Issues Raised in Parliament

ANSWER TO PARLIAMENTARY QUESTION ON:
CLOB

For Parliamentary Sitting on 17 Jan 2000

Questions:
Q1. To ask the Deputy Prime Minister what are the latest developments on the Central Limit Order Book (CLOB) issue with Malaysia, and whether there are any mutually acceptable and workable solutions being considered.

Q2. To ask the Deputy Prime Minister whether the Government should consider legal recourse at this juncture in view of the continued deadlock in settling the Central Limit Order Book (CLOB) issue with the Malaysian authorities.

Q3. To ask the Deputy Prime Minister whether the Government intends to adopt a pro-active approach in expediting a settlement of the deadlock on the frozen Central Limit Order Book (CLOB) shares prior to the ultimate deadline of 30 June 2000.

Answer:

Introduction

1. I last updated Parliament on the Clob issue in November. I informed Parliament then that the Stock Exchange of Singapore (now the Singapore Exchange, "SGX") had written to the Kuala Lumpur Stock Exchange ("KLSE") on 15 Nov 99. The letter reminded KLSE that SGX had yet to receive a reply to its proposal¹ for a staggered release of Clob securities. SGX sent KLSE another reminder on 7 Dec 99 to ask for a response within one month. SGX has not received any reply.

2. SGX's lawyers had circulated a legal summary to all Clob investors on 17 Dec 99. The summary apprised investors of their legal rights as owners of the Clob securities.

Authorised Nominee Status

3. In late December, Malaysian Prime Minister Dr Mahathir and Finance Minister Mr Daim Zainuddin said that the Clob securities might be transferred to the Malaysian Finance Minister when the Central Depository's ("CDP") authorised nominee account expired at the end of 1999. They commented that Clob investors should accept some of the private sector offers promptly to resolve the matter. On 31 Dec 99, KLSE announced the extension of CDP's authorised nominee status for a "final period of 6 months to end on 30 Jun 2000".

4. MAS responded with a press statement on 29 Dec 99. It cited the unanimous view of legal counsel, including Queen's counsel, that SGX [CDP] has acted in accordance with the law; and that there is no basis in law for a transfer of the Clob securities to the Malaysian Minister for Finance either on 31 Dec, or at any other time. Whether KLSE extended CDP's authorised nominee status was not relevant, because CDP's and Clob investors' legal rights under the CDP-SCANS agreement and Malaysian law did not depend on the nominee status.

5. Clob investors are asking for their securities to be migrated into individual securities accounts, in keeping with Malaysia's obligations under the WTO, KLSE's public duties under Malaysian law, and KLSE's contractual obligations under the agreement between CDP and SCANS. Private sector offers cannot resolve the Clob issue. They do not supersede obligations that are binding in law, nor can they absolve the relevant parties from their legal responsibilities.

Malaysia's WTO Obligations

6. The Singapore Government has been advised by WTO legal specialists that the measures taken by Malaysia against Clob are inconsistent with the most-favoured-nation ("MFN") provision of the WTO General Agreement on Trade in Services ("GATS"), because they discriminate against Clob vis-a-vis other foreign exchanges. The failure to migrate the Clob shares is inconsistent with Malaysia's obligations under the MFN provision of GATS, and its specific commitments to provide national treatment to foreign providers of financial services, recognised by the WTO. This is an issue that, if brought to the WTO for its review, would have to be resolved government-to-government.

KLSE's Legal Obligations Under Malaysian Law

7. The Malaysian Securities Industry (Central Depositories) Act ("SICDA") amendments of Sep 98 provide for the transfer of Clob securities in the securities account of CDP into the accounts of individual Clob investors held with MCD. This requirement under Malaysian law to migrate the securities into individual accounts is a statutory duty. It is not a discretionary exercise.

The CDP-SCANS Agreement

8. In an effort to resolve the situation, CDP has also entered into an agreement with the Securities Clearing Automated Network Services ("SCANS"), a subsidiary of KLSE, to migrate Clob securities into individual accounts held at MCD. This is a key agreement whose significance the Malaysian authorities have played down. KLSE stated in May 99 that the agreement "was entered into to assist SES/CDP in facilitating the resolution of the Clob problem." More recently in its 31 Dec 99 statement, KLSE made no mention of the agreement, but continued to maintain that "it is the duty and responsibility of SGX and CDP to resolve the [Clob] problem".

9. The settlement of the Clob issue is a matter of public interest. Furthermore, the failure of KLSE to migrate the Clob shares in accordance with this agreement has implications under WTO law. I am therefore providing members with copies of the actual legal document.

