SGX RegCo Tan Cheng Han & Tan Boon Gin: Financial Markets and Covid-19 – A Regulatory Perspective
Investment commentary on Financial Markets and Covid-19 – A Regulatory Perspective by Singapore Exchange Regulation (SGX RegCo) Chairman Tan Cheng Han and CEO Tan Boon Gin (Q3 2021):
Singapore Exchange (SGX) is Asia’s leading and trusted market infrastructure, operating equity, fixed income, currencies and commodities markets to the highest regulatory standards. As Asia’s most international, multi-asset exchange, SGX provides listing, trading, clearing, settlement, depository and data services, with about 40% of listed companies and over 80% of listed bonds originating outside of Singapore.
Financial Markets and Covid-19 – A Regulatory Perspective
By SGX RegCo Chairman Tan Cheng Han and CEO Tan Boon Gin. This article first appeared in the Q3 2021 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.
Climate change, technological disruption and growing stakeholder activism have forced businesses and governments to reassess and recalibrate their policies and processes. Regulators need to address market development to cater to new demands for access to and provision of capital and transfers of risk. They need to do so while preserving market integrity.
The human and economic cost of the pandemic has intensified some prior trends, including increased automation, digitalisation, and job obsolescence. The pushback against globalisation and heightened attention to sustainability and related issues have also altered the business landscape.
Governments and businesses cannot ignore the worsening of existing socioeconomic fault lines. Inequalities in income and wealth, already exacerbated by rapid technological change, will likely widen. Around the world, socioeconomic fractures have fed discontent against governments and other establishment institutions. This has led to increasing scepticism and scrutiny of actions of regulators and other parts of the establishment.
The impact on financial markets
These trends have major implications for financial markets and their regulation. Dealing with the economic upheaval from Covid-19 requires capital, which is the raison d’etre of financial markets.
Increasingly, a more informed public is paying greater attention to how financial markets can support ways to address the twin challenges of sustainability and climate change. Moreover, geopolitical tensions have been conflated with access to markets, resulting in shifts in capital flows. Thus, the likely outcome will be an intensified search among issuers and investors for venues and vehicles to raise and deploy capital.
Technological disruption will accelerate financial innovation across markets worldwide in response to market demand for new products. These trends are exacerbated by the rise of social and alternative media, an enabling agent that both erodes the influence of previously authoritative sources of information and enhances the reach of individuals. Greater democratisation of society will be a long-term phenomenon.
The rise of social and alternative media has also empowered and enabled retail investors, including facilitating collective action. This is especially salient, as financial markets have seen a significant increase in retail investor interest worldwide. This trend is likely to continue post-Covid. Greater investor interest and participation in the markets is to be welcomed, which means that investor protection issues loom ever more significantly.
Singapore Exchange Regulation (or SGX RegCo) will continue to focus on facilitating the development of the market while simultaneously safeguarding its integrity. This finds expression in a number of ways.
A key area of focus is in enhancing disclosures. One of the fundamental design decisions is to operate the Singapore market as a disclosure-based regime. A large part of the regulatory role is in ensuring that information is made available so that market participants can make informed decisions.
Of course, SGX’s disclosure-based orientation exists on a spectrum between a fully merit-based and fully disclosure-based regime, even if it is tilted more towards the disclosure side of the house. This means that the scope for some level of merit judgment and discretion by the regulators remains. In some instances, these are substantive judgments, for example, whether a particular product or issuer is suitable for the local market, and the appropriate safeguards that need to be put in place. In other instances, these are process judgments about how the SGX Listing Rules should be set up, amended and revised.
In this regard, and particularly in light of what appears to be a growing consensus around the recommendations of the Taskforce on Climate-related Financial Disclosures, SGX RegCo is planning to consult the market on whether those recommendations should be incorporated into SGX rules.
Even as SGX RegCo considers prescribing a specific format for climate-related disclosures, there is recognition that sustainability goes beyond climate change. While there is an international push towards having a single sustainability reporting standard, what that would look like is still unclear.
