global market structure - deutsche bank · 2017-07-10 · 2. philippines market remained volatile...

2

Deutsche BankEquities

March 2017

Global Market StructureAsia Pacific Newsletter Special Edition

2017YEAR OF THE ROOSTER

3

Global Market Structure

Contents

APAC and ASEAN Summary 4

Hong Kong 8

China 16

Taiwan 24

Japan 27

India 33

South Korea 39

Australia 42

Thailand 47

Singapore 50

Philippines 54

Indonesia 57

Malaysia 59

Chart Definitions 62

Editor

Jessica Morrison, Head of APAC Market Structure [email protected]

Quantitative Content

Winnie Khattar, Head of APAC Analytics [email protected]

Market Structure

Nikki Tanner

Contributors

Nithin Nath, Rahul Mundra, Scarlett Bian

Issue 43, Special Edition 2017

4


APAC and ASEAN Summary

Fig 1: APAC Volatility (30 day index return volatility)

Fig 2: ASEAN Volatility (30 day index return volatility)

Fig 3: APAC Market Share Distribution

Source: Bloomberg, Deutsche Bank Analytics

Fig 4: ASEAN Market Share Distribution

USAEuropeAustraliaChinaHong KongIndiaJapanSouth KoreaTaiwan

USAEuropeIndonesiaMalaysiaPhilippinesThailandSingapore

Fig.7 Primary Futures Turnover vs Open Interest

Bill

ion

s

Avg Turnover (US$ Bn)

Open Interest (US$ Bn)

Fig.6 Turnover Velocity by Exchange Free Float

2014 2015 2016 Australia 5% 2% 4%China 48% 74% 58%Hong Kong 7% 4% 4%India 3% 1% 3%Japan 25% 12% 21%South Korea 6% 4% 5%Taiwan 4% 2% 2%ASEAN 4% 1% 3%

2014 2015 2016Indonesia 14% 13% 16%Malaysia 18% 16% 13%Philippines 6% 6% 5%Singapore 25% 27% 24%Thailand 37% 48% 43%

462%

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126%

65% 82% 99%

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Fig.5 Turnover Velocity by Exchange Market Cap

61%

13% 25% 26% 28% 37% 42%

55% 58%

70% 88% 95%

214%

198%

CHINA - SHCHINA - SZ JAPAN SOUTH KOREA TAIWAN AUSTRALIA THAILAND INDIA INDONESIA MALAYSIA HONG KONG SINGAPORE PHILIPPINES


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Welcome to the Special Edition Market Structure Newsletter that gives an overview of APAC market structure changes in 2016 with a forward look into 2017. We consider both the macro themes of regulation, technology and cost against a variety of micro structure features including YoY volume trends on a total and intra-day basis, spreads and free float adjusted turnover velocity. We hope this helps inform execution decisions and guide on how to trade, once you have decided what to trade.

2016: As the flow cries. With global shock events from Brexit to Trump, and China recovering from the troubles of 2015, both fundamental and statistical analysis was compromised making investors nervous to put money to work. Towards the end of the year there were some bright spots – the launch of Shenzhen-Hong Kong Connect bringing 7-10% Hong Kong market share down the pipes from Southbound investors, US attaining RQFII status and the launch of the first broker independent dark pool, Kai-X, in Japan – but these were largely symbolic rather than liquidity accretive.

2017: As the crow flies. With the first two months of the year showing increased volumes, and investor appetite returning as funds feel underinvested, we hope the Year of the Rooster proves to be a straight player and puts to rest the capricious Year of the Monkey. We provide an in depth update on the market structure status of a MSCI A-share inclusion, Japan may see liquidity shifts resulting from the opening of margin trading to PTS venues and Taiwan prepares to move to continuous trading at the same time as potentially reducing day trading transaction taxes.

There will be some tough issues to get through too. In India, the commencement of GAAR on 1st April could see people shifting their product mix more into futures and the market awaits the remedial steps NSE will need to take due to the SEBI finding NSE’s co-location systems prone to manipulation. Hong Kong may find out what additional identifiers will be needed to be added to aid regulatory surveillance and it looks like Japan will similarly require the registration of HFT players.

We look forward to navigating the year with you, if you have any thoughts or questions on the paper, please do get in touch.

2. Philippines market remained volatile in 2016 in correlation with US equity market events, interest rate hikes and general elections.









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1. Japan’s market had the most volatility impact to global events in 2016. Brexit vote in June 2016 and US presidential elections in November 2016 both events saw volatility spike in Japanese equities market.

2. China volatility early 2016 coincided with RMB devaluation and introduction of circuit breakers which were removed after one week. Although this impacted region at the time, volatility since then reduced and has not subsequently seen a similar peak.

APAC Volatility Jan-17 Jan-16 YoY%

Australia 10% 20% -50%China 10% 46% -78%Hong Kong 12% 29% -58%India 11% 19% -42%Japan 13% 41% -69%South Korea 10% 19% -51%Taiwan 9% 18% -49%









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65% 82% 99%

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61%

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1. Volatility in Thailand stock index rose after the King Bhumibol passed away in October last year, it may continue to impact in 2017 volatility as the plans for Thai king’s successor develop.

ASEAN Volatility Jan-17 Jan-16 YoY%

Thailand 9% 24% -64%Singapore 8% 23% -63%Malaysia 7% 15% -54%Indonesia 12% 17% -25%Philippines 21% 30% -32%

5










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Fig 1: APAC Volatility (30day index return volatility)


Fig 2: ASEAN Volatility (30day index return volatility)





0

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0.45 USAEuropeAustraliaChinaHong KongIndiaJapanSouth KoreaTaiwan


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2011 2012 2013Australia 6% 6% 6%

131211

39% 37% 39%China

9% 9% 7%Hong Kong

3% 4% 2%India

24% 28% 36%Japan12% 11% 6%South Korea6% 6% 4%Taiwan

2011 2012 2013

28% 33% 40%Thailand

4% 6% 6%Philippines

15% 15% 15%Malaysia

32% 29% 24%Singapore21% 16% 15%Indonesia


Fig.5 Estimated Cost of Trading

0.05.0

10.015.020.025.030.035.040.045.050.0

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%Trade size (%ADV)

Imp

act

Co

st E

stim

ates

(b

ps)

Hang Seng Composite

Nikkei 225

Taiwan TAIEX

NSE S&P Nifty

S&P/ASX 200

Kospi 200

Straits Times


Fig.6 Turnover Velocity

Indonesia MalaysiaPhilippinesThailand SingaporeTaiwan AustraliaChina Hong KongIndiaJapan South Korea

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

1 2 3 4 5

1 2

131211



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ThailandSingaporeTaiwan ChinaHong Kong IndiaJapanSouth Korea

335%

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103%

77%65% 64% 62%

45% 31% 30% 21% 8%

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Fig.8 APAC Market Microstructure Matrix

Contact

Email: [email protected] Tel: +852 2203 5710

Country % APAC Market Share

Turnover Velocity

Primary/ATS Market Share

MTD Index Return

YTD Index Return

Avg Spread (BPS)

Avg Trade size

30D Avg. Volatility

Avg. Daily Equity Volume (Mn USD)

Avg. Daily Futures Volume (Mn USD)

Avg. Daily ETF Volume (Mn USD)

CHINA 50.57% 472% 100% 2.4% 2.4% 10 5,328 10% 53,354 5,662 254

JAPAN 25.02% 149% 84% 0.2% 0.2% 6 1,419 13% 25,010 23,953 1,685

AUSTRALIA 4.13% 83% 85% -0.8% -0.8% 11 791 10% 3,925 2,777 49

SOUTH KOREA 5.82% 189% 100% 3.5% 3.5% 16 36 8% 5,691 11,917 477

HONG KONG 5.07% 50% 98% 6.2% 6.2% 16 13,239 12% 5,069 9,501 293

INDIA 3.36% 119% 100% 4.6% 4.6% 3 170 11% 3,260 2,448 13

TAIWAN 2.57% 91% 100% 2.1% 2.1% 24 7,813 9% 2,779 6,478 111

THAILAND 1.64% 100% 2.0% 2.0% 42 6,716 9% 1,557 435 0

SINGAPORE 0.80% 100% 5.8% 5.8% 22 1,685 8% 691 244 6

MALAYSIA 0.41% 100% 1.8% 1.8% 19 4,381 7% 389 93 0

INDONESIA 0.47% 100% 0.0% 0.0% 27 9,789 12% 425 3 0

PHILIPPINES 0.14% 100% 5.7% 5.7% 15 2,515 21% 123 - 0









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Fig 7. Open interest in Japan listed index futures has been on the rise since January when Bank of Japan announced the change of interest rates into negative territory, followed by stimulus package later in the year.

Fig 6. In this edition we are introducing a free float adjusted measurement of turnover velocity which shows annualized market turnover as a percentage of its free float market capitalization. Fig 5 and Fig 6 above compare the turnover velocity calculated with exchange market capitalization and free float market capitalization.









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6


Timeline Summaries Global Market Structure

Timeline Summaries

New derivatives trading platform launched

FY2016-18 plans announcement

FSA published rules on margin requirements for

OTC derivatives

Tax agreement between Japan and Germany comes into effect

Launch Chi-X dark pool ‘Kai-X’

Tax treaty with Belgium signed

TAIEX futures listed on OSE

Tax agreements with Germany and Taiwan effective

Tax treaties agreed with Latvia and Bahamas

SBI Japannext to extend night market hours

BoJ announces doubling of annual

ETF purchases

SBI Japannext upgraded its

matching engine

Japan

Order visibility restrictions relaxed

New short position disclosure rules

Pilot testing for omnibus account for foreign investors

Double taxation agreement with India effective

IPO rules relaxed to allow for listing of unprofitable start-ups

FSS publishes draft guidelines on margin requirements for non-centrally cleared derivatives

FSC allows rehypothecation of securities

Introduction of omnibus account structure

New short selling rules (Q1 2017)

Relaxation of KOSPI entry and exit rules to be eased (Q1 2017)

