DPM Lee's Reply to Parliamentary Question on CLOB
Issues Raised in Parliament
ANSWER TO PARLIAMENTARY QUESTION ON:
DPM Lee's Reply to Parliamentary Question on CLOB
For Parliament Sitting on 12 Oct 98
To ask the Deputy Prime Minister, in the light of recent changes imposed by Malaysia on the currency and stock market rules, what steps are being taken by the Monetary Authority of Singapore and the Stock Exchange of Singapore Ltd to provide a better sense of direction and assistance to the public so that they will be adequately prepared.
To ask the Deputy Prime Minister whether Government will consider taking steps to see that the investors' interest in the Central Limit Order Book System is protected.
To ask the Deputy Prime Minister what are the effects on the financial sector and the Singapore economy of the closure of Clob International.
To ask the Deputy Prime Minister (a) how many investors suffered losses from trading in Clob due to the financial control measures announced by Malaysia recently and what is the estimated losses of the investors; and (b) to what extent will the closure of Clob affect the revenue of the securities industry and Singapore as a financial investment hub.
1 The recent closure of trading of Malaysian shares on Clob, after Malaysia imposed capital controls and new rules on the clearing and settlement of Malaysian shares, has highlighted the risks of investing in shares. There is a price risk inherent in any share. But in addition, shares listed on overseas exchanges are subject to regulatory risk arising from changes in rules by the overseas exchange.
2 The government cannot protect investors from such risks. Investors have to keep their eyes open and judge for themselves whether the returns are adequate to justify the risks.
3 The Malaysian government's opposition to trading of Malaysian shares on Clob is long standing, and has always been reported in the press. When the SES established Clob in Jan 1990, after Malaysia unilaterally delisted all Malaysian shares from the SES, the KLSE objected strongly. It declared publicly that Clob was an unrecognised market, and warned investors of the dangers in trading Malaysian shares on Clob.
4 As recently as Aug 98, the National Economic Action Council of Malaysia called for the closure of Clob. The SES responded that Clob would remain viable only so long as there is demand from investors for its services. This exchange was widely reported in the press, and put investors on notice of Malaysia's intentions.
5 The SES has issued a statement explaining why it did not stop trading of Malaysian shares on Clob earlier, for example immediately after the KLSE announced its new rules on 31 Aug 98, or even before that. It apologised for not reassuring investors earlier than 7 Sep 98 that the Malaysian actions had not made their shares worthless. However, this omission did not make a material difference to Malaysian share prices on Clob.
6 Even after the SES had given repeated assurances to investors that their shares were not worthless, shares on Clob continued to trade at a deep discount 1 to prices on the KLSE. Once the Malaysian measures were announced, nothing the SES did could prevent a decline of share prices on Clob. Many investors evidently preferred to sell their shares on Clob and receive the proceeds in S$, rather than wait to dispose of their shares on KLSE and retain their proceeds in Ringgit accounts in Malaysia for one year, as required under the new Malaysian rules.
7 As at 31 Aug 98, 197,000 investors held Malaysian shares on Clob. 90% were Singaporean investors. Many Clob investors sold their shares after the Malaysian measures were announced, including 24,000 who sold all their Malaysian shares. They would have made losses. But for every seller there was a buyer, hoping to make a gain by buying the shares and subsequently selling them on the KLSE. Most such investors, be they buyers or sellers, were Singaporean.
8 The closure of trading of Malaysian shares on Clob is a loss to Singapore's financial sector, but the loss is not significant relative to the size of the financial sector. In 1997, the stock market accounted for 10% of the financial sector's value added, or 1.1% of overall GDP 2. Clob represented about 24% of the SES' turnover at that stage. But more recently from Jun 98 to Aug 98, Clob's share had declined to only 3-8% of the total turnover in the stock market. Moreover, since the closure of Clob trading of Malaysian shares, some retail investors have channelled their interest into Singapore shares3.
9 Over the years, the SES has taken steps to develop the market for local and foreign shares. Clob is not a market solely for trading Malaysian shares, although because of historical reasons and investors familiarity, the bulk of the trade on Clob has been in Malaysian shares. The SES will continue its developmental efforts to provide investors with a broad range of options for trading of Asian shares.
10 Singapore's financial sector provides a wide range of services and products, and serves a large pool of investors, borrowers and financial intermediaries. The regional crisis has shrunk the volume of financial activity, but the sector has remained resilient. Some financial activities have continued to grow despite the slowdown. A recent Bank for International Settlements survey found that daily turnover in the Singapore foreign exchange market has increased by 32% since 1995, whereas turnover in the other major Asian financial centres declined. SIMEX is also experiencing a record year in trading futures contracts. Investors increasingly appreciate our AAA country risk rating, and the transparent, predictable and open business environment that Singapore offers. We are therefore confident that despite difficulties and occasional setbacks, Singapore is strengthening its position as a financial hub in the region.
1 On 28 Aug 98, Clob shares were traded at a discount of only 9% on average, compared to the prices of the shares on the KLSE. Following the announcement of the Malaysian measures on 31 Aug 98 and 1 Sep 98, the discount on Clob prices widened to 49% on 3 Sep 98. Clob was suspended from trading on 4 Sep 98, and subsequently reopened for 5 trading days from 9 to 15 Sep 98. At the end of the trading period, the discount on Clob shares averaged 42%.
2 In 1997, the share of the stock market in the financial services sector was 9.9%, and the financial services sector in turn had a share of 11.4% in overall GDP.
3 For the period from 1 Sep 98 to 15 Sep 98, the average daily turnover of Singapore shares was $190.3m. This has increased to $201.1m during the period from 16 Sep 98 to 30 Sep 98.