issuers).

22. The presence of foreign investors in the markets is more significant. For November 2011, Bursa Malaysia estimated that foreign investors trading in securities listed on Bursa Malaysia Securities represented 27.7 percent of the total value traded and 6.1 percent of the total volume of trading on the market. Foreign shareholdings in the companies listed on Bursa Malaysia Securities accounted for 22.9 percent in value and 17.2 percent in number of shares of the total shareholdings held at the central securities depository. The proportion of foreign investors participating in the trading on the derivatives exchange is even higher at 32 percent of the total number of investors.

23. The number of foreign companies listed in Malaysia and foreign investors participating directly in Malaysian markets is likely to rise in the future. Bursa Malaysia currently does not have any formal links with any other securities exchanges or clearing houses. However, there are discussions on-going with the exchanges in Singapore and Bangkok to build a regional alliance, which will make it easier for Malaysians to invest in foreign securities and foreign investors to invest in Malaysian securities. Cross-listings are likely to increase.

24. The growth in the retail collective investment scheme (unit trust) market has been steady. The number of retail unit trusts has increased by 21 percent over the past five years, with the highest growth shown in mixed income funds (up 250 percent, from 6 to 21). Assets under management have grown much faster – up 49 percent percent over the same period.

Retail Unit Trusts (Collective Investment Schemes) Numbers of Funds by Type

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Source: Securities Commission

Retail Unit Trusts (Collective Investment Schemes)

Total Net Assets Value & Number of Unit Trust Management Companies

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Source: Securities Commission

25. The growth in the wholesale collective investment scheme (unit trust) market has been much more significant. The number of unit trusts sold only to qualified investors (high net worth individuals, institutional investors, etc.) has increased by just under 360 percent over the past five years (from 29 to 133 funds). Assets under management have grown much faster – up over 1070 percent over the same period (from RM 2.34 billion to RM 27.4 billion).

Wholesale Funds (Collective Investment Schemes) Numbers of Funds and Total Net Asset Value by Year

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2007 - 19 Restricted Investment Schemes (RIS) and 10 Wholesale Funds (all offered to qualified investors).

2008 - 29 RIS and 25 Wholesale Funds

Note: From 2006 to 2009, a fund management company that wished to pool investments of its various qualified investors who had similar investment objectives was allowed to establish a RIS under the Guidelines on Restricted Investment Schemes. From 2005 to 2009, a UTMC could establish a wholesale fund under the Guidelines on Unit Trust Funds. In light of the similarities between RIS and wholesale funds, in 2009, the SC merged the two categories of fund into one category and the Guidelines on Restricted Investment Schemes was subsumed under the new Guidelines on Wholesale Funds issued in the same year. Since then, wholesale funds can only be established by fund management companies. Source: Securities Commission

26. The bond market has grown steadily over the past ten years. The total value of the Malaysian bond market stands at RM841.2 billion as at 31 December 2011, having grown at a average annual growth rate of 10.6 percent since 2001. At the end of 2011, the value of outstanding ringgit-denominated sukuk (Islamic bonds) stood at RM349.0 billion, i.e., 41.5 percent of the total bond market. Short-term debt securities were 13.8 percent of outstanding bonds, with longer-term instruments (i.e. debt securities with a term to maturity of longer than one year) making up the remaining 86.2 percent. Corporate debt securities accounted for 40.7 percent of all debt securities outstanding. 82 ringgit-denominated and 16 foreign currency-denominated corporate debt issues were approved in 2011. Net new issues of debt securities by the private sector in 2011 (gross issues less redemptions) amounted to RM24.5 billion.

27. The number of authorized market intermediaries operating in Malaysia is stable. Market intermediaries include stock and futures brokerage firms, investment banks, unit trust management companies, fund management companies, corporate finance advisors, investment advisors and various CIS distribution companies. Financial institutions under the supervision of BNM (such as commercial banks, Islamic banks and insurance companies) are permitted to carry on certain capital markets activities (such as trading in government bonds, securities lending, arranging for the execution of trades in securities by customers through intermediaries licensed by the SC, advising on corporate finance, selling unit trusts and dealing in OTC derivatives or derivatives in the money market) without having to be licensed by the SC. They are, however, subject to certain market conduct rules under the CMSA and are subject to similar regulatory requirements on fit and proper standards.

Number of Authorized Market Intermediaries

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Notes:

Fund Supermarket licence effective from 2007 onwards

UTMC licence for dealing in securities (restricted to unit trusts) effectively operational from 2008 onwards

Intermediaries licensed in both UTMC and FMC categories.