Minimum foreign investor thresholds for corporate tax exemption to be clarifed

Restructuring of KRX to allow for venue competition

Scope of corporate tax exemptions widened

FSC announces revised asset management regulations

Trading hours extended by 30 minutes

FinTech open platform launched

South Korea

China

Hong Kong

Rules on suspension of “overheated” stocks due to short selling

HKEx consults on amended stock option position limits

VCM for equities

Consultation on listing rules

begins

Closing auction introduced

Consultation on position limit regime

SPSA RMB T0 DVP for Stock Connect

Conclusions of Short Position

Reporting consultation

SZ-HK Stock

Connect launch

SFC circular on best practises for Algo

Trading

SFC introduces new requirements for senior

management

Reporting requirements for OTC derivatives

effective

Closing Auction Phase2

VCM for derivatives

SFC issues listing guidelines for GEM stocks

Extended short position reporting requirements in effect

Changes to listing regime

New Orion trading platform

Investor level trade ID requirements

Stock Connect Phase2, ETF Connect

New QFII rules

New CSRC chairman

Foreign firms given access to CIBM

U.S granted US$38 billion RQFII quota

China A-shares not added to MSCI EM

AMAC released PFM WOFE guidelines

Circuit breakers removed

SZ-HK Connect announced, aggregate quota removed

Forced delisting of Xintai electric

PBOC and SAFE announce changes to RQFII rules

CSRC removes requirement to have 50% QFII in equity

Tightening of stock suspension rules

SSE relaxed restrictions on options trading

SZ-HK Connect

launch

CFFEX relaxed rules on index futures

First US RQFII

First PFM WOFE granted

First A-share ETF listed in London

MSCI A-share decision

New Trading halt mechanism for companies

HK ETFs list on TWSE

TWSE published amendments to research report distribution regulation

Trading hours for SBL extended

Review of AML laws

TWSE’s potential move to continuous trading

Review of TWSE tick size

Day trading transaction tax review

Reduced weight in MSCI index

Nifty50 futures granted CFTC approval

First dual currency ETF

Taiwan Amended Margin Trading & Securities Lending Rules

Relaxed day trading rules

Nifty50 based leveraged and

inverse products launch on HKEx

Approval for new exchange in

‘GIFT’ city

Algo trading test facility launched by BSE

SEBI issues FAQ on Alternative

Investment Funds

Aug: Dr. Raghuram Rajan announced

India Budget Highlights

Dr. Raghuram Rajan announced as governor of the RBI

SEBI consults on Algorithmic trading and co-location

NSE CEO resigns

SEBI finds that NSE had given preferential co-lo access to some brokers

SEBI relaxes F&O limits for FPIs to 20% of market wide position limit

Vikram Limaye is NSE’s new CEO

Conclusions to HFT and algo regulation consultation

Development of GIFT city

NSE permits intraday collateral transfers

SEBI investigates NSE over unfair HFT access

IndiaBSE stock lists on NSE

GAAR and new DTAA with Singapore take effect

New HFT/ Algo trading rules

Review of rules on margin trading on PTS

Tax changes for NISA

Possible changes to Best Ex regime

Additional Kai-X members

London Connect

Chinese D-Shares listing in Germany

Review of R/QFII, Stock Connect rules

IPO registration system

7


Timeline Summaries Global Market Structure

Timeline Summaries

SEC considers tighter trading penalties

Thai bourse and SEC to launch “Digital IPO”

SEC’s three-year strategic plan

Public hearing on draft revisions to market infrastructure rules

IDX launches ‘Go Public’ system to

encourage private firms to list

Consultation on P2P lending

Prince Maha Vajiralongkorn,

succeeds his late father

King Bhumibol Adulyadej

SET amends listing criteria to enhance

quality of listings

New law with civil penalty for market

manipulation effective

Increase in stocks available for margin trading

New Fintech platform to be set up (Q1 2017)

Launch of start-up specific trading platform (Q3 2017)

Reduction of settlement cycle to T+2 (2018)

Thailand

Minimum public float requirement increased to 15% for new IPOs

Trading of US dollar denominated securities approved

Exchange publishes for Public-Private

Partnerships rules

PSE plans merger with PDS

Consultation on rules to facilitate trading of structured warrants

Foreign investment limits to be increased for specified industries

PSE to implement a new front-end trading system

Indonesia

MoU signed with Malaysia to create a world Sharia stock market

Indonesia considers new board for listing SMEs

IDX plans to ease margin trading rules

IDX considers removing stock price threshold

IDX to issue new regulations on margin trading

Existing tax amnesty ends

OJK restricts share buy backs when markets are volatile

Tax amnesty launched

SEC consults on information disclosure for REITs

OJK launched online service for reporting, licensing & registration

Foreign ownership limits relaxed for 35 sectors

Margin trading rules expected

IDX tightens stock price rules

Malaysia

Securities Commission consults on

REITs and CIS

IOSCO to set up APAC hub in Malaysia

Rule changes for REITs following public consultation

P2P financing platform

Revised takeover and merger rules effective

New guidelines on management of cyber risk

Malaysia Exchange and IDX agree to develop Islamic capital market

Listing rules amended to improve transparency

Corporate governance standards tightened

Australia

ASIC consults on disclosure of information in prospectuses

ASIC backs ‘blockchain’ tech; ASX invests on it

Outage closes ASX

and impacts market

New listing rules come into effect

ASIC updates minimum bid price rule for

takeovers

ASIC releases new guidance on ASX-

listed buy-backs

ASIC publishes findings from ASX

outage

ASX moved to T+2 settlements

Dominic Stevens appointed ASX CEO

ASX to launch updated derivatives trading platform

ASIC consults on market integrity rules

ASX implementation of blockchain technology

Conclusions on MIR consultation including changes to block rules

ASX response to ASIC recommendations post outage

Philippines

Singapore

Singapore’s RQFII investment quota

to be doubled

Minimum traded price requirements come into force

SGX mandates 6 monthly update on suspended stocks

SGX launches MSCI China Free

Index Futures and Options

contracts

Consultation on short sell flagging and disclosure launched

SGX revises minimum price rule

SGX to move regulatory

function to new subsidiary

Hardware failure closes SGX for half a day

MAS announced New Financial Reporting Framework for Business Trusts

New short sell flagging and disclosure rules

Introduction of dual class shares

SGX review for MAS post outage

Transfer of SGX regulatory function to independent subsidiary

Proposed increase in stock transfer tax

Minimum fund purchase threshold to be removed

Potential merger of equity and bond markets

Cross listing of IDX and Malaysia Sharia securities

8

Global Market Structure Hong Kong


Global Market Structure Hong Kong Newsletter Special Edition Issue 43, 2017

2017 Market Structure

Insight into the Securities and Futures Commission’s plans for 2017

Speaking at the 7th Pan Asian Regulatory Summit, held in Hong Kong on the 8th of November 2016, Securities and Futures Commission (“SFC”) CEO Mr. Ashley Alder highlighted some of the SFC’s key focus points for the latter half of 2016 and looking forward to 2017.

The dominant focus of his speech was the current consultation on amendment to the Hong Kong Listing regime. Mr. Alder acknowledged that feedback has been mixed, but he remains adamant that change is necessary to bring the current regime (established in 1988) in line with world standards.

Mr. Alder noted that

“The need to change has been driven by a significant rise in complaints against listed companies exhibiting patterns of problematic behavior”.

Other topics covered in his speech included cross border supervision, with Mr. Alder citing increased interaction between the SFC and the China Securities Regulatory Commission (“CSRC”) following establishment of the Stock Connect trading systems.

“Stock Connect basically meant that, for the first time, the CSRC had much the same incentive as we have had to identify and root out cross-border misconduct”.

Mr. Alder went on to explain that implementation of Stock Connect meant that the CSRC has became more focused on the activities of overseas investors in Mainland markets, in much the same way that the SFC has been focused on the activities of overseas and Mainland investors in the Hong Kong market.

“Cross-border supervision and investigation will become even more essential to contain risks to our respective markets as they experience even larger cross-border flows.” said Mr. Alder.

The SFC’s continued focus on promoting sustainable market development was also mentioned. The SFC has pursued intensive talks with other jurisdictions to strike practical agreements enabling the Hong Kong funds industry to obtain direct access to large overseas markets, mainly in Europe. Mr. Alder said that the SFC should be in a position to announce the first of these very soon, along with a consultation on changes to our Fund Manager Code of Conduct.

Mr. Alder’s full speech can be found here: http://www.sfc.hk/web/EN/files/ER/PDF/Speeches/Ashley_20161108.pdf

Overhaul of Hong Kong’s stock listing process

As mentioned in Mr. Alder’s speech at the 7th Pan Asian Regulatory Summit, changes to Hong Kong’s stock listing process are likely to occur in 2017.

By way of background, in June 2016 the SFC and the Hong Kong Stock Exchange (“HKEx”) jointly launched a three-month consultation on proposed changes to Hong Kong’s stock listing process. Source: Bloomberg, Deutsche Bank Analytics

Fig 4: Lit versus Dark Market Share

HKG

0%

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100% Dark

Jan-14 Apr-14 Jan-16 Apr-16Jul-14 Jul-16Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-17 Oct-16


Fig 1: Free Float Turnover Velocity

Turn

ove

r V

elo

city

(%

)

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rno

ver

(Bill

ion

s U

SD

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2017 Turnover 2017 Velocity

2015 Turnover 2016 Turnover

2015 Velocity 2016 Velocity

Fig 1. Trading in the local stock market decreased in 2016. The aggregate average daily turnover amounted to HK$66.9 billion (US$8.5 billion), 37% lower than the HK$105.6 billion (US$13.6 billion) in 2015.


Fig 2: Equities(Cash), Futures and ETFs Monthly ADV

EQUITY FUTURES ETFS

Eq

uit

ies

& F

utu

res

(US

$B

illio

ns)

ETF

s (

US

$ M

illio

ns)

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-16 Jan-17

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Fig 2. The number of ETFs fell to 127 as at end-2016 from 133 as at end-2015. The average daily turnover in 2016 was HK$4.1 billion (US$0.53 billion), which was 53% lower than the HK$8.8 billion (US$1.13 billion) in 2015. ETFs accounted for 6% of the total market turnover in 2016 compared to 8% in 2015. The average daily turnover of A-shares ETFs was HK$1.6 billion (US 0.20 billion), accounting for 39% of total ETF turnover compared to HK$6 billion (US$0.77 billion) and 68% in 2015.

Fig 3. Total turnover of listed futures in Hong Kong reached 84,100,129 contracts, up 14% on the full-year record of 73,462,212 contracts in 2015. Turnover of Hang Seng Index Futures was up 40% from the previous high in 2011 according to Hong Kong exchange statistics.

Fig 4 Dark pool volumes in Hong Kong continue to remain low. SFC sent a questionnaire querying brokerages about dark pool rules in June last year, and released a circular in December governing controls in algorithmic trading which is detailed under the Market Structure section.


Fig 3: YoY futures average daily turnover

HSI Fut

0

5

10

15

20

US

$ B

illio

ns

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-16 Feb-16 Mar-16 Apr-16

Hong Kong

9


The consultation stated that the changes intended to:

— Achieve closer coordination and cooperation between the SFC and HKEx.

— Provide the SFC with earlier and more direct opportunity to provide input.

— Streamline the decision making process.

— Simplify the process for IPO applicants.

— Establish clearer accountability and enhance oversight.