Given that there is already a sense of specific areas where market participants would like to see precise disclosures, SGX RegCo is considering whether it would be appropriate to provide guidance on the specifics of what should be disclosed. Relatedly, given the growing relevance and importance to investors of such climate and sustainability-related disclosures, there is also discussion over whether it would be appropriate to start requiring independent assurance for those disclosures.
Looking beyond sustainability, however, SGX RegCo is also constantly looking for ways to strengthen its disclosure regime, which requires the active participation of all parts of the community.
SGX RegCo continually encourages and provides guidance to issuers and their professional advisers on enhancing their disclosures. The investor community can and should play an active part. Investors are now increasingly empowered with the ability to obtain information from a variety of sources, corroborate information provided by issuers, and question and engage companies. Social media and other tools have also enabled investors to mobilise and act collectively more than ever before. Such active participation by investors is to be encouraged, as enhanced interaction and engagement can only contribute to the market’s overall health.
New products and investable assets
Another key focus is on meeting the market’s need for new products and investable assets. The demand for new products is growing, and the question is how to support this expansion in a way that also appropriately protects market integrity.
How can the market balance innovation with pragmatism and remain open to new structures and ways of doing things – while not being afraid to consider possible refinements that enhance the model? One example has been the proposal to introduce Special Purpose Acquisition Companies (SPACs), where SGX RegCo has had to address several key concerns from the market which speak to precisely these sorts of issues.
First, how can SGX RegCo get the risk-reward balance right, such that it avoids some of the concerns, such as excessive dilution and a rush to de-SPAC experienced in other jurisdictions? Or are such issues best managed through the commercial terms of each transaction as determined by the sponsors? The end game is to have a viable model that will serve the needs of sponsors and investors looking for access to such early-entry high-return/high variance investments.
Second, how much of a role should SGX RegCo entrust to market discipline? It is a fine balancing act to empower and encourage investors at all stages (IPO, de-SPAC, PIPE), to vote responsibly, with their hands (and their wallets). This also has to do with the alignment of interests. The longer-term goal in having this SPAC framework is to have more quality companies listed on SGX post-de-SPAC. It is in the market’s interest to ensure, as far as possible, that sponsors and investors at every stage are aligned in terms of achieving that end goal.
Third, is the Singapore financial market ready for SPACs? SGX RegCo is ramping up preparations to inform and educate the investor community, including working with the Securities Investors Association (Singapore) to support retail investors. This is to ensure that investors are provided with the opportunities to fully understand the mechanics and details, such as how SPACs trade, how redemptions work, and how SPACs de-SPAC. And SGX RegCo is also working with its partners from the Singapore Institute of Directors to ensure that independent directors on SPAC boards are well-equipped to perform their oversight responsibilities. For instance, what to do when there are rumours of a de-SPAC and their duties when recommending a de-SPAC to shareholders.
Preparing for the next shock
Crises such as Covid-19 are an irreducible feature of human existence. With the introduction of greater complexity and new products, the risks to the market from such incidents will naturally rise.
SGX RegCo actively monitors developments during such crises and stands ready to respond in a calibrated and appropriate way. But it is also the role of the market, as a mechanism for risk transfer and management, to help the wider economy to prepare for – and wherever possible to cushion – such shocks. From a regulatory perspective, SGX RegCo’s role is to organise the market in a way that best enables this.
Tan Cheng Han is Chairman, and Tan Boon Gin is CEO, of Singapore Exchange Regulation.
About Singapore Exchange
Singapore Exchange is Asia’s leading and trusted market infrastructure, operating equity, fixedincome, currencies and commodities markets to the highest regulatory standards. As Asia’s most international, multi-asset exchange, SGX provides listing, trading, clearing, settlement, depository and data services, with about 40% of listed companies and over 80% of listed bonds originating outside of Singapore.
SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN and offers commodities and currency derivatives products. Headquartered in AAA- rated Singapore, SGX is globally recognised for its risk management and clearing capabilities.