Integration by degrees


Gradual development in regional markets will provide progressive benefits to investors

Last of three parts

THE prevailing opinion among Asean market watchers based on developments so far is that the effort toward integrating the region’s capital markets will fall well short of its end-2015 target date, and the available evidence, as discussed in the first two installments of this special report, certainly supports that conclusion.

Nevertheless, market authorities, policymakers, and investors throughout the region and here in the Philippines are upbeat about market prospects for this year. Just this week, the Philippine Stock Exchange index marked its 25th record high for the year (it closed at 8.098.68 on April 7).

On the bond market side, Philippine Dealing System (PDS) President Cesar Crisol offered a rosy outlook, pointing out that the volume of new listings in 2014 at P190 billion nearly doubled from the previous year (P83 billion), and predicting even bigger results this year.

As Crisol was speaking on the occasion of BDO Unibank’s maiden listing of P7.5 billion in long-term negotiable certificates of deposit (LTNCD)—a product that has been unavailable in the Philippine Dealing and Exchange (PDEx) system until very recently—energetic issuer activity tends to add some weight to the PDS chief’s optimistic forecast.

One area of possible concern, however, is the apparent widening of the “preparation gap” between better-developed Asean capital markets and their less-developed neighbors.

Regionally, a number of initiatives needed to support capital market integration are being implemented, but in most cases, the new frameworks are being put in place by a limited number of participants, increasing the distance lesser markets have to close to reach parity with other Asean markets.

New trading system
In the local equities market, the two major initiatives underway this year are the merger of the PSE and PDS—for all intents and purposes, a takeover of the bond market system by the PSE—and the launch of a new trading engine called PSE Tradex.

The PSE Tradex system was developed by Nasdaq, and is an online system that, according to information provided by the PSE, “allows trading participants to offer online trading services to a wider range of clientele,” including through a mobile application. The system, which has so far adequately demonstrated its capabilities in testing, is scheduled to be formally launched next month.

The new trading system has become a critical priority, not only for the sake of attracting new investors, but also to more efficiently manage the eventual integrated local markets.

In effect, the local market is creating its own ‘integration advantage’ described by Japan Research Institute market expert Satoshi Shimizu: Any degree of regional integration, even a partial attainment of the goal, will naturally result in an increase in the number of issuers and investors seeking cross-border transactions.

Combining the local stock and bond markets—which in one respect is simply bringing those markets up to a regional standard (bond and equity markets are combined in most Asean countries except Vietnam)—eases access to the ‘other side’ for local investors who have been limited to one market or the other, or who must currently maintain two different accounts.

Shimizu asserted in a study published in 2014 that one critical factor in making the Asean capital market integration a success is whether or not the individual Asean countries are able to increase the number of domestic investors in order to help absorb foreign capital flows.

“There is strong demand for funds in ASEAN countries, especially for infrastructure development, and the region will inevitably remain reliant on external funds to some extent,” Shimizu explained in his report.

New securities products
The LTNCD market, a standard part of developed securities markets elsewhere, is a fairly recent development in the Philippine bond market, as is the launch of a short-term commercial paper (STCP) program. So far, only one company—Phoenix Petroleum—has issued STCP debt, offering approximately P1.7 billion in November last year with a second listing worth P1.5 billion made on March 12.

Another product set to debut on the local market sometime this year is a bond issued under the Asean+3 Multi-Currency Bond Issuance Framework (AMBIF). While PDS president Crisol provided no details about the planned local issuance, the AMBIF in general, according to a primer provided by the Asian Development Bank (ADB), “provides an intra-regionally standardized bond issuance framework, which would ultimately allow bond issuers in Asean+3 to issue bonds in all participating economies with one set of standardized documentation and information disclosure requirements, subject to compliance with the legal and regulatory requirements of each economy.” Under AMBIF a Philippine issuer could, for example, issue a single large bond in several markets simultaneously.

Region-wide initiatives
Beyond the local markets, the Asean Capital Markets Forum (ACMF), the lead body overseeing the integration effort, has developed several new frameworks that will eventually be used by all the markets in Asean in line with the overarching goal of liberalizing financial services and capital transactions.

In April 2013, Malaysia, Thailand, and Singapore implemented the Asean Disclosure Standards Scheme, which establishes a uniform set of standards for disclosure—for example, in a prospectus—for bond and equity issuances in Asean countries, particularly cross-border or ‘multi-jurisdictional’ issuances. In August of last year, the Asean CIS [collective investment scheme]Framework was launched, which is intended to facilitate the issuance of collective instruments (such as mutual funds) on a cross-border basis; again, Malaysia, Thailand, and Singapore were the pioneers in this advance. More recently, the same three countries adopted the Streamlined Review Framework for the Asean Common Prospectus. According to a press release by the ACMF, “Under the Framework, issuers planning to offer or list equity or plain debt securities can now expect a shorter time-to-market and faster access to capital across signatory countries through a streamlined review process.”

Growing inequality?
There is one glaring problem with the above initiatives: Only three countries out of the 10 Asean members have signed on to them, which may give the markets in Thailand, Malaysia, and Singapore a greater advantage. In a sense, the markets in those countries are being integrated in a practical way, while in other markets like the Philippines, domestic legal and regulatory changes necessary to join the effort in a substantial way have been much slower in coming.

In one sense, this is emblematic of a core characteristic of the Asean collective that will present challenges to any integration effort, not just in capital markets. Because the association is consultative and respectful—to a fault, in some instances—of national sovereignty, implementing supranational legal or economic frameworks only proceeds at the speed at which individual countries can accept them, often only after making extensive changes to their own laws and regulatory structures.

So far, local investors and market watchers are cautiously optimistic. As former PSE official and now UST professor Mark Valino remarked, “regulators are preparing for it but not fully,” suggesting that market technological and infrastructure enhancements are far outpacing the effort on the legal and regulatory side, perhaps because of the number of agencies involved. “Nonetheless,” Valino added, “the effort to be a part of it is very much evident.”

In the meantime, improvements being made, even if they are falling short of what is actually needed to make Asean capital market integration a reality in which the Philippines has a part, do appear to be contributing to more investor interest in local markets, which should help to, at least, partially compensate for the apparent head start being taken by Singapore, Malaysia, and Thailand. Barring the manifestation of risks from some of the ‘normal’ threats faced by Philippine markets—natural disasters, potential power shortages, and unfavorable monetary policies in developed economies—local markets are looking forward to a good year even if expectations for integration are not met.


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