Under the proposed changes, a listing regulatory committee would be created, with half of the committee’s members from the SFC and half from the HKEx. This differs from the current set up in which the HKEx and a listing committee approve new listings and set policies, while the SFC grants approval at the final stage.

Source: http://www.scmp.com/business/investor-relations/article/2047370/compromise-likely-outcome-hong-kong-listing-reform

Supporters of the consultation have heralded the changes as necessary to bring the regime into the twenty first century. Those in opposition question the necessity of changing a system that appears to work well, and note that the new structure gives the SFC more control over the listing process.

The Hong Kong Government has publically supported the changes with the Secretary for Financial Services Mr. Chan Ka-Keung dismissing suggestions that the reforms give control to the SFC, or lead to over-regulation.

“The proposed reforms would help achieve a one-stop platform for the SFC and HKEx to discuss new listing applications. I do not agree with some commentators that the reforms would add power to the SFC or that they would lead to over-regulation,” Chan said.

The consultation period was due to end in September 2016, however it was extended by two months until the 18th of November 2016.

Once released by the SFC, consultation responses and the SFC’s own response to the consultation will be available here: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/

The HKEx has released their submission to the consultation:http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/Documents/1611172news.pdf


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Fig 5: Average Index Spread and Trade Sizes

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Fig 6: MoM Index Price Change

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Fig 7: Intra-day volume curve

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Fig 6. Hang Seng index closed for the full year 2016 up 0.4% for the year. In January 2017 index is already up 6.2%.

Fig 7. Hong Kong Exchange went live with closing auctions on July 25th 2016. For Hang Seng index stocks, the closing auction volume is ~8% of full day’s volume. In the period from 14:00 – 15:00 hours during the day there is an average drop of 5% in market volume before the market volume picks up again when China market closes at 15:00. Trading volume in the first 30 mins of continuous trading has also increased by 16% versus 2015.

Fig 5. Average index spread and trade sizes in Hong Kong increased in second half of 2016, which coincides with a range of events in domestic and global markets - introduction of closing auctions, Brexit decision and US elections.

Plans for increased surveillance transparency maybe released this year

The introduction of identifiers for underlying investors, often referred to as IDs, has been a topic of discussion in Hong Kong for a number of years following Ashley Alder’s speech at the 2015 Thomson Reuters conference.

“The starting point is that as regulators both we and the CSRC want to make sure that our existing ability to detect and enforce against market misconduct – which may range from price manipulation to insider dealing – remains unaffected under the Stock Connect scheme.

We will look to change the way in which we conduct surveillance of our public markets.

Specifically we’ll see whether it would be feasible for us to identify market orders directly at a client level rather than at a broker level to better detect potential misconduct.

This is a longer-term project, but it would mean that we would have a much better overview of market-wide trading patterns, and also reduce the number of times we would need to bother brokers for client-level information.”

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There are some indications from 2016 that indicate discussion is continuing. Art 6(7) of the CSRC consultation paper of August 2016 stated in relation to Shenzhen-HK Stock Connect made it through to the final version of rules published in November 2016 and appear to make provisions for ID’s to be provided on Northbound flow, once Hong Kong moves to an ID market.

Also of note in the increasing usage of the Special Segregated Account (“SPSA”) account model for Northbound Stock Connect trading which allows a fund manager that uses a custody bank to voluntarily create an ID for each underlying fund, give that ID to up to 20 brokers who will then include the ID on each order allowing the HKEx to perform a position check pre trade.

Details of what the SFC are considering in terms of ID requirements are not yet known, such as whether the SFC will require investor identification on a real-time or delayed basis, and at account or fund level. Another point to watch is whether the ID will be a newly created ID, or leverage international constructs such as Legal Entity Identifiers that were created post the G20 commitment to effectively monitor the systemic risk from OTC derivatives, or the local SPSA IDs. Either way, the change will require significant technology builds for both brokers and the HKEx.

The SFC and HKEx have yet to comment on the potential for implementation of a trade ID system this year.

For the full Alder speech from 2015 click here: http://www.sfc.hk/web/EN/files/ER/PDF/Speeches/AIA_20151013.pdf

SFC review may lead to transparency of asset management industry fees

According to its Annual Report 2015-2016, the SFC is preparing a public consultation on enhancements to the regulation of the asset management industry, including recommendations regarding commissions and independent advice.

Media reports in June 2016 suggested that the SFC is reviewing asset management industry fees to increase transparency of how these fees are divided between the product manufacturer and the distributors, with a view to providing clarity that licensed intermediaries are acting in the best interests of the investor.

At present, such fees may include up-front sales or subscription charges, plus a range of annual charges such as management fees, administration fees, maintenance fees, etc.

The SFC note that they want to keep pace with international regulatory developments in this space. They may look to the likes of:

– United States: where fees must be disclosed in dollar amounts rather than percentages.

– United Kingdom: where trailer fees were banned in 2013.

– India: where front-end loaded fees were banned in 2009.

The SFC’s Annual Report 2015-2016 also notes that widening Hong Kong’s fund distribution channels is a priority. Specifically that:

“We are in discussions with the Government and HKEx on creating an exchange-based platform for fund distribution”

SFC CEO Mr. Ashley Alder has said

“Right now in Hong Kong, the narrow bank-dominated distribution channel makes funds too expensive and limits choices for investors.”

The SFC has not yet disclosed a date for release of the proposed consultation.

The SFC’s Annual Report 2015-2016 can be found here: http://www.sfc.hk/web/EN/files/ER/Annual%20Report/SFC_AR2015-16_Eng.pdf

2017 Venue News

HKEx Strategic Plan 2016 – 2018

The HKEx’s strategic goal for 2016-18 is to “extend and deepen HKEx’s value proposition against the backdrop of Mainland China’s accelerating capital market internationalisation”.

In it’s recently published ‘Strategic Plan for 2016 – 18’, the HKEx highlight how they will look to achieve this in the coming years.

Three key strategic initiatives for the equity market are to:

– Grow and strengthen the core franchise business as a compelling listing and fundraising venue through the implementation of reforms that will strengthen the listing regime and help attract a wider range of issuers.

– Significantly expand mutual connectivity by extending the now successfully launched Shanghai and Shenzhen Connect. The document states they plan to add Exchange Traded Funds (“ETFs”), listed and convertible bonds; work with the regulators in Hong Kong and the Mainland to relax trading restrictions such as quotas, eligible securities, and eligible investors; and enable access to the market through a “Primary Equity Connect” structure.

– Expand the derivatives suite covering Mainland China, Hong Kong and international underliers. The HKEx say “this will include listing A-share index benchmarks, adding sector-specific products and exploring international benchmark derivatives in Hong Kong”.

No timelines have yet been provided for implementation of the above initiatives and they are not without obstacle. Factors such as the operational differences between the way in which Hong Kong and China trade and settle Exchange Traded Funds (“ETFs”) and list IPOs, need to be addressed prior to launch on Stock Connect.

Platform enhancements are also discussed with HKEx explaining that they have two major projects in the pipeline such as the implementation of the Orion Trading Platform, which will replace the existing securities trading system and the development of a Next Gen post trade environment replacing the existing cash clearing system.

Under the heading of market microstructure, the HKEx’s plans include new capabilities in pre-trade risk management, stock borrowing and lending, remote Participantship, a new hedge exemption regime for derivatives position limits, and new after-hours and holiday trading arrangements

Full details of the HKEX’s Strategic Plan 2016-2018, can be found here:

https://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/Documents/1601213news.pdf

HKEx Volatility Control Mechanism for derivatives

Following the 2016 launch of a Volatility Control Mechanism (“VCM”) for the equities market, one of the HKEx’s first initiatives for 2017 was to roll out the VCM to the derivatives market. VCM for derivatives launched on the 16th of January 2017.

The purpose of the VCM is to safeguard market integrity from extreme price volatility arising from the likes of flash crashes and algorithmic system errors.

The VCM used by HKEx triggers a ‘cooling-off’ period in case of abrupt price volatility. For the derivatives market, the VCM is triggered if the price of a VCM exchange contract deviates more than ±5% from the last traded price five minutes prior. If triggered, a five-minute cooling-off period will commence during which trading can continue but only within a pre-defined price band. Normal trading without restriction will resume after cooling-off period.

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Source: http://www.hkex.com.hk/eng/market/dv_tradinfra/Documents/TradingMechanismforDeriVCMEng.pdf

The derivatives VCM covers the spot month and next calendar month contracts in the Hang Seng Index (“HIS”), Mini-Hang Seng Index (“MHI”), H-shares Index (“HHI”) and Mini H-shares Index (“MCH”) futures markets.

Derivative VCM was initially scheduled for launch on the 14th of November 2016, however it was delayed due to technical issues specific to certain exchange participants, uncovered in the final rounds of system tests and market rehearsals.

Full details of VCM operation in the derivatives market can be found here: http://www.hkex.com.hk/eng/market/dv_tradinfra/Documents/TradingMechanismforDeriVCMEng.pdf

HKEx looking to amend stock option position limits

HKEx and SFC consultations on amendments to stock option position limits were undertaken in 2016, with subsequent changes expected in 2017. In May 2016 the HKEx issued a public request for comments on proposed revision of the stock option position limit (“SOPL”) model for its derivatives market.

The HKEx currently adopts a two-tier approach for stock option position limits of either 30,000 or 50,000 depending on market capitalisation and liquidity of the underlying stocks. At present, of the applicable stock options, 80 out of 84 have limits set to 50,000. The revised rules look to bring additional capacity to the market through introducing a three-tier approach with limits set at 50,000, 100,000 and 150,000.

HKEx also proposes introducing an annual review of limits, as the current system does not have a mechanism to revise limits in line with material changes to the underlying stock.

In a statement released on its website, the exchange noted that the last review of the SOPL model was ten years ago and since then there has been significant growth in Hong Kong’s securities and stock options markets, average daily stock options volume increased from over 73,000 contracts in 2006 to just under 375,000 contracts in 2015.

“The existing SOPL regime is not in line with investors’ trading and hedging needs because of its technical deficiencies including a de facto single position limit system. There are also no regularly scheduled reviews to help ensure the regime reflect the market’s development,” Mr. Roger Lee, HKEX’s Head of Markets, said.

In order to facilitate the changes proposed in the HKEx’s consultation paper, amendments to SFC regulations are required. As such, on the 20th of September 2016, the SFC released a related consultation paper which noted that “to take forward the recommendations of the conclusions to the consultation paper of the HKEx […] the SFC proposes to raise the statutory position limit for stock options from 50,000 contracts to 150,000 contracts to facilitate the introduction of a three-tier system proposed by HKEX.”

The SFC paper also proposed to:

— Raise the cap on the excess position limit that may be granted to an Exchange Participant or its affiliate for a “relevant business need” from 50% to 300%.