These companies were issued a FMC and dealing in securities (restricted to unit trust) licence in anticipation of plans to undertake retail business in relation to unit trust business and becoming a UTMC.

In 2007, licences for Corporate Finance Advisors and Financial Planning were introduced. Prior to that, they were licensed as Investment advisers

Source: Securities Commission

28. The regulatory structure in Malaysia makes use of self-regulatory organizations (SROs) that exercise some direct oversight responsibility for certain market participants and whose rules are subject to meaningful sanctions. There are two such SROs in the jurisdiction – Bursa Malaysia and FIMM. FIMM is a recognized and authorized SRO under the CMSA. Bursa Malaysia is recognized as an exchange holding company under the CMSA, but undertakes certain functions of an SRO and is the front line regulator of the stockbrokers and futures brokers that are members of the exchanges and the participants in the related clearing houses. FIMM is responsible for the supervision of participants in the unit trust market. This includes registration of distribution agents (individuals and institutions). If banks or stockbrokers distribute unit trusts to their clients, they are required to be registered with FIMM.

29. There are two components to the capital markets in Malaysia: conventional and Islamic. The Islamic capital market (ICM) is conducted based on Shariah principles and operates parallel to the conventional market. The fundamental securities regulatory scheme for each market is similar (extensive product disclosure, licensing requirements for intermediaries, etc.), but with an additional set of requirements layered on top to ensure the Islamic products and services are Shariah-compliant. In determining the Shariah-compliance status of a given security, SC is guided by the Shariah Advisory Council (SAC), which is made up of Islamic finance and Shariah experts. According to the SC, Shariah-compliant securities amounted to RM1.16 trillion at the end of 2011, accounting for 54.4 percent of the entire capital market. Of the securities listed on Bursa Malaysia Securities, 89 percent are deemed to be Shariah-compliant. Malaysia is the biggest sukuk market in the world, with RM349.0 billion in outstanding ringgit-denominated sukuk as at the end of 2011, accounting for approximately two-thirds of global sukuk outstanding. Out of this amount, RM206.2 billion was issued by private entities with the remaining RM142.8 accruing to public issuers.

30. The ICM has not been assessed separately in this review. The Assessment Methodology does not distinguish between conventional and Islamic markets with respect to expectations or standards. In any event, owing to the way the two markets are regulated in this jurisdiction, the ratings are equally applicable to the two markets as the base requirements for equivalent products are the same, with the Shariah-compliance component added for ICM products and services.

C. Preconditions for Effective Securities Regulation

31. The preconditions for effective supervision (a stable macroeconomic environment, sound legal and accounting framework, and effectiveness of procedures for the efficient resolution of problems in the securities market) appear to be in place in the jurisdiction. Unlike many jurisdictions, there are specialized courts with expertise to deal with complex commercial matters, including capital markets transactions. As a result, hearings for enforcement orders can be carried out fairly expeditiously. The Companies Act 1965 (Companies Act) contains comprehensive provisions relating to the management of the company, rights of shareholders, duties of directors and officers, preparation of company accounts and audit, issuance of shares and debentures, proceeding of general meetings and the winding up of companies. If a company is publicly listed, the CMSA and the Listing Requirements of the exchange prescribe additional requirements. Further, provisions pertaining to take-overs and mergers are contained in the CMSA and the Malaysian Code on Take-Overs and Mergers 2010 (Take-Over Code). Unlike many jurisdictions, the Take-over Code has statutory backing and is enforceable by the SC.

32. The bankruptcy legislation is dated, but is under review and is expected to be substantially amended in the near future. However, the CMSA provides for modifications to the laws of insolvency and miscellaneous provisions in relation to the default procedures of the clearing house (s. 41- 57). If any participant of Bursa Malaysia becomes insolvent, trades on the securities and derivatives exchanges continue to be enforceable. The CMSA states that the default proceedings of Bursa Malaysia Securities Clearing and Bursa Malaysia Derivatives Clearing take precedence over law of insolvency (s. 43).

