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Fragmentation Impeding Success of Asean Exchanges

[FIRST - 25]  BT/NEWS/PAGES ... 29/07/15SINGAPORE, Jul 29 (Reporting ASEAN) – Four years after the stock exchanges of the Association of Southeast Asian Nations took steps towards regional integration, the notion of a borderless capital market remains but a grand vision.

Asean Exchanges kicked off in April 2011 as a collaboration of seven exchanges from Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.

Alone, each of the Asean economies exists as a blip on the world map. But together, with a combined gross domestic product of US$2.4 trillion, Asean is the seventh largest and one of the fastest growing global economies.

To ride on the growth prospects, Asean Exchanges was created to increase regional cross-border trades, boost trading stability and attract foreign funds into the region. Yet the journey towards regional integration has not been smooth sailing.

In June, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), said that the pace of Asean financial integration had been “disappointing” and was lagging behind efforts to integrate trade within the region.

ASEAN Trading Link

Since its launch, the Asean Exchanges has rolled out several initiatives to promote Asean stocks as an asset class among retail and institutional investors. One key initiative is the Asean Trading Link, an electronic gateway for brokers to offer clients easy access to the bourses in the region.

For Tony Lewis, head of HSBC Securities Services, Singapore, an effective trading and settlement link “will reduce the cost of cross-border trading and settlement, serving the overall objective of attracting more investments and volume”.

John Chong, chief executive officer of Maybank Kim Eng – one of the pioneer brokers of the Asean Trading Link – says the link will benefit brokers with inadequate technology and networks for cross-border trades, at reduced time to market and implementation costs. In turn, stock markets should benefit from greater liquidity.

But after its initial thrust in 2012-2013, which began with the linkages of the stock exchanges of Singapore, Malaysia and Thailand, progress on Asean Exchanges has been “extremely slow”, CMC Markets analyst Nicholas Teo notes.

The original plan to link up to seven exchanges – including the Philippine Stock Exchange (PSE), Indonesia Stock Exchange, as well as Hanoi and HoChiMinh Stock Exchanges – through the Asean Trading Link by the end of 2015 also looks doubtful, Mr Teo adds.

Earlier in February, PSE president and CEO Hans B Sicat said that the bourse was waiting for the country’s corporate regulator Securities and Exchange Commission (SEC) to become a member of the International Organisation of Securities Commissions (IOSCO), a Paris-based international body of the world’s securities regulators, be- fore coming on board the Asean Trading Link.

In March, Indonesia’s Financial Services Authority’s commissioner for capital market supervision Nurhaida said that the country’s bourse would join the trading link only if several important issues were first addressed. These issues include how the system would handle disputes, as well as deal with the wide gaps between stock exchanges in the region.

“We are ready to join the trading link; our market is ready to be integrated. But we are still assessing whether or not this system is favourable for our stock exchange,” she said.

Presently, the three exchanges on board the Asean Trading Link – SGX, Bursa Malaysia and the Stock Exchange of Thailand (SET) – comprise about 70 per cent of the region’s combined market capitalisation.

The smaller exchanges in the region are reluctant to jump on board the trading link as they fear that trade volumes will flow towards the larger exchanges, and that they stand to lose out. The Cambodia Securities Exchange, for instance, has to date attracted only two listings, while the Yangon Stock Ex- change is slated to open only in October this year.

Says CMC’s Mr Teo: “The developing markets may be more focused on developing their domestic exchanges first, before extending their reach. Given such, the priority of working towards a common goal may not be as aligned across the exchanges.”

SGX, on its part, cannot quite say if intra-Asean liquidity has improved since the trading link, “as the flows cannot be tracked in this way”, a spokeswoman told BT. But Mr Teo has observed that trading volumes have been low.

For the Asean Trading Link to be success- ful in the long run, it will need stronger support from other Asean countries.

In Mr Teo’s view, the priority of the Asean Exchanges’ founding members should be on building the trading volume critical mass before wooing new markets to participate. “That will provide a sexier story,” he says.

He suggests that the authorities work on the current Singapore-Malaysia-Thailand link, drum up a greater degree of retail participation and cross activity first, before bringing on board another member who may not yet be as prepared. “Once there are signs of visible success here, others on the fringe will naturally follow.”

Maybank Kim Eng’s Mr Chong also sees a need to galvanise support from the ground up for the trading link, especially among capital market stakeholders such as listed companies, market intermediaries and investors in member countries still on the sidelines.

“We need the private sector to understand the benefits of the link to push the cause further. To achieve that, Malaysia, Singapore and Thailand could join forces to start engaging the capital market players and show them how the links can benefit them,” he says.

If more bourses join the Asean Trading Link, it would “truly provide critical mass and give the Asean Exchanges a lift”, Mr Chong adds.

But full integration of the Asean stock markets is hampered by settlement and currency differences among Asean countries. UBS Singapore’s head of equities and head of Asean client trading & execution Yeoh Choo Guan says: “Although these are not structural issues, it would require some time to resolve these.”

At a meeting of the Asean Banking Council in Singapore in June, MAS’s Mr Menon suggested that member countries build on the Asean Trading Link by “further broadening and deepening post-trade linkages”.

Presently, there is no centralised clearing and settlement system in Asean. Most exchanges in the region still trade as separate discrete clearing systems. Establishing clearing, settlement and custody links will make the Asean Trading Link a “full-fledged end-to-end platform across the three Aseanmarkets”, Mr Menon said.

