CENTRAL LIMIT ORDER BOOK SYSTEM (Closure)

[Mr Speaker in the Chair]

Mrs Yu-Foo Yee Shoon asked 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.

Mr Low Thia Khiang asked 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 are 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.

Mr Shriniwas Rai asked 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.

Dr Lee Tsao Yuan asked the Deputy Prime Minister what are the effects on the financial sector and the Singapore economy with the closure of Clob International.

The Second Minister for Finance (Mr Lim Hng Kiang) (for the Deputy Prime Minister): Mr Speaker, Sir, may I have your permission to take Question Nos. 1 to 4 together?

Mr Speaker: Yes.

Mr Lim Hng Kiang: Mr Speaker, Sir, 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.

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.

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 January 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.

As recently as August 1998, 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.

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 31st August 1998, or even before that. It apologised for not reassuring investors earlier than 7th September 1998 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.

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 discount1 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 Singapore dollars, 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.

1 On 28th August 1998, Clob shares were traded at a discount of only 9% on average, compared to the prices of the shares on the KLSE. Following the amendment of the Malaysian measures on 31st August 1998 and 1st September 1998, the discount on Club prices widened to 49% on 3rd September 1998. Club was suspended from trading on 4th September 1998, and subsequently reopened for 5 trading days from 9th to 15th September 1998. At the end of the trading period, the discount on Clob shares averaged 42%.

As at 31st August 1998, 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.

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 GDP2. Clob represented about 24% of the SES' turnover at that stage. But more recently from June 1998 to August 1998, 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.

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 1st September 1998 to 15th September 1998, the average daily turnover of Singapore shares was $190.3m. This has increased to $201.1m during the period from 16th September 1998 to 30th September 1998.

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.

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.

Mr Low Thia Khiang (Hougang): Mr Speaker, Sir, on 3rd September 1998, SES announced that Clob would continue as long as there is demand. On 4th September 1998, it suddenly decided to suspend trading and close Clob. Would the Minister explain what situational changes between 3rd and 4th September resulted in SES making an about-turn?

The second supplementary question is: why did SES wait until 7th September 1998, about a week after Malaysia announced the new measures, to assure the investors that their shares would not be worthless? Was SES itself not sure, prior to 7th September, about the status of the shares traded in Clob?

The third supplementary question is: was the Government aware, during the setting up of Clob, that Clob itself could face eventual closure under some circumstances if Malaysia were to take extreme measures?

Mr Lim Hng Kiang: When the Malaysians first made the announcement, as SES explained in the press statement, SES could not straightaway close the market. There was no reason for it to do so. As Members will remember, subsequently, the Malaysians also imposed currency controls and, as a result, that removed the arbitraging between the Singapore Clob and the KLSE. When that happened, it became obvious that Clob could not continue any more and that is why SES suspended trading to make the announcement that trading would continue for another five days, after which the nominee accounts would be migrated to the KLSE. I think SES has responded correctly at every stage.

The key issue is when to suspend trading on stock exchanges. This is something that you cannot take lightly and I think SES made the right decision in providing an orderly and free market so that investors can trade in the securities. But when conditions became clear that it no longer could trade any more because the arbitraging between the two exchanges could not take place, SES had to suspend trading and close down Clob. This explains the about-turn. It is not just the closure of Clob but also the imposition of currency controls.

Mr Low also asked why it took one week. This is because of the announcement subsequently by the Malaysian government on the currency controls.

His third question was, if we knew that Clob could be closed, why did we not take measures to prevent it. SES has explained that Clob exists only to service investors. As long as there is a demand for its services, there is a reason for Clob to exist. Clob also services the Malaysian investors by providing liquidity and more volume. So it is a win-win situation for both sides in having Clob. But once the Malaysians decided on currency controls, then they are prepared to accept the disadvantages of not having Clob, in having lower liquidity, etc. They are prepared to take that loss in furtherance of their overall currency controls and, under such circumstances, Clob cannot exist any more.