Main Findings

33. Principles 1–8, Principles relating to the regulator: The SC has clear statutory authority over and responsibility for the Malaysian capital markets. In practice, the SC has operational independence from the industry and the government. Its independence at law is somewhat impaired as the Minister has the right to dismiss any member of the Commission without cause at any time under the SCA. The statutory immunity of the SC, its Commission members and staff members does not extend to cover former employees and agents. Indemnities are not available to these persons if they are sued for actions taken in the course of their duties at the SC. There are clear regulatory processes in place and they are applied consistently. Persons affected by decisions of the SC are afforded a full range of protections, including the right to be heard, to written reasons and to rights of appeal. The SC’s staff are very professional and subject to detailed conduct rules. Market participants uniformly praised the quality and openness of SC staff. The SC has an explicit mandate and authority for monitoring, mitigating and managing systemic risk. There are regulatory processes in place to carry out this mandate and communication and information sharing between the SC and BNM. The perimeter of regulation is assessed regularly and where developments in the market require action, the SC can exercise its public interest jurisdiction to block problematic behavior or products or change the relevant rules to permit new services and products. The SC has in place processes to address conflicts of interest and misalignment of incentives. The SC, issuers, intermediaries, CRAs the Bursa, FIMM and CIS are subject to extensive requirements regarding the management and disclosure of conflicts of interest.

34. Principle 9, Principles relating to self-regulation: There are two organizations in the Malaysian capital markets that exercise some direct oversight responsibility for certain markets and market participants and whose rules are subject to meaningful sanctions. Both Bursa Malaysia and FIMM are subject to the oversight of the SC and are required to observe high standards of conduct in carrying out their tasks. The regime applicable to Bursa Malaysia is detailed, comprehensive and has been operating effectively for several years. The SC has recently established the supervisory framework for FIMM as an SRO, which includes on and off-site supervision, reporting and a rule review process. As at the date of the review, the SC had not yet conducted an on-site examination of FIMM, even though other modes of oversight were operative prior to recognition. However, since then an on-site inspection of FIMM has been carried out (May 2012).

35. Principles 10–12, Principles relating to enforcement of securities regulation: The SC has broad inspection, investigation and surveillance powers. It has powers to investigate and take action against anyone who breaches the laws it administers. The SC carries on active inspection and enforcement programs. Both on-site and off-site reviews of regulated entities are performed. Market surveillance is performed at the exchanges and at the SC. The fines that can be imposed by the SC and the Bursa Malaysia vary.

36. Principles 13–15, Principles for cooperation in regulation: The SC has the ability and capacity to share information and cooperate with regulators, both domestically and internationally. There is no requirement that there be an MOU in place. The SC has specific authority to provide assistance to a foreign supervisory authority to investigate an alleged breach of a legal or regulatory requirement that the foreign supervisory authority enforces or administers. The SC is a signatory to the IOSCO Multilateral MOU and to many bilateral MOUs with its counterparts in other countries.

37. Principles 16–18, Principles for issuers: Extensive requirements are in place for initial offering and continuous disclosure documents for securities. The disclosure to be provided to purchasers of futures contracts is specified in the CMSA and the rules of the Bursa Malaysia Derivatives. New issues of securities (debt, equity or CIS) to the public are required to be offered via prospectuses that must be registered by the SC. Virtually all public issues of equity securities are listed on the Bursa Malaysia Securities and are subject to the provisions in the CMSA, SC guidelines and the Listing Requirements. The SC approves listings on the Main Market of Bursa Malaysia Securities and the Bursa approves listings on the ACE Market. Continuing disclosure documents are made public through the facilities of the exchange. Investors are treated equitably with respect to voting, access to information and the ability to participate in any takeover bid. Full information must be provided for any takeover bid. As of January 2012, Malaysia implemented International Financial Reporting Standards (IFRS) for all Public Interest Entities (PIEs), which includes public companies, CIS, financial institutions and market intermediaries. The publication of annual audited financial statements and annual reports by listed companies are slow compared to the requirements that apply to CIS. The notice period for shareholder meetings may be too short for full communication with all shareholders. Substantial shareholders in listed companies are given much longer to report their initial positions and any changes than are the directors and the CEOs of these issuers. The definition of ‘interests in securities’ does not include publicly offered rights. There is no timely public transparency of information on the positions of these key personnel for unlisted public companies.