— Allow market makers or liquidity providers of exchange traded funds (“ETFs”) to hold or control excess futures or stock options contracts to hedge the risks arising from their ETF market making.

— To allow to participants conducting index arbitrage to hold or control HSI and HHI futures and options contracts in excess of the statutory limit.

— To allow asset management participants to hold or control HSI and HHI futures and options contracts in excess of the statutory limit.

The SFC’s consultation closed on the 21st of November 2016 and the outcome is pending. Their consultation paper can be found here:http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP3

There have been no media reports of opposition to the consultations and therefore subsequent rule changes may be announced in 2017.

The HKEx consultation period closed on 3rd June 2016 and the consultation paper can be found here: https://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp201604.pdf

An illustrative example taken from HKEx source follows:

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Hong Kong’s stock market in 2016

The SFC has published a report outlining both worldwide and local, economic trends and statistics for 2016. A number of these statistics are covered in the analytics commentary accompanying the surrounding graphs.

In addition:

— Short Selling. Average daily short selling was HK$7.8 billion (US$1 billion) or 11.8% of total market turnover in 2016. In 2015, the average daily short selling was HK$10.0 billion (US$1.3 billion), or 9.5% of total market turnover. As at the 30th of December 2016, aggregated short positions amounted to HK$192 billion (US$24 billion), or 1.2% of the market cap of the reported stocks.

— IPOs. There were 117 IPOs in Hong Kong during 2016. Total IPO funds raised amounted to HK$194.8 billion (US$25.1 billion), compared to 124 IPOs and HK$261.3 billion (US$33.7 billion) in 2015. IPO funds raised by Mainland companies accounted for 95% of the total during the year. Hong Kong ranked first in IPO activities worldwide in both 2015 and 2016.

— ETFs. The number of ETFs fell to 127 as at end-2016 from 133 as at end-2015. The average daily turnover in 2016 was HK$4.1 billion (US$0.53 billion), which was 53% lower than the HK$8.8 billion (US$1.13 billion) in 2015. ETFs accounted for 6% of the total market turnover in 2016 compared to 8% in 2015. The average daily turnover of A-shares ETFs was HK$1.6 billion (US$0.20 billion), accounting for 39% of total ETF turnover compared to HK$6 billion (US$0.77 billion) and 68% in 2015.

The SFC’s full report “Research Paper No. 60: A Review of the Global and Local Securities Markets in 2016” can be found here:

http://www.sfc.hk/web/EN/files/SOM/RS%20Paper/EN/RS%20paper%2060.pdf

SFC publish guidelines for algorithmic trading controls

Following a review of algorithmic trading controls of selected Hong Kong licensed corporations (“LCs”), the SFC published recommendations in a ‘Circular to all Licensed Corporations (“LCs”)on Algorithmic Trading’, giving their observations and suggesting areas for improvement namely:

1. Insufficient representatives from management and control functions in the overall algorithmic governance process;

2. Insufficient pre-trade controls to prevent the generation of algo orders which might adversely affect market integrity.

3. Inadequate due diligence on algorithmic trading systems provided by third party service providers.

4. Lack of written contingency plans specific to algorithmic trading systems.

5. Policies and procedures concerning testing of algorithmic trading systems.

On a positive note, accompanying the Circular is an FAQ that details “a number of sound and effective controls that have been effectively adopted by some”. Addressing the above points in order below are some highlights from the recommendations.

1. Where governance committees have been established, the input from Responsible Officers (“ROs”) should be commensurate to the scale, complexity and level of risks posed by the algorithmic trading systems. Meetings should be evidenced through documentation.

2. Pre-trade controls should be in place regardless of whether a trade is agency or principal. Child orders should be subject to the same

pre- and post-trade controls as parent orders. Kill switches which immediately prevent systems from generating and sending orders

For the full Circular see here:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=16EC67

Here is the Appendix including the observations from the review:http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openAppendix?refNo=16EC67&appendix=0

Author banned following publication of a sell recommendation

2016 saw the SFC sanction the issuer of a sell recommendation report, with Citron Research fined HK$1.6 million (US$206k) and report author banned for 5 years.

The sanctions followed an SFC investigation into a report published in 2012 in which Citron Research claimed that China Evergrande Group used misleading accounting to mask insolvency. Prior to publication, the reports’ author short sold 4.1 million shares of Evergrande with proceeds of HK$1.7 million after the share price fell 20% once the report was released. Upon investigation, the SFC found that the report was “false and/or misleading […] through omission of material facts”.

When pleading their case, Citron argued that the SFC should release Evergrande’s financials, a request that was declined by the SFC. As of January 2016, the report author continues to appeal the sanctions although the most recent appeal has been denied as ‘without merit’ Hong Kong’s Court of Appeal.

The SFC ruling has raised some concerns regarding freedom to publish negative research in Hong Kong. David Webb, a prominent Hong Kong corporate governance activist and investor was quoted as stating that “In Hong Kong, there’s a culture of regulatory bias against critics”.

The SFC announcement can be found here:https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR84

SFC acts to increase accountability of senior management

On the 16th of December 2016, the SFC issued a circular introducing new measures to heighten the accountability of the senior management.

The circular identified eight core functions as instrumental to the operations of licensed corporations and noted that firms are expected to designate a ‘manager-in-charge’ (“MIC”) for each function:

1. Overall management oversight

2. Key business line

3. Operational control and review

4. Risk management

5. Finance and accounting

6. Information technology

7. Compliance

8. Anti-money laundering and counter-terrorist financing

MIC is a new category of senior management for SFC regulated firms, in addition to the existing ‘responsible officer’ (“RO”) role. The SFC note that these two roles are not necessarily mutually exclusive.

In a press release made on the same day, SFC CEO Mr. Ashley Alder noted that:

“Senior managers bear primary responsibility for the effective and efficient management of their firms, and they should be well aware of the obligations currently imposed on them as well as their potential liability if they fail to discharge their responsibilities.”

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He went on to add that:

“These measures will provide more clarity to the industry and strengthen our licensed firms’ governance structures so as to better align with the present responsible officer and regulated persons regime.”

Further details of the new requirements can be found here: http://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/licensing/doc?refNo=16EC68

SFC published FAQs: http://www.sfc.hk/web/EN/faqs/intermediaries/licensing/manager-in-charge-regime.html

2016 Venue News

Launch of SZSE Connect

On the 5th of December 2016 the much anticipated Shenzhen-Hong Kong Stock Connect link was successfully launched. The new trading link will operate in a similar way to the existing Shanghai-Hong Kong Stock Connect link. Please see below for highlights.

Source: https://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/Documents/1608163news.pdf

SZSE SSE Order input period

Opening Auction 09:15 - 09:25 09:10 - 11:30

Morning Session 09:30 - 11:30

Afternoon Session 13:00 - 14:57 13:00 - 15:00 12:55 - 15:00

Closing Call Auction 14:57 - 15:00 -

Tax treatment for SZSE-HK Connect has been confirmed as the same as that for SSE-HK Connect, and for QFII and RQFII trading.

The Association of the Luxembourg fund industry (“ALFI”) says the launch of the Shenzhen-Hong Kong Stock Connect in early December 2016 is an opportunity for Luxembourg investment funds to gain access to new asset classes.

In a press release on the 21st of December 2016, ALFI also noted that the Luxembourg financial regulator Commission de Surveillance du Secteur Financier (“CSSF”) has confirmed that it accepts the new Shenzhen Connect programme on a similar basis as the Shanghai Connect programme which launched two years ago. The CSSF have not approved a specific model of trading and details of model should be included by the fund when submitting the prospectus to CSSF for approval.

ALFI noted that a Luxembourg based fund was one of the first to receive authorisation when Stock Connect originally launched and since that

time over 125 additional funds have received authorisation.

Further Information can be found here:

http://www.hkex.com.hk/eng/csm/index.htm

Read the full ALFI press release here:

http://www.alfi.lu/node/3402

Stock Connect – update on Southbound trading

Aggregate trading through the Southbound trading link in 2016 has been skewed to buy, with average daily buy volumes up 20% versus 2015 and 22nd February saw record volumes.

On average, Southbound volumes contributed 5.2% to full year trading volume on HKEx. This figure increased to 7% in the last quarter of 2016, ahead and after the launch of SZSE-HK Connect.

Charts at the end of the Hong Kong country section are an extract from DB Researcher Will Stephens piece titled “Stock Connect report card: overall flow accelerating/SZ still early days” released 23rd February 2017.

Bloomberg has reported that Southbound trading through Connect has risen each time RMB declines versus USD. While Chinese investors deliver and receive CNY when they buy or sell through Southbound trading link, they have exposure to Hong Kong denominated assets which are pegged to US dollar and hence are shielded from on shore currency depreciation while their funds are invested in Hong Kong stocks.

HKEx Closing Auction Session launched in 2016

25th July 2016 saw the launch of a Closing Auction Session (“CAS”) on the HKEx. The system has been operating successfully since launch and HKEx is now looking to roll out phase II.

As outlined in an FAQ document published by HKEx, phase II will see extension of CAS to all equity securities and funds with consideration also given to including short selling.

At present CAS includes the Large and Mid cap, and duel A – H listed stocks and ETFs. Stocks that fall outside this list continue to close under the old mechanism at 4:00pm (rather than the later time of 4:08 – 4:10pm for the new CAS depending on the randomisation of closing time).

The below graph shows how the volume curve in the last 10 minutes of continuous trading and through the close has adjusted since launch with the pre close volume moving into the close.


For a full description of the CAS and an analysis of potential microstructure impact, please see DB Market Structure’s ‘Hong Kong: Closing Auction Session’ briefing paper that can be accessed here: https://integration.internet.autobahn.gto.cib.intranet.db.com/microSite/docs/DB_GMS_HK_ClosingAuctionSession.pdf

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HKEx Volatility Control Mechanism

The HKEx ‘Volatility Control Mechanism’ (“VCM”) came into effect on the 22nd of August 2016, for HSI & HSCEI constituent stocks and related index futures. The VCM is designed to cool the market for five minutes following abrupt changes to the price of stocks or futures by imposing a five-minute cooling-off period if the price of a stock swings more than 10% from the last trading price five minutes earlier, or when the price of a futures contract moves by over 5%. Trading remains possible during the cooling off period, albeit within a specified price band.

Through these features, coupled with limiting the VCM to being able to be triggered only once per trading session, the HKEx aims to regulate market anomalies through what it is calling a light touch approach.

According to HKEx’s Head of Market Operations Roger Lee, “It’s a simple and light-touch approach to balance market protection and trading with no limits. Perhaps the lightest touch among all similar approaches adopted by major stock markets.”

As at time of writing, the circuit breaker had been introduced by not triggered as the necessary swings in price had not occurred for any of the in-scope instruments.