Mr Low Thia Khiang: I do not think the Minister has answered my question. My question is: why was there an about-turn between 3rd and 4th September 1998? On 3rd September, SES announced that Clob would continue as long as there is demand. The currency controls imposed by Malaysia was announced on 1st September 1998. After this announcement of currency controls, SES announced that Clob would continue trading. Then on 4th September, it was suddenly decided to close down Clob.

My second question is: why did Clob not assure investors earlier that their shares would not be worthless? Why wait until 7th September? Was SES itself not sure about the status of the shares?

Mr Lim Hng Kiang: With hindsight, it is always possible to raise these questions. These events took place rather rapidly, and as the market adjusted it was not possible for SES to intervene and make an announcement and unsettle the market. When the announcement was made about the rules for Clob, SES responded by saying that it would remain open and it would trade as long as there is demand for its services.

When the currency controls were imposed and the differences started to widen between the two markets, it became obvious, as the days went on, that they could not arbitrage any more. Therefore, the very vital feedback link was no longer there and you were just trading within yourselves without taking advantage of the price changes in the KLSE. That is why on 4th September, SES decided that it was no longer possible to continue with Clob and had to suspend trading and close down Clob. You do not make that kind of decision immediately. You have to weigh the pros and cons and you have to assess the impact. You do not immediately close Clob. What happens if that was the wrong decision? Then investors would be disadvantaged. I think it is fair for SES to make its decision after consultation with all the players and after assessing the impact of the currency controls.

His next question was why SES did not tell the investors that their shares were not worthless. I think SES did not realise that Singaporeans thought that their shares were worthless. These were controls imposed by KLSE. If you are an informed investor, you know there is an omnibus account, of which your own stocks can be migrated to the KLSE MCD. Therefore, there is no reason for Singaporeans to think that their stocks were worthless.

There were two things happening in the market during that period. First, there was a lot of uncertainty. The KLSE was changing rules practically every other day. So there was a lot of uncertainty and confusion. Second, there was a great premium to get out of the market. As Members could see, the difference between the share prices in Clob and the KLSE prices widened to 49% and even at the end of the trading, it ended at 42%, which shows there was a high premium. Singaporean investors have decided that they wanted to get out of it and they wanted to take their proceeds in Singapore dollars.

Under such circumstances of uncertainty as well as a high premium on getting out and having the proceeds in Singapore dollars, it was not obvious to SES that people were trading below the value of KLSE just because they thought that their shares were worthless. The interpretation is that Singaporeans wanted to get out their proceeds in Singapore dollars and therefore were prepared to accept the heavy discount.

Mr Low Thia Khiang: It seems to me, from the Minister's answer, that SES was not able to fully appreciate the market situation as well as the rules that would affect the trading. Would it not be more prudent for SES then to suspend trading on Clob on 1st September after knowing the effect and at the same time assessing the impact on Clob rather than to suspend trading later?

Mr Lim Hng Kiang: As I have said earlier, a decision to suspend trading is something that you do not take lightly. In fact, SES has suspended trading on the market for only three days in 1985, and that is to SES' credit that we keep the market open. That is the role of the Exchange, ie, to keep the market open. As long as there is equal information available to buyer and seller, the role of the Exchange is to keep it open. The Exchange only suspends trading if it is assessed that there is inequity in the availability of the market information. In this case, buyers and sellers were operating on the same level playing field. The announcement was made by the Malaysians. It is up to you to decide whether to buy or sell and whether you are going to make money or lose money. For every seller, as long as there is a buyer, there is a basis for the market. But if SES feels that the information is only available to one group and not to the other group, then, of course, to be the referee, it ought to suspend trading on the market. So such conditions were not there on 1st September and there was no reason for SES to suspend trading on the market.

Mr Chng Hee Kok (East Coast): Sir, will the Minister remind the House that when trading on the stock market in 1985 was suspended by the Stock Exchange, Singapore was subjected to a great deal of criticism for doing so? So I think there is a very high price to be paid for the suspension of trading on the stock market.

Mr Lim Hng Kiang: When the SES suspended trading on the market in 1985, because of the Pan-El crisis, that decision was also criticised by many investors.