Reply to PQ on the Links Island Case

Date : For Parliamentary Sitting on 25 Sep 2001

Question:

• To ask the Deputy Prime Minister, in the light of the recent  disquiet over the suspension of trading of certain shares, what steps will be taken to reassure the investing public that the Singapore Exchange will adequately explain (i) the circumstances for any suspension of the trading of shares; (ii) the justification for the period of suspension, if resumption is not readily contemplated; and (iii) how it attempts to treat all affected shareholders fairly.

• To ask the Deputy Prime Minister if the Singapore Exchange rules need to be reviewed to make it more equitable in the light of the Links Island case.

Answer:

Reasons for trading suspension

1.    Trading in the shares of a company listed on the Singapore Exchange (SGX) may be suspended at the request of the company or of the exchange. 

2.    A company may request that trading in its shares be temporarily suspended before announcing material information, to give time for the information to be disseminated to the investing public.

3.    SGX may suspend trading in the shares of a particular company where it is likely that trading of the company?s shares will not be conducted in a fair or orderly manner.  This may occur, for instance, where a company fails to disclose or ensure proper dissemination of material information to the investing public.  Alternatively, the company?s shares could be the subject of market manipulation.  SGX?s power to suspend trading is necessary to protect the integrity of the market place and safeguard investors? interests.  All major international exchanges operate under similar rules.

4.    SGX suspended trading in Links shares on 16 Aug 2000, after the exchange?s preliminary review showed that trading in those shares had been irregular during the period leading up to 16 Aug 2000.  On the same day, SGX issued a public announcement, stating that it was conducting inquiries into whether a corner situation had arisen in the counter.  SGX also stated that the exchange considered it appropriate to impose a trading suspension in view of the irregular market in Links shares and pending the outcome of the inquiries.

Duration of trading suspension

5.     Once imposed, any trading suspension should be as short as possible in order not to deprive market participants of liquidity.  But whether trading should be allowed to resume depends on whether the concerns that led to the suspension being imposed in the first instance have been addressed, thereby allowing an informed and orderly market to prevail.

6.     In the case of Links, it was only after a thorough investigation lasting nearly one year that SGX was able to conclude, on 26 Jul 2001, that a corner situation had arisen in Links shares in the period leading up to the trading suspension.  As mentioned in SGX?s press statement of 26 Jul 2001, the investigation was complicated by the need to examine the trades of more than 50 parties, the significance of the commercial and personal relationships among them, and the cash flows and trading patterns of the individuals and institutions that trades in Links shares.

7.    If SGX had allowed trading to resume before establishing whether Links shares were cornered, it could have further exposed investors to an irregular market in those shares. 

8.    In retrospect, given the duration of the inquiries, the exchange could have updated the investing public periodically that the investigation was still ongoing.

Fair treatment of affected shareholders

9.    Having established that a corner situation had arisen in Links shares, SGX decided that all outstanding market trades in Links shares transacted during 14 ? 16 Aug 2000 be settled by way of cash instead of delivery, at the fair settlement price of $1.21.  The fair settlement process is intended to settle all outstanding market trades in Links shares done during the three-day period in a manner that would on balance be most equitable to all parties to those transactions.  This is not an easy task.  To be fair to all persons who traded in Links shares during those three days, the settlement procedure had to treat all contracts alike, regardless of whether they were done by investors with long or short positions.  After considering the particular circumstances of this case, the Settlement Committee determined that the weighted average price of Links shares on 14, 15 and 16 Aug 2000 would be the most appropriate fair settlement price.

10.    Various alternatives for dealing with the outstanding transactions in Links shares have been suggested.  SGX has considered these proposals, and found them no better or more equitable than SGX?s decision.  MAS concurs with SGX. 

11.    For instance, one suggestion was to allow those sellers who hold Links shares to settle by delivery instead of cash, and apply the fair settlement procedure only to short sellers.  However, under this alternative CDP would not be able to treat all buyers equally.  The CDP acts as the central counterparty to both sellers and buyers in all market trades.  If a seller elects to deliver Links shares under this proposal, CDP would have to deliver those shares to the buyer(s) who contracted to buy those same shares.  On other hand, if a buyer has contracted to buy Links shares from a short seller, the buyer would have to contend with cash settlement at the fair settlement price even if he may have preferred receiving Links shares in settlement.

12.    Another proposal was to lift the trading suspension on Links temporarily so that investors could unwind any outstanding positions they may hold in Links shares.  Proponents of this alternative point to SGX?s reinstatement of trading of Malaysian stocks on CLOB International for two weeks after the initial trading suspension, which allowed investors to square their positions before trading on CLOB International was ceased. 

13.    The current situation is different.  In the CLOB International case, the trading of Malaysian stocks continued on the KLSE and there was no suspicion of a false market in those stocks.  But in the Links case, the company?s shares had been cornered, and there could have been no assurance of a fair and orderly market in those shares if trading had been resumed.

Other forms of redress

14.    The Commercial Affairs Department is currently investigating whether criminal offences had been committed in relation to trading in Links shares.  If any of the persons under investigation is convicted, he will be liable to pay compensation to those aggrieved investors in Links who traded with him.  The affected investors can seek such legal recourse any time within six years of an offence.

15.    This criminal prosecution regime will be complemented by a civil penalty and civil claim regime when the proposed Securities & Futures Act (SFA) comes into force.  MAS can already institute an action for civil penalties in relation to insider trading.  This will be extended to other forms of market misconduct such as market rigging, the employment of fraud or deceit in trading, and failure to make continuous disclosure of material information, in the forthcoming SFA.  Further, the offender will be liable for civil damages to investors who suffer losses as a result of the market abuse.  Instead of having to institute their own legal action, aggrieved investors can file within 6 years of the offence, claims for compensation with the Court on the strength of criminal convictions or civil penalties imposed by MAS.  Under the new regime, MAS will also have enhanced enforcement powers in investigating suspected offences.

Appropriate due diligence in disclosure-based regime

16.    Investors should analyse information and understand the fundamentals before they invest.   Investors who intend to trade heavily in a counter which has doubled or tripled in price within a short period of time for no apparent reason, should recognise the risks involved and consider whether it is within their means and risk appetite to do so. Market intermediaries who extended credit to such investors must be prepared for the consequences if the counter is suspended and later declared cornered.