Functional details of the HK VCM can be found here: https://www.hkex.com.hk/eng/market/sec_tradinfra/vcm_cas/Documents/VCM%20CAS%20Overview%20Eng.pdf

Launch of HKEx derivatives risk management system

On the 11th of April 2016, the HKEx launched their Pre-Trade Risk Management (“PTRM”) system, a system offering the ability to set and monitor limits in real time.

PTRM aims to help prevent the unintended build-up of excessive positions, with orders submitted to the derivatives market checked against pre set limits. Breach of limit will trigger order rejections. The system also offers a “kill switch” that enables participants to withdraw all their orders at once and prevent further trading in emergency situations.

The levels at which PTRM restricts activity are set by each participant and therefore the amount of protection offered by PTRM will vary on a case by case basis.

Further details of PTRM can be found here: http://www.hkex.com.hk/eng/market/dv_tradinfra/documents/ptrmbriefing_201502.pdf

HKEx tightens criteria for short selling

On the 27th of July 2016, the HKEx announced revisions to the criteria for stocks to be eligible for short selling. The changes, which were effective from the 4th of July 2016, noted that for stocks to be eligible for short selling include the following criteria:

— Market capitalisation > HK$3 billion (US$0.39 billion);

— 12 months aggregate turnover to market capitalisation ratio > 60% (previously 50%);

— Have public float capitalisation > HK$20 billion (US$2.58 billion), (previously HK$10 billion (US$1.29 billion)) for a period of 20 consecutive trading days commencing from the second trading day after their listing (currently date of listing); and an

— Aggregate turnover >$500 million (US$64.48 million), (previously HK$200 million (US$25.79 million)) during such period.

An immediate result of the change saw 32 stocks removed from the list of short sell eligible securities.

For the full HKEx Rules see here:http://www.hkex.com.hk/eng/market/sec_tradinfo/regshortsell.htm

2016 Personnel News

Ashley Alder chair of IOSCO in 2016

The SFC announced in May 2016 that its Chief Executive Officer, Mr. Ashley Alder, would be chairing the Board of the International Organisation of Securities Commissions (“IOSCO”).

The appointment was a natural next step for Mr. Alder, who has been active within IOSCO for a number of years and had previously held the position of Vice Chair.

The SFC viewed the appointment as a positive step for Hong Kong, with the SFC’s Chairman, Mr. Carlson Tong, saying

“I am delighted with Ashley’s appointment to chair the new IOSCO’s Board which demonstrates Hong Kong’s standing as a leading international financial centre.”

IOSCO was established in 1983. Its membership regulates more than 95% of the world’s securities markets in more than 115 jurisdictions. The IOSCO Board is made up of 34 global regulators, with approximately thirty percent of these representatives from the Asia Pacific region.

New CEO for two of HKEx’s subsidiaries

Mr. Roger Lee Kwok-Keung, previous Head of Markets at HKEx has been appointed as Chief Executive Officer for the Stock Exchange Market of Hong Kong (“SEHK”) and the Hong Kong Futures Exchange (“HKFE’).

Mr. Lee replaced Mr Romnesh Lamba, who will remain as a Director of SEHK and HKFE.

Mr. Lee holds a Bachelor of Business Administration degree from The Chinese University of Hong Kong and a Master of Business Administration degree from The University of Hong Kong, and is a fellow of Certified Public Accountant Australia.

HKEx has appointed a new head of OTC Clearing Hong Kong Limited

Effective from the 25th July 2016 Mr. Jacky Mak was appointed Head of OTC Clearing Hong Kong Limited (“OTC Clear”) which is a central counterparty established by HKEx for the purpose of providing clearing and settlement services for OTC derivative transactions.

Mr. Mak is in charge of business development and operations for OTC Clear and will report to Mr. Calvin Tai, HKEx’s Head of Clearing.

Mr. Mak succeeded twenty-five year veteran Kelvin Lee who retired in 2016.

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Sources:

www.sfc.hk

www.hkex.com.hk

www.alfi.lu

www.scmp.com.hk

Contact


16

Global Market Structure China


Global Market Structure China Newsletter Special Edition Issue 43, 2017


MSCI inclusion: To be or not to be in 2017…

The most closely watched topic for global investors, whether passive or active, is the potential inclusion of A shares in the MSCI EM Index. According to DB Research Index and ETF Stategist Shan Lan in Jan 2017, full inclusion would result in $300 billion of inflows for MSCI and an additional $100 billion for FTSE into Mainland China making it one of the largest liquidity events on the horizon for Asia if not globally.

In June 2016, MSCI decided not to include A shares, notably because of the need for a “period of observation” on the suspension rules that had only been introduced the month before.

Below is a summary of the key findings in the Market Classification Review of last year.

MSCI Topic

Beneficial Ownership

Accessibility and Capital Mobility

Stock Suspension

Exchange Imposed Pre-Approvals

China’s Response

CSRC released clarification on beneficial ownership issues in May 2016

Enhancements to QFII policy introduced in Feb 2016, including capital mobility and allocation process.

Changes to RQFII now under discussion

Shanghai and Shenzhen exchanges announced measures on treatment of suspended stocks on 27th May 2016

Restrictions apply to any new financial products as well as to any existing products to get exchange approval prior to launch

Conclusion Satisfied with the changes

Large number still awaiting their QFII quota allocation for applications submitted months before.

Not yet benefitting from daily capital repatriation despite the policy changes in early Feb.

Operational challenges surrounding monthly repatriation limit of 20% of the prior year’s net asset

Market cap of suspended stocks has reduced.

Further observation required.

Could disrupt trading of existing financial products based on the MSCI EM Index if A-shares are included.

Alignment to international norms and satisfactory resolution of this issue is essential

Sources: Trading China, DB Market Structure

It is of note that the “Exchange Imposed Pre-Approval” requirement was a new addition in 2016. Other EM markets such as Brazil, Turkey and Korea also have regimes around pre approval of index futures and options and yet have not been excluded.

Short term stock suspensions fall in 2016

During July 2015, China’s equity markets experienced a period of heightened volatility, during which time the number of suspended stocks rose to 52% of the total number of stocks listed on SZSE and SSE, being 27% of listed market capitalisation. Analysis of disclosure records subsequently showed that the suspensions were voluntary triggered by the companies themselves.



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Fig 2. ETF volumes in 2016 were 25% of those in 2015, which could be due to a tougher regulatory environment after a volatile 2015. Equities volumes were lower due to similar reasons along with currency pressure in second half of 2016.

Fig 4. Average index spreads and trade sizes remained relatively consistent throughout the year as volatility calmed vs 2015.

Fig 3. CFFEX on 17th February 2017 relaxed the limits on index futures, doubling the daily cap of 10 contracts on a single index future to 20 among other changes detailed in the market structure section.



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Fig 7: Cumulative QFII and RQFII Licenses and Quota Granted

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The Deutsche Bank Market Structure team published a paper titled “Stock Suspensions: Regulations, Risks and Remedies” in December 2016 which provides further information on stock suspensions in China and more broadly across APAC. A full copy of the report can be sent on request.

MSCI flag concerns around repatriation

Recent media reports have raised the question of whether China’s capital controls will have a negative impact on the still pending decision of whether China’s A-shares will be included in MSCI’s emerging markets index.

Most analysis on the topic concurs that inclusion it is only a matter of time however, tightening of China’s capital controls may prove to push out the timetable. The South China Morning Post reported in January 2017 that “China’s continuation of capital controls may hamper chances for its A-share market to be included in the MSCI Emerging Markets Index in 2017”.

The reported capital controls included tightened rules for individuals buying insurance products outside of China and reporting of overseas cash transactions. While such measures do not directly impact foreign asset managers investing in the A-share market, some view the moves as a general signal of intent which could be interpreted negatively by MSCI.

Trading inclusion in 2017 is still possible if there are significant positive developments in these areas and if the current environment of capital controls is not looked upon negatively.

Stock Connect as a primary trading route

As mentioned in the April 2016 “Consultation on China A-shares Index Inclusion Roadmap”, MSCI investors have flagged the daily quota for Connect trading as a key limitation causing hesitation for usage of the pipe in balance with QFII or RQFII on shore licenses.

Although the quota has not be close to being hit, there is legitimate hesitation that if inclusion were to go forward, the increased liquidity that comes from index rebalance days could bring the market to limit. Given passive funds are benchmarked on close, having full confidence that they will be able to trade to full volume is a key concern.


In May 2016, new stock suspension guidelines were introduced limiting suspension durations to ten days for changes of controlling rights or purchase or sale of assets, one month for non public offerings and three months for major asset reorganisation (with a further two months extension possible). Links to the full rules are at the end of this story.

Market participants, including MSCI, have been actively following China’s stock suspension data to gauge the effectiveness of the new rules. As illustrated in the below chart and table, stock suspensions, specifically those with shorter terms have decreased.

Source: MSCI October 2016

Number of suspensions

23/07/2015 27/05/2016 30/09/2016 03/01/2017

>10D 322 t54% 147 t70% 98 t89% 34

>1M 200 t36% 128 t60% 80 t80% 41

>3M 79 t38% 49 t44% 44 t 0% 79

>5M 37 t51% 18 t41% 22 t 8% 34

Bloomberg, Deutsche Bank Analytics



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Fig 5. CSI 300 index closed down 11% for 2016 and is up 2.4% in the first month of 2017. Fig 7. QFII and RQFII license and quota approvals stay level through 2016 and early 2017 as utilisation comes into focus and Northbound Connect broadens universe.

Fig 7. CSI300 intraday shows a reduction in market open volume and increase in volume at the close of day. Trading volume in first 5 minutes dropped by 28% and in the last 5 minutes increased by 8% in 2016 versus 2015.

18


MSCI inclusion roadmap

MSCI have proposed a gradual inclusion with first stage representing 5% or 1.1% by free float adjusted market capitalisation.

DB research report on China A Shares Index Inclusion, Shan Lan: http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/164-64F5/24033414/0900b8c089c3bc6c.pdf

MSCI report for June 2016 Review: https://www.msci.com/documents/10199/4b1ba122-5f18-4a36-91c0-41a9b358c2ff

MSCI report for Apr 2016 Consultation: https://www.msci.com/documents/1296102/2907491/Consultation+on+China+A-Shares+Index+Inclusion+Roadmap/1634d584-0320-4a30-b7a3-9c148f2ed5d0

MSCI Roadmap https://www.msci.com/documents/1296102/2907491/Consultation+on+China+A-Shares+Index+Inclusion+Roadmap

Shanghai and Shenzhen suspension rules

SH:http://english.sse.com.cn/aboutsse/news/newsrelease/c/4121069.shtml

SZ:

http://www.szse.cn/main/aboutus/bsyw/39759920.shtml

Limit for new position in index futures relaxed to 20 lots

On 17th February, it was announced that the China Financial Futures Exchange (“CFFEx”) lowered margin requirements of stock-index futures trading for non-hedging accounts. As stated in the announcement:

1. Abnormal trading standard will now be defined as “opening of more than 20 new futures contracts of the same index within a trading day”, as compared to 10 new futures contracts previously. Index futures trading for hedging purpose will not be subject to such abnormal trading standard.