38. Principles 19–23, Principles for auditors, credit rating agencies and other information service providers: There is a regulatory system in place in Malaysia that subjects auditors of PIEs to appropriate levels of oversight. Auditors of PIEs must be registered with the Audit Oversight Board (AOB) that is an agency of the SC. The AOB conducts examinations of auditors and has the power to sanction breaches of the standards. There are extensive requirements for auditors to be independent of the entities they audit and these requirements are enforced by the AOB. The regulatory framework in Malaysia requires that the financial statements included in public offering and listing particulars documents and publicly available annual reports be audited in accordance with the International Standards on Auditing (ISA) issued by IFAC, for all periods beginning on or after January 1, 2010. CRAs whose ratings are used for regulatory purposes are subject to registration; bonds issued in ringgit must be rated. The SC has full power to supervise these entities, including carrying out on-site and off-site examinations and sanctioning. The SC has a framework in place to conduct on-site examinations of CRAs and on-site examinations were being planned. As of the date of the review, SC had yet to conduct an on-site examination of a CRA. One inspection has since been completed. Entities that provide analytical or evaluative services include investment advisors/analysts, corporate finance advisors, bond pricing agencies and property valuers. Investment advisors/analysts, corporate finance advisors and bond pricing agencies have to be licensed or registered with the SC. Property valuers are professionals registered with the Board of Valuers at the Ministry of Finance.

39. Principles 24–28, Principles for collective investment schemes and hedge funds: All publicly offered CIS and their operators and distributors are subject to authorization and reporting requirements. All funds offered to the public must be approved by the SC, which process includes the review of a detailed prospectus that contains comprehensive and timely information about the CIS. Funds are established as unit trusts, with assets segregated from those of the operator and distributor and held by an independent trustee that must be approved by the SC. All CIS and their operators and distributors are subject to a comprehensive supervision framework that includes both off-site and on-site reviews. The fund’s securities and its assets are subject to valuation in accordance with IFRS. Continuous disclosure of unit prices is provided through the FIMM website. A hedge fund can be set up under the wholesale framework to offer securities only to qualified (sophisticated) investors and it must be approved by the SC. The operator must be licensed as a fund management company and the offering memorandum containing extensive information about the fund must be deposited with the SC. Wholesale funds are also subject to requirements to report regularly to investors and to the SC, including delivery of audited annual reports within two months of the fund’s year end.

40. Principles 29–32, Principles for market intermediaries: A framework is in place for licensing and to apply on-going requirements for market intermediaries. Applicants are subject to detailed reviews before being licensed. There are initial and ongoing capital requirements for all types of intermediaries that reflect the risks that they undertake. The capital requirements for stockbroking and futures broking companies address the full range of risks to which the firms are exposed, including market, credit, liquidity and operational risk. There are requirements regarding capital calculations and immediate reporting of deficiencies by market intermediaries. Market intermediaries are required to have extensive systems of risk management and internal controls in place. There are regulations for proper protection of clients, including requirements for segregation of clients’ assets and business conduct rules, such as ‘know your client’ and suitability. The SC has plans in place for dealing with a firm’s failure. The plans are flexible to include action to restrain conduct, to ensure client’s assets are properly managed and to provide relevant information to the regulators and the general public.

41. Principles 33–37, Principles for the secondary markets: Exchanges are subject to authorization by the Minister with the advice of the SC. An electronic facility, which falls within the meaning of “stock market” but is not intended to operate as a stock exchange or derivatives exchange, must be registered by the SC as a Registered Electronic Facility (REF). The monitoring activities conducted by Bursa Malaysia include conducting real-time surveillance of the market and supervision of its participating members and clearing members. Market surveillance for trading on the securities market is performed at the exchange and the SC in parallel. The SC has a comprehensive oversight system for exchange supervision that includes on-site examinations and off-site reviews of rules and other matters. The SC may suspend the operations of a stock exchange or REF. On the recommendation of the SC, the Minister may revoke the authorization of any exchange; the SC may revoke an REF’s registration. There is both pre-trade and post-trade real-time transparency of prices on the Bursa Malaysia exchanges, other than for certain specified trades that are permitted to take place outside the automatic trading system subject to clearly defined conditions. The rules against market abusive transactions are extensive and there are mechanisms in place to detect and take action against improper conduct. Trades on both the securities and derivatives exchanges are cleared and settled through central counterparties that have detailed and transparent provisions designed to protect the markets against a default by any participant.

Table 1.

Summary Implementation of the IOSCO Principles—Detailed Assessments

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Fully Implemented (FI) -34, Broadly Implemented (BI) - 2, Partly Implemented (PI) - 1, Not Implemented (NI) -0, Not Applicable/Assessed (NA) – 1.

D. Recommended Action Plan and Authorities’ Response

Table 2.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

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Authorities’ response to the assessment

42. The high level of compliance accorded to the Malaysian capital market in this assessment under the more rigorous IOSCO standards and the new Financial Market Infrastructures (FMI) principles demonstrates that the strategic ‘roadmap’ adopted by the SC in regulating and developing the market has been appropriate.