David Gerald, president of the Securities Investors Association Singapore, or SIAS, adds that an Asean clearinghouse will help to strengthen and speed up the progress of the Asean Trading Link, as it acts as a central counterpart for cross-border trades and form depository links for cross-border settlement and custody.


Asean’s 10 markets remain fragmented, with great diversity in market sizes, level of economic development, legal and regulatory systems, among other areas.

There also exists capital controls and ex- change jurisdictions within Asean, including differences in the withholding tax regimes, says SIAS’s Mr Gerald, adding that some of the markets reckon that their domestic markets should be integrated with the rest of the world rather than within Asean.

But fragmentation raises the costs of doing business, and of investing in the region. Says Hong Kong-based Nicholas Ronalds, managing director and head of equities at Asia Securities Industry & Financial Markets Association (Asifma): “Adopting regional structures and policies that introduce greater consistency between the Asean markets would reduce access costs and hence lower barriers for international investors to invest in those markets.”

According to a European Commercial Bank study, a market is fully integrated if all potential market participants face a single set of rules, have equal access to instruments and services, and are treated equally when they are active in the market.

“There are considerable challenges still to be overcome,” says Amod Dixit, Standard Chartered Bank’s managing director and regional head of investors & intermediaries, Asean. He suggests that the grouping harmonise its trading hours, allow for simple trade orders rather than local specialties, and create common listing criteria.

Asean acknowledges its diversity. To some degree, the region has made attempts to harmonise rules. In August last year, Singapore, Malaysia and Thailand launched the Asean Collective Investment Scheme framework, which is a mutual recognition framework providing fund managers with a streamlined authorisation process for cross-border offering of funds.

In March this year, the three countries signed a memorandum of understanding to establish a streamlined review framework for the Asean Common Prospectus. The framework streamlines the review process for a multi-jurisdiction offering of equity securities or plain debt securities, as long as the prospectus is prepared in line with the Asean Disclosure Standards, thus shortening the process, and providing the issuer more certainty of time-to-market.

Says Daniel Lee, DBS Vickers Securities (Singapore) senior vice-president and head of electronic trading & ETF business: “These are steps in the right direction.”

He suggests that Asean take a leaf from Europe’s MiFiD, or Markets in Financial Instruments Directive, a European Union law that serves as financial regulation for investment services across the 31 member states of the European Economic Area.

“The establishment of MiFiD took a long time, but it managed to effectively harmonise investor regulations across the different places . . . With something like that, it will be easier for investors to access the (Asean) market, without the need to relearn every single market in the region.”


As one of the exchanges in Asean, SGX will benefit from the increased liquidity flow, cross trading, and increased foreign funds coming into the region, says an SGX spokeswoman.

Unfortunately, trading volumes remain in the doldrums for SGX. On Tuesday, its daily trading volume was about 2.3 billion shares, versus 10.7 billion shares traded on SET.

Says Roger Tan, CEO and founder of Voyage Research: “If you look at Thailand, they are opening their markets to foreign issuers to list. This shows that the Thais have a fair level of confidence in their own markets. If I am Thai, I will wonder if I want to link up.

“SGX needs to bring back the excitement to the Singapore market first, before it begins talks with other bourses. It needs to have bargaining chips on the table. There are no two ways about it.”

The departure of Magnus Bocker as CEO of SGX is also seen as a further setback for the efforts at regional capital market integration. SGX’s new CEO, ex-banker Loh Boon Chye, who stepped into his role earlier this month, “has to do his rounds” during his initial settling-in period, which may further delay progress, says CMC Markets’ Mr Teo.

“I think Mr Loh has so many more issues that are higher up in the (priority) order, but that said, regional integration would solve a lot of peripheral problems that he has and bring back some vibrancy to the Singapore bourse.

“Ironically, as SGX faces huge challenges in trying to boost trading volumes domestically, playing a lead role in pushing for a more vibrant and robust Asean Trading Link may offer just the medicine for the sluggishness in trading here.”

SGX’s commitment is vital to the success of the Asean Exchanges. Says SIAS’s Mr Gerald: “Singapore is undoubtedly the gateway to Asia and in Asean. SGX commands respect widely for its corporate governance, being the best in Asia.”

Standard Chartered’s Mr Dixit concurs. “An open financial centre like Singapore and SGX has a lead role to play in Asean,” he says.


The growth of China and India’s capital markets, coupled with increasing consolidation of stock exchanges across the world, provides growing impetus for Asean’s financial collaboration.

Packaged together, the Asean capital markets will be larger and stronger, and better able to offer a more compelling value proposition to international investors, and fare competitively against global peers. Cooperation will also reduce the region’s vulnerability to external shocks and market volatility.

A fully integrated Asean stock market would feature more than 3,000 companies – more than the bourses of Hong Kong, Shanghai, or Tokyo. As a single entity, Asean would rank among the top 10 stock exchanges globally by market capitalisation.

A fragmented market, on the other hand, will encourage negative competition, says UBS’s Mr Yeoh.

The integration of Asean’s capital markets is not going to be an overnight affair, CMC Markets’ Mr Teo adds. “As China increases market share from us and from the rest of the world, Asean will become increasingly marginalised. I think the priority is to get all the different heads to sit down and say that they are committed. I think everybody has their own different agendas.”

Maybank Kim Eng’s Mr Chong suggests the corporate sector to stop harping on the challenges of integration. Instead, start seeing Asean as a single marketplace and capitalising on its enormous opportunities. “Make the region a focal point of their growth strategy and aspire to be an Asean multinational.”

This story was produced for the ‘Reporting ASEAN’ media fellowship programme. A version of this article was first published in The Business Times:

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