2. CFFEx will now lower the minimum margin for CSI300 and SSE50 (non-hedging) index futures positions from 40% to 20% of contract value; while that for CSI500 will be adjusted from 40% to 30%. Meanwhile, the minimum margin of these 3 index futures for hedging purpose will remain unchanged at 20% of contract value.

3. CFFEx will also decrease the trading fee to 0.092% of the transaction amount for closing of positions opened within the same trading day.

The below graph shows there was an immediate impact on trading volumes.

In absolute terms this may not be a significant liquidity event however as local media reports suggest, it can be viewed as a strong indication that the market has recovered and that China continues to work towards allowing more freedom in its capital markets.

On 8th August 2016, the SSE had previously relaxed some of the restrictions imposed on option trading with the daily position-opening quota of the SSE 50 ETF option only apply to call options. Prior to the amendment, the quota applied to both call and put options.

Over time it is likely that the limit may increase gradually, perhaps in time back up to previous limits where the CSI300 was the most liquid futures contract in the world, surpassing even the S&P.

Possible index inclusion roadmap of China A-shares

China 20.7%

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KR 15.2%

TW 15.2%

IN 7.9%

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China 21.0%

China Overseas 5.2%

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China 17.4%

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KR 12.3%

TW 9.7%

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China 25.9%

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Current Status

Potential Initial Step:Partial Inclusion (5%*)

Potential Full Inclusion (100%*)

Data as of March 30, 2016* The percentage number refers to the Inclusion Factor applied to the free float-adjusted market capitalization of China A share constituents in the pro forma MSCI China Index. China A-share securities are subject to a foreign ownership limit of 30%# Overseas listed Chinese companies were included in Nov 2015

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For the full announcement (Mandarin) click here: http://www.cffex.com.cn/gyjys/jysdt/201702/t20170216_20058.html

Development of the Private Fund Manager WFOE scheme

In June 2016 rules were first released to allow the establishment of ‘Wholly Foreign Owned Enterprises’ (“WFOEs”), or in other words giving foreign fund managers the ability to set up a 100% owned entity. Introduced in June 2016, the regime allows WFOEs to sell privately managed funds within China and is a huge step forward for non Mainland managers to develop business in China as well as giving Mainland investor access to premier global fund management offerings.

Fidelity Worldwide Investment were announced as the first to gain approval for their license on 5th January and under the regulations would be required to start trading within 6 months. It is understood there are a number of fund managers in process of application or awaiting approval and is an area that is likely to grow in 2017.

The Asset Management Association of China (“AMAC”) has published ‘Illustrative Guidance for the Registration and Filling of WFOE and Joint Venture Private Securities Investment Fund Managers’ to help applicants better understand the requirements.

Specific requirements must be met in order to qualify as a WFOE, and to conduct trading activity such as:

— The WFOE should make independent financial decisions and have independent trading systems.

— WFOE PFMs shall locate their system terminals within the territory of China.

— All trading paths shall be transparent and traceable.

— All trading data shall be complete and available for inspection.

— All trading procedures shall be clear and controllable.

— All trading records are to be kept in entirety during the whole process.

— WFOE PFMs shall also appoint persons-in-charge for both the investment decision making and the trade execution.

— The foreign institutions’ regulator must have a memorandum of understanding with the CSRC.

According to Natasha Xie, Partner at JunHe, one of the longest established law firms in Mainland China

“The AMAC Guidelines state that an order cannot delivered by offshore system or staff for execution and must be actioned on the decision of the onshore responsible person.”

For the full AMAC guidance see here:

http://www.amac.org.cn/cms/site/preview?ID=23

Futures trading companies may be barred from offering asset management services

As reported by Caixin, futures companies that currently run an asset management business through subsidiaries may soon have to return to trading offerings rather than asset management products (“AMPs”). AMPs would include bank wealth products, trust plans, mutual funds, funds sold in private placements as well as insurance products.

According to AMAC data, although such subsidiaries have a small market share, the AMP business has grown from RMB 12.4 billion in 2014 to RMB 279 billion 2016 year end. These funds may trade stock, bonds, and other riskier assets as banks are allowed to set lower provision against investment holdings under China’s capital adequacy rules. According to Caixin, around 80% of AMPs sold by futures companies are used as such channels. The banks retain control of the investment decision while the futures company acts as a passive manager charging commissions.

Since the summer stockmarket crash in 2015, when investors suffered a 40% slump in the benchmark Shanghai Composite Index over a two-month period, the China Futures Association (CFA) has suspended the registration of new asset management subsidiaries by futures companies.

Citic, Everbright and Zhongzhou Futures were cited in the story as firms conducting such business.

To read the full Caixin story click here: http://www.caixinglobal.com/2017-02-23/101058580.html

Roll out of the IPO registration system?

The Chinese IPO market currently operates under a system which requires the CSRC to approve and price IPOs on a case by case basis. The CSRC has historically made use of this system to manage the flow of new offerings to the market, including temporarily suspending IPOs from July to November 2015.

While the CSRC has recently increased the speed of IPO approvals, having approved 131 new IPOs in the last quarter of 2016, up from the 28 it approved in the last three months of 2015, a large number of companies (in excess of 700) are still waiting to list.

Going forward, China may move to a registration based rather than approval system. A registration system would allow the market to price the IPO, reduce the amount of input required from the CSRC, simplify the listing process and increase the emphasis on post listing information disclosure.

The system was given the nod by CSRC in December 2015 but implementation stalled, perhaps due to market conditions. Given the recent rekindling of media interest in the IPO listing process, we may see a resumption to the transition from approval to registration in 2017.

China’s IPO Market

Source: http://www.ey.com/cn/en/newsroom/news-releases/news-2016-ey-global-ipo-trends-q4

It is of note that the HKEx have mentioned an IPO Connect in the Strategic plan. See the Hong Kong country section of this Special Edition for further information.

SSE provides case studies for abnormal trading based on recent enforcement cases

In September 2016, the SSE released a paper titled “Abnormal Trading Behaviour Case Studies” (“ATBCS”) detailing 7 supervision cases that identified abnormal trading scenarios. The source documents are in Mandarin only, we provided the below summary in English on a best efforts basis and encourage readers to seek their own legal advice from a firm with Mandarin expertise. Sources are at the end of the story for your further due diligence.

The 7 cases covered the following topics:

1. False declaration of orders in a call auction

As part of the opening auction mechanism, a virtual indicative opening price mechanism is used that indicates opening price, volume and unmatched trading volume based on orders submitted between 09:15 and 09:25, on a real time basis. From 09:20 – 09:25, orders may be submitted but not cancelled.

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According to the ATBCS, certain short-term retail traders were submitting a large quantity of orders with prices significantly higher than the previous days close between 09:15 and 09:20, driving the virtual indicative opening price upwards in order to attract buyers.

Shortly after they would cancel all, or the majority of, orders and reverse their buys to sell at a higher price. SSE considered various factors including the magnitude of the premium/discount, and the frequency and relative size of the orders compared to the total market volume.

2. False orders reinforcing the market-closing limit up/down trend

According to the SSE, it is a common view amongst investors that when a stock closes limit up, the demand for the stock is strong and will continue to inflate the next day. The larger the unfilled limit up bid order at market close is, the bigger the possibility of the stock inflating the next day. The same applies in reverse for stocks that are limit down.

Some investors would exploit such mentality and use a so called “locked limit-up” strategy. When a stock is close to limit up, the investors would continue to submit large volumes of buy orders with a high price intending to reinforce the trend, despite the small possibility of the orders being filled. They intend to profit from attracting more investors to buy the next day while they would sell the stock. Similarly “locked limit down” involves entering large volumes of sell orders to buy the following morning.

From these cases, the SSE identified 3 characteristics that could be viewed as false orders:

1. Stock price continued it’s limit up/down status until the market closed.

2. Trading volume is larger near market close. As the unfilled volume is larger than the approaching market close, the probability of fill for newly entered orders is low.

3. Provided the previous points 1 and 2, the newly added orders further reinforce the limit up/down trend.

The SSE again considers the quantity and volume of the investors unfilled limit up/down orders and the proportion of orders relative to the total market unfilled orders. In this case, a stock had been locked limit up from 10:31 till market close. At 14:43, the investor bid for 4 orders (3 million shares) at the limit up price of RMB 11.7. At 14:53, there were still 9 million shares of unfilled orders at limit-up bid. The investors bid again at limit-up price for 8 million shares, accounting for 40.82% of the 19 million shares of unfilled orders at limit-up bid when the market closed. After market closed, the investors unfilled buy orders accounted for 11 million shares.

Before the investor bid for the 8 million shares at limit-up at 14:53, unfilled orders in the market had accumulated to 9 million shares. Given that 3 million shares of the market unfilled orders were bid by the investor himself, and that since 10:31, the stock has only traded 6 million shares in 3 hours, the investors bid again at limit-up for 8 million shares 7 minutes to market close has exposed the investor’s intention in reinforcing the limit up trend via bid order accumulation.

3. Intraday misleading bid/offer orders

The typical feature of intraday misleading orders is the investors placed multiple bid/offer orders at a price higher/lower than the current trading price. In addition, the cancellation ratio is high and self-crossing orders would be placed. In western markets this is often referred to as spoofing.

There are two forms noted:

1. Investor places frequent and large volume of bid/ask orders below the current trading price within 5 price levels of touch, but then rapidly cancel the orders creating a false and misleading impression.

2. Second, the investor would place large volume of orders at limit up

/down when the stock is limit up/down, however, without actual real execution or the execution volume is small. It is intended to create a false impression that there are large bid/ask orders at limit up/down so to maintain the limit up/down trend and then cancel the order to make profit. As limit up/down stocks draw more attention from the market, it would do more harm to other investors when abnormal trading activities take place under such circumstances.

Within these scenarios, there are 3 actions the SSE would view as misleading:

1. Investor frequently places order then cancels in a short period of time, which indicates there was not a genuine intention to trade.

2. Repeatedly entering and cancelling orders with a high cancellation ratio.

3. The ratio of the size of the order compared to the investor’s capital. SSE would not put emphasis on the time interval between the placing and cancellation of orders.