43. Since its establishment, SC has been committed to benchmarking itself against international standards and best practices. In the past, prevailing market conditions led the SC to implement a prescribed approach to regulation which was appropriate and effective under the circumstances. The SC has instituted a comprehensive regulatory and supervisory framework, including the issuance of detailed laws and guidelines. This approach has effectively enabled the SC to heighten transparency and establish clarity on the roles and responsibilities of market participants, thus promoting stability and confidence in the Malaysian capital market.

44. These strategies were documented in the first Capital Market Masterplan (CMP1), and recommendations were implemented between 2001 and 2010. These measures, including market developmental initiatives, fostered stability and resilience which helped to insulate the Malaysian capital market from the impact of the recent global financial crisis. There is now a strong foundation for on-going efforts to develop the capital market within a robust regulatory and supervisory structure, underpinned by a mandate to ensure investor protection and reduce systemic risk. The IOSCO assessment result, as well as the Malaysian capital market’s successful weathering of the recent GFC, is a validation of the regulatory philosophy that is being adopted.

45. The capital market has expanded significantly and become an important source of financing in the Malaysian economy, particularly with the development of the bond market to meet long-term financing needs. The capital market continues to evolve in support of Malaysia’s economic transformation agenda. The resilience of the market now gives SC the flexibility to adopt a regulatory framework that can drive greater competition and innovation. Under the CMP2, the SC will adopt a regulatory approach that will further drive market growth domestically and through greater internationalisation, while focusing on strong governance arrangements, and streamlining regulatory procedures and processes.

46. Malaysia is taking continuous steps to align its regulatory framework with the changing global regulatory landscape and is actively involved in international financial regulatory policymaking work.6 Amid the growing regional expansion of local market intermediaries and plans to further internationalize the Malaysian capital market, the SC also recognises the increasing importance of cross-border enforcement and supervisory cooperation.

47. While SC continuously reviews its policies to ensure that regulatory and supervisory requirements remain relevant and effective, it welcomes suggestions by multilateral institutions like the IMF and the World Bank, and pro-actively learns from international best practices for putting in place appropriate preconditions that will be essential to ensure an effective regulatory regime.

48. The SC notes that a number of recommendations in the IOSCO DAR reflect strategies identified in CMP2 as well as the CG Blueprint. Consequently, the SC is already in the process of implementing the recommendations in this Report.

49. This Report noted that, as a self-funding statutory body with comprehensive rules of internal governance, SC is operationally independent. The Report also noted that, in practice, any discretionary power of the Minister provided by the securities law has always been exercised upon advice and recommendation by the SC. The ability of the SC to promote a sound and transparent capital market that supports economic growth has resulted in building market confidence. The SC works closely with other regulators to ensure financial stability while encouraging the development of new market segments and entry of new players to promote competition. The overall stability of the capital market, amidst rapid but orderly growth, has also meant that SC is trusted by the market and the government to perform its functions effectively within its current governance structure.

50. Issues raised in this Report on further enhancing information disclosure practices by issuers and treatment of securities holders have already been identified in the CG Blueprint, published prior to this assessment. Resolving these issues is a priority for the SC and is part of its on-going efforts to heighten the quality of corporate governance in Malaysia. These include the formation of a taskforce to review the current framework for periodic disclosure by issuers (including the need to shorten the submission period for quarterly and annual reports); a proposed extension of the notice period for shareholder meetings to ensure effective and informed investor participation; and the removal of restrictions on proxy voting. As of 3 January 2012, the Bursa Malaysia Listing Requirements no longer have qualification restrictions for proxies and allow shareholders of listed companies to appoint multiple proxies.

51. The SC would like to thank the IOSCO assessors for their time and effort in engaging with the SC staff, other authorities, market institutions and intermediaries, and other stakeholders. While the assessment required significant resources and time, it has been valuable in enabling the SC to identify its strengths as well as areas for further improvement. The IOSCO assessment methodology is a useful tool for reviewing of the effectiveness of regulatory and supervisory frameworks. The analysis and recommendations contained in this Report will feed into SC’s on-going improvement efforts, with the aim of effectively supporting the projected growth and greater internationalization in the capital market during the CMP2 period.

II. Detailed Assessment

52. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.

53. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.

  • A Principle is considered fully implemented when all assessment criteria specified for that Principle are generally met without any significant deficiencies.

  • A Principle is considered broadly implemented when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address.

  • A Principle is considered partly implemented when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies.

  • A Principle is considered not implemented when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle.

  • A Principle is considered not applicable when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations.

Table 3.

Detailed Assessment of Implementation of the IOSCO Principles

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