10. Members will observe that this is a formal legal agreement concluded between the two parties. Mr Lim Choo Peng, President SES

had met with Dato' Mohd Azlan Hashim, Executive Chairman of KLSE on 8 Sep 98 to discuss how to effect the migration of accounts on Clob to the MCD. Arising from their meeting, the two sides formed a working group comprising senior executives of the KLSE and SES to work out detailed procedures for migration. The outcome was this CDP-SCANS agreement.

11. The agreement is dated 18 Sep 98. It was signed by YM Ungku A Razak, general manager of SCANS who was duly authorised for and on behalf of SCANS, and by Kok Kar Wing, executive vice-president, SES

duly authorised for and on behalf of CDP; in the presence of witnesses. CDP's Singapore and Malaysian Counsel as well as QC have advised that this agreement is a legally binding contract and is specifically enforceable in Malaysian courts.

12. The agreement lists clearly the steps by which Clob securities are to be transferred into individual accounts with the MCD for trading on the KLSE.

13. Clause 2 of the agreement defines the obligations of the CDP. Clause 2(a) reads:

1. "CDP shall unconditionally and irrevocably grant SCANS the power and authority to act as follows:
   
2. to accept all securities to be transferred from CDP and to be deposited into a securities account to be established by SCANS on behalf of CDP;
   
3. to hold the said securities in custody and thereafter transfer the securities to the respective Depositors' interim securities accounts to be established and maintained by SCANS;
   
4. upon request of the Depositors through their Authorised Depository Agents and/or Authorised Depository Members², to transfer the said securities from the respective Depositors' interim securities accounts maintained by SCANS to the respective Depositors' securities accounts established or to be established by the ADAs and/or ADMs.

14. Clause 3 of the agreement defines the obligations of SCANS. Clauses 3(a)-(c) read:

1. SCANS shall provide the services pursuant to Clauses 2(a)(i) and (ii) only when SCANS has verified and is satisfied with the information furnished by CDP under Clause 2(b).
   
2. SCANS shall provide the services pursuant to Clause 2(a)(iii) above only upon request of the Depositors through the ADAs and/or ADMs.
   
3. SCANS' responsibilities herein are merely in the capacity of a custodian to provide the services pursuant to Clause 2(a) above, without any obligation and/or liabilities howsoever derived or arrived.

15. In Dec 98, KLSE stated in a letter to SES and CDP that SCANS' role is merely as custodian and shall be without any obligations and/or liabilities, citing Clause 3(c). SES

responded stating that it had been advised by its lawyers that the clause does not excuse SCANS from performing any and all obligations assumed by SCANS as custodian under or in connection with the Agreement. At the same time, CDP also wrote to SCANS to emphasise that the agreement was a legally binding contract, and CDP having performed all its obligations was entitled to enforce the performance by SCANS of its obligations under the agreement. There was no rejoinder from either KLSE or SCANS.

16. CDP has fulfilled its part of the agreement. It has provided SCANS with all information required under the agreement and the Clob securities have been transferred into a consolidated account held with the MCD. MCD informed CDP on 20 Oct 98 that individual interim accounts had been opened in the names of the persons appearing on the list furnished by CDP. But SCANS has failed to complete its obligations and continues not to perform its contractual duties. CDP has since repeatedly requested SCANS to provide the interim securities account numbers. SCANS has not done so to-date.

Singapore Government's Intentions

17. As the KLSE has not replied to SGX's letter to it asking for a response within one month of 7 Dec 99, the Minister for Finance, Dr Richard Hu, has written to his Malaysian counterpart Tun Daim Zainuddin on 13 Jan 2000. Dr Hu's letter set out the Singapore Government's understanding of the legal issues involved, and requested Tun Daim to ask the KLSE to fulfil its legal obligations under the CDP-SCANS agreement. Dr Hu is now awaiting the Malaysian Finance Minister's reply.

Conclusion

18. The Clob issue must be settled in accordance with the law, and with the rights and obligations of Clob investors and the Malaysian authorities. An early resolution is in the profound interest of both countries. The SGX and Singa-pore Govern-ment continue to be anxious to resolve the matter bilaterally with Malaysia, and will make every effort to do so. It is therefore premature to speculate on what further steps may be necessary should a bilateral solution not prove possible.

¹ SGX had submitted a proposal to the Kuala Lumpur Stock Exchange ("KLSE") on 5 July 99, suggesting a staggered release of Clob securities over 12 months into individual accounts for trading on the KLSE. The proposal was without prejudice to SES' rights under the CDP-SCANS agreement.

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² ADAs and ADM are intermediaries through which investors open and maintain their MCD accounts.

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