4. Intraday abnormal bid/offer orders

There are two main features to consider:

1. Investor had multiple bid/offer orders that were successfully filled resulting in related stock inflating/decreasing.

2. Investor placed orders with prices that significantly deviated from the current price, and with significant shortage of counterparties to fill the orders causing significant fluctuation in the stock price.

Relevant factors:

1. The larger the buy order quantity / value and the ratio of the orders’ turnover rate to the total market turnover rate, the greater the impact of it is to inflate the stock.

2. The investors active executed price followed the stock price movement with a continuous rise/fall pattern.

Considering that the closing price would impact the trading of the next trading day, and may impact fund and asset management industry products’ value, the SSE would keep a close tab on abnormal orders near market close.

5. Abnormal block trades

The block trade system was introduced in August 2013 with the main objective of increasing the efficiency in successfully transacting a large amount of shares and reduce market impact. According to SSE rules, the transaction time, pricing mechanism and price range are different to auction trading rules.

As observed by the SSE, abnormal block trades are more influenced by the trading mechanism and the transfer of benefits is achieved through the large transaction amount and discounted transaction. Regardless of the how the investor conducted the abnormal block trade (either to purchase stocks with a premium or sell stocks at a discount), the market might be moved and thus disrupt the trading order of the securities market

The case study on this point highlights that the investor bought bought 6.66 million shares of a certain stock at RMB4.63 through the auction trading system. On the subsequent day, Investor A sold 6.67 million shares at RMB 4.20 through the block trade system, with a loss of RMB 2.87 million.

5 similar transactions took place in a period of time, causing Investor A an accumulated loss of RMB 10 million. Upon further investigation, it was discovered that the opposite party of Investor A for the 5 block trades is the same party (Investor B), which is a related interest party of Investor A. Investor B had profited in a short period of time through block trade system as Investor B had purchased the stock at a significant discount compared to the price in the secondary market.

21


Although the transaction price was within the regulatory specified range, the act of transferring benefit through frequent (reverse) operation and discounts has constitute abnormal block trade behaviors. SSE had taken actions accordingly.

6. Abnormal debt trades

There are two main features to consider:

1. Investor buys/sells at significant premium/discount causing the bond price to move significantly, particularly near the close of the market.

2. Investor buys/sells at significant premium/discount to the opposite party in order to transfer benefit.

Relevant factors:

1. Magnitude of premium/discount

2. Frequency and amount of “buy high sell low”

3. Connection/relationship between the trading parties.

7. Abnormal ETF trades

The SSE notes that Indicative Optimized Portfolio Value (“IOPV”) is an important benchmark for investors to conduct market risk control, and an important factor for investors to consider when deciding trading strategies. IOPV is calculated by taking reference to the calculation method and subscription and redemption lists of the portfolio assets provided by fund managers daily.

As observed by SSE, certain investors subscribed large amount of ETFs, causing the trading price of the ETF to significantly deviate from IOPV. This could affect other investors’ views towards the value of the ETF. This led to the ETF trading price significantly deviates from its IOPV, this could constitute an abnormal ETF trading behavior.

Action expected to continue into 2017

The CSRC’s Chairman has called on his agency to take a tougher stance on illegal activities in 2017, to ensure market order and limit risks. Speaking to the CSRC’s inspection bureau and enforcement task force, CSRC Chairman Mr. Liu Shiyu is reported to have said that:

China will “severely punish capital magnets who challenge the foundation of the law and catch both the mice as well as the wolves”.

Liu commended the division’s work in 2016 but said that such work must continue at an intensified level.

2016 saw a 21% increase in CSRC imposed penalties to 218. Total capital confiscated exceeded RMB 4.28 billion (US$622.08 million), up 288%, according to a CSRC statement.

Information released by the SSE and SZSE notes that since the start of July 2016, the exchanges had initiated 774 investigations into abnormal trading, which resulted in the accounts of 38 investors being frozen.

As part of their broker education initiative, the Market Supervision departments of both exchanges co-hosted a seminar in Shenzhen, which focused on market supervision and abnormal trading mid-July 2016.

For the full version of the ATBCS:

The 39th press release: http://www.sse.com.cn/aboutus/mediacenter/conference/c/c_20160722_4146612.shtml

The 40th press release: http://www.sse.com.cn/aboutus/mediacenter/conference/c/c_20160729_4149439.shtml

The 41st press release: http://www.sse.com.cn/aboutus/mediacenter/conference/c/c_20160805_4152144.shtml

2017 Venue News

Trading link to join China with London

The first details have emerged indicating how the proposed trading link between London and Shanghai will operate.

As explained in statements published during December 2016, a select group of London-listed companies would be made available to trade during Shanghai’s market trading hours through designated brokers appointed to act as market makers. The trades would be cleared and settled in Shanghai. Likewise, select Mainland listed companies would be traded on the London Stock Exchange via appointed market makers.

Mr. Xavier Rolet, Chief Executive of the London Stock Exchange, explained that:

“The London-Shanghai Stock Connect will help promote globalisation […]. It will create a new bridge to connect the markets, allowing listed companies to be traded by more investors, and providing them with more investment choice.

The new comments allay previously held concerns that progress on establishing the link had stalled.

Announcements from both sides had previously stated that they would engage in a feasibility study to contemplate the practicalities of a Connect program. However, media reports in July 2016, speculated that Britain’s decision to leave the European Union (“EU”) and the subsequent political and regulatory uncertainty, would cause the study to be sidelined.

These sentiments changed in August 2016 with media quoting London’s financial community as being supportive of the link and that Britain’s exit from the EU will not slow progress; going so far as to state that, London’s tougher listing rules compared with EU rules, would make it an even more attractive venue for high-quality new listings.

Mainland companies to list in Germany

The China Europe International Exchange AG (“CEINEX”) has confirmed that Mainland companies will soon be able to list in Frankfurt, Germany through CEINEX offered D-shares. D-shares, or Deutschland Shares, refer to shares issued by companies incorporated in China and listed in Germany.

The D-shares will have similar traits to other European listed shares, with CEINEX marketing materials noting that D-shares will be subject to strict and transparent listing procedures, in line with European Union standards.

The new facility will cater for both trading of Mainland companies with existing listings in China and those who wish to launch their IPOs jointly on CEINEX and in China.

CEINEX is a German company, whose three shareholders are the Shanghai Stock Exchange, Deutsche Börse AG and China Financial Futures Exchange. It specialises in the development and distribution of China- and RMB-related investment products outside Mainland China and already offers bonds and ETFs.

Mr. Que Bo, a Vice President of the Shanghai Stock Exchange (“SSE”), was quoted in local media confirming that that a first batch of mainland companies will be traded on CEINEX this year.

22



First US RQFII license issued

In December 2016, Blackrock Fund Advisors became the first US entity to be granted an RQFII license.

The RQFII scheme allows qualifying overseas institutions to directly invest in onshore capital markets using RMB raised offshore. Established in 2011, the regime gives foreign investors more flexibility in managing their currency risk than the traditional US dollar denominated scheme.

Having now been granted a license, the next step is allocation of quota. In June 2016, China announced that it had granted the United States RQFII status with a total quota allocation of RMB 250 billion (US$38 billion). This is the first time that the U.S. has been granted such quota, with the amount allocated second only to that held by Hong Kong (RMB 270 billion).

RQFII rules updated

In September 2016, the Renminbi Qualified Foreign Institutional Investors (“RQFII”) rules were brought further into line with those of Qualified Foreign Institutional Investors (“QFII”).

The changes are similar to those made to the QFII rules early in 2016 and can be summarised as follows:

1) Introduction of a “Base Quota” concept.

If the RQFII’s assets are mainly offshore:

Base Quota = US$100 million in CNY equivalent + (average assets from the last 3 years, multiplied by 0.2%) - approved QFII quota in CNY equivalent.

If the RQFII’s assets are mainly onshore:

Base quota = RMB 5 billion + (last year’s assets multiplied by 80%) - approved QFII quota in RMB equivalent.

If the RQFII is a sovereign wealth fund or central bank, quota is at the discretion of the authorities.

2) Simplified quota application procedure.

3) Relaxation of capital injection and repatriation requirements.

— Publicly raised open-ended fund type RQFII will remain to have no lock-up period.

— Lock-up period for the other types of RQFII will be shortened to 3 months.

— Revolving quota will be allowed.

— All RQFIIs will be allowed to perform daily capital injection/repatriation, subject to their relevant lock-up period. Previously, non-open-ended fund RQFII could only perform repatriation on monthly basis.

China continues to open up interbank bond market

In early 2016, the Peoples Bank of China (“PBoC”) released a notice advising that offshore companies such as commercial banks, insurance companies, securities companies, fund management companies and pension funds, could invest directly in the interbank bond market, provided they do so with medium or long-term investment objectives.

The programme, referred to as the China Interbank Bond Market or CIBM scheme, does not require approval from CSRC for a license and is managed by the PBOC. Latest statistics released in October 2016 showed that 373 overseas institutional investors had entered China’s interbank bond market.

Access to China’s bond market has historically been restricted to QFII and RQFII holders, however developments in 2016 saw the removal of these restrictions, with the market opened to direct foreign investment.

CSRC tightens supervision of local operators

In late 2016, the CSRC released details of its supervision and enforcement activities, with the information showing increased numbers of investigations and repercussions for those found to fall short of requirements.

i) Inspection of private fund mangers

The CSRC inspected 305 private fund managers, accounting for 2,462 individual funds (14% of the domestic industry). The inspections focused on five areas of financing, asset safety, information disclosure, leverage and the extent to which investors’ interest are harmed.

The CSRC found:

— 65 funds did not disclosure relevant information appropriately.

— 6 funds violated money handling rules.

— 4 funds would require further investigation due to potential illegal financing activities.

ii) Downgrades for domestic brokers

The CSRC annually assesses brokers and assign each a rating from A to E. Results released in 2016 showed downgrades for 58 of the 95 brokers reviewed.

The CSRC stated that the ratings reflect a company’s compliance and risk management controls. Specifically stating that:

“The brokerage companies ranked lower in this list will have to submit a higher proportion of their revenue into the investors’ protection fund, looked after by specialised company under the CSRC”.

Tougher rules for backdoor listings / mergers

China’s ‘major asset restructuring’ guidelines were revised in September 2016, in a move reportedly aimed at reducing backdoor listings.

“Backdoor listings” or “reverse mergers” involve injecting assets into an already listed firm. They have increased in popularity in China as a means to achieve faster listing than through a traditional IPO.

The CSRC launched a public consultation on the in June 2016, seeking comments on draft rules which would be used to determine whether an acquisition is an allowable major asset restructure or a thinly veiled backdoor listing.

Following the close of the consultation and subsequent rule change, 116 firms ceased proceeding with “asset restructuring” plans.

SFC publishes FAQ on mutual fund recognition

In December 2016 the SFC published an updated FAQ document providing guidance on Mainland and Hong Kong Mutual Fund Recognition of Funds (“MRF”) scheme.

MRF allows Hong Kong based funds to be sold in the mainland and 42 mainland domicile funds sold in Hong Kong.

The FAQ covers key areas of the MRF scheme including:

— Eligibility requirements

— Disclosure

— Operations issues

— HK representative requirements

— Sales and distribution

— Taxation

SFC’s FAQ document can be found here: http://www.sfc.hk/web/EN/files/PCIP/FAQ-PDFS/FAQs%20on%20Mainland-Hong%20Kong%20Mutual%20Recognition%20of%20Funds_20161202.pdf

23


2016 Venue News

New SZSE trading system launched in 2016

2016 saw the launch of SZSE’s next generation trading system. The system was the culmination of four years research and development and supports cross-market trading.

According SZSE Executive Vice President Mr. Zou Sheng, the new system was a necessary to ready SZSE for the launch of new businesses, including the Shenzhen-Hong Kong Stock Connect and stock options trading.

SZSE said that the system offers improvements to market operation efficiency, lowers trading costs, supports the reform and innovation and opening-up of capital market, and safeguards national financial security.

The system has provided dramatically increased capacity, accommodating over 300 million investor accounts and 50,000 stocks, compared with 5,000 stocks for the old system.

As many as 300,000 transactions can be handled per second, triple the previous amount. No changes have been made to the release of market data, which remains at once every 3 seconds.

For the full exchange announcement click here:

http://www.szse.cn/main/en/AboutSZSE/SZSENews/SZSENews/39760049.shtml

Shanghai-HK Stock Connect transfer fee increased

In late 2016, the HKEx announced an amendment to the Northbound transfer fee for Shanghai-HK Connect.

From Monday the 15th of August 2016, the transfer fee for Northbound flow increased to 0.004%.

The fee applies to each side of every China Connect Securities transaction. Half of the fee is payable under China Clear’s rules and the other half payable under the rules of CCASS.

The fee prior to this amendment had been 0.003%.

Please see here for the HKEx announcement:http://www.hkex.com.hk/eng/market/partcir/hkscc/2016/Documents/ce_191_2016.pdf

First stock de-listed for IPO fraud

For the first time ever, a stock has been forcible de-listed as a result of a CSRC investigation into suspected IPO fraud.

Dandong Xintai Electric Co. was de-listed from the ChiNext board in August 2016, following CSRC findings that the company had provided false financial data in their listing application and that after listing, they had withheld material information which should have been disclosed.

From the point of the de-listing announcement, until the 22nd of August 2016, the stock lost over RMB 2 billion (US$ 0.26 billion) in market captialisation. There was however, unexpected demand for shares on the last day of trading. According to media reports, some investors suspected that regulators would give the company a reprieve and allow them to continue to trade. This did not eventuate and the stock was de-listed on 22nd August 2016.

2016 Personnel News

Head of the PBOC’s Financial Stability Bureau to join the CSRC

Mr Xuan Changneng, Head of the Financial Stability Bureau at the People’s Bank of China (“PBOC”), is to join the CSRC as an assistant to the Chairman.

Mr Xuan has diverse experience at foreign financial institutions and Chinese financial regulatory departments. He previously worked at the CSRC from 2000-2004.

CSRC deputy head of Markets Surveillance leaves for university role

Ms Wang Xian, deputy head of Market Supervision at the CSRC, has left to work at Tsinghua University’s National Institute of Financial Research.

Ms Xian had worked at the CSRC for 14 years, undertaking both supervision and regulatory functions.

Mr. Pi Liuyi, former director of SSE’s Membership Department, has been appointed as a deputy head of the Department of Market Supervision.

Ex CSRC official moves to CIC

Mr. Qi Bin, a 16 year veteran of the CSRC has joined China’s sovereign wealth fund ‘China Investment Corporation’ (“CIC”).

Mr. Bin has worked in several departments within CSRC and was part of the team responsible for approval of Shanghai-HK Stock Connect.

Mr. Bin has joined CIC as the company’s Deputy General Manager.

Sources:

www.sfc.hk

www.szse.cn

www.hkex.com.hk

www.caixin.com

www.scmp.com

www.chinadaily.com.cn

www.xinhuanet.com

www.businesswire.com

www.international-adviser.com

www.sse.com.cn

www.globaltimes.cn

Contact


24

Global Market Structure Taiwan


Global Market Structure Taiwan Newsletter Special Edition Issue 43, 2017



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Day trading transaction tax under review

Taiwan’s Financial Supervisory Commission (“FSC”) has announced plans to lower the existing transaction tax for day trading, in an effort to bolster market volumes.

The topic was discussed during a question-and-answer session at a meeting of the legislature’s Finance Committee on the 10th of November 2016, with FSC Chairman Mr. Lee Ruey-Tsang commenting that:

“Specific tax changes related to day trading have a good chance of being implemented swiftly, as they do not involve changing the capital gains tax rate, which requires a more complex legislative process”.

Specific details have not yet been confirmed but the changes under consideration may include:

— That tax only be paid on positions that have not been closed during the session, as opposed to having taxes levied on each transaction; and / or

— That the transaction tax rate to be lowered from the current 0.3% to between 0.1% to 0.2%.

According to media reports, day trading accounts for 10% of turnover in Taiwan compared with 48.5% in the US, 45% in Japan, 36% in the UK and 26% in Hong Kong.

After-hours futures trading platform to be launched in 2017

FSC representatives have confirmed that an after-hours futures trading platform will launch in May 2017.

FSC Vice Chairman Mr. Cheng Cheng-Mount confirmed to local media that:

“Expanding after-hours futures trading is part of the commission’s plan to address issues around shorter trading hours in the local securities market, and would provide investors with a hedging tool against overnight developments in the global markets”.

The platform would allow for after-hours trading of TAIFEX Futures, between 3pm and 5am local time. The platform would initially include TAIFEX Futures and option contracts as well as futures and options contracts tracking USD to RMB exchange rates.

Securities and Futures Bureau (“SFB”) Chief Secretary Mr. Tsai Li-Ling has said that the platform is expected to bring in additional earnings of NT$261 million (US$8.15 million) for the TAIFEX in its first year.

Further details including an official press release from the exchange, are pending.

Source:

http://www.taipeitimes.com/News/biz/archives/2016/11/19/2003659536

Fig 3. Listed index futures volumes on Taiwan futures exchange have dropped over 50% year on year.

Development of retail lending

On 1st February 2016, rules came into effect that allowed the inventory of retail investors to be made available for stock borrow lending (“SBL”) giving the market the ability to gain exposure to a broader range of securities. Local brokerages have been running marketing campaigns onshore to promote this new business opportunity. Retail stock provides a diversification from the traditional margin pool and asset management inventory pools from Taiwan.

A high proportion of the eligible brokers in Taiwan are now connected to the retail pool with the total estimated retail positions held by combined brokers totally around US$4bn, with lendable assets of around 25%

Fig 1. Turnover in Taiwan’s equities market has dropped 25% year on year versus January 2016.



EQUITY FUTURES ETFS

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Fig 2. Similar to Hong Kong, Taiwan also saw an increase in Leveraged/Short ETFs with 18 new ETF listings and US$ 3Bn inflows over the last year, according to DB research.

Taiwan

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Fig 5. TWSE Index closed the year up 11% in 2016 and is up 2% in January 2017.

Fig 6. Trend in Taiwan index volume curve is slightly different from regional markets with an increase in intraday volume during the afternoon versus the close volume.

Fig 4. Average trade sizes in Taiwan have dropped slowly over the last two years. January 2017 average trade size is 30% smaller versus January 2015.

IPO figures are expected to be flat for 2017

A report released by international accounting firm EY at the end of 2016 predicts that initial public offering (“IPO”) figures for 2017 are likely to be in line with those seen in 2016.

2016 saw 54 companies list in Taiwan, raising a total of NT $24.22 billion (US$756.8 million). Of these, 19 were listed on the Taiwan Stock Exchange (“TWSE”) and 35 on the Taipei Exchange, representing declines of 5% and 33.3% respectively from last year.

EY predict that approximately 60 companies, mostly in the biomedicine, technology and industrial sectors, may apply for primary listings in Taiwan this year.

EY publications can be found here: http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-report-4q16/$FILE/ey-global-ipo-trends-report-4q16.pdf

2017 Venue News

Implementation of continuous trading

It has been reported that TWSE Chairman Mr. Shih Jun-Ji has confirmed that the exchange is reviewing the concept of moving to continuous trading at present, with a view to implementation in 2017. The TWSE currently operates a batch auction trading system matching orders every 5 seconds. Few markets use frequent batch auctions and a change to continuous trading would bring Taiwan into line with global exchange practices for developed markets.

Order execution strategies will need to be adjusted to account for the continuous order book, and the number of fills order will likely increase. Moving to continuous trading will also require exchange participants to make changes to their order routing systems, something which could result in considerable cost for brokers whose systems are designed purely on the basis of frequent batch auction trading. The TWSE is reportedly considering whether subsidies may be given to assist with the change.

Neither official comments, nor an implementation timeline, have been released yet.

TWSE considering changing minimum trade size

The TWSE announced on the 10th of August 2016 that it is considering reducing its minimum trade size in order to attract retail investment.

At present the minimum trade size on TWSE is 1000 shares, which is considerably larger than comparative markets with Singapore, Shanghai, Shenzhen, Malaysia and Indonesia all having a minimum trade size of 100 shares.

While no indication of timing for the change has been given, media reports indicate that the moved aims to increase TWSE’s investor base attract a more diverse range of investors to the exchange.


Weighting in MSCI EM index reduces for 12th consecutive quarter

The weighting of Taiwanese stocks in two MSCI indexes have been cut after the global index provider completed a quarterly review in August 2016.

According to information released by MSCI, Taiwan’s weighting in the MSCI Emerging Markets Index has been lowered to 12.09% (from

($1bn USD). The sign up process will be an ongoing as retail holders have to individually attest to the SBL service at the point of account opening, or to furnish an agreement on existing positions. As we move into the Annual General Meeting trading season, the retail pool has high levels of utilisation for the mid and small cap space.

Over the next three years, the estimated retail pool growth is targeting an increase up to US$10bn.

TWSE’s news announcement (English):

http://www.twse.com.tw/en/about/press_room/tsec_news_detail.php?id=18256

FSC announcement (Mandarin):http://www.fsc.gov.tw/ch/home.jsp?id=128&parentpath=0,3&mcustomize=lawnew_view.jsp&dataserno=201511020001&aplistdn=ou=newlaw,ou=chlaw,ou=ap_root,o=fsc,c=tw&toolsflag=Y&dtable=NewsLaw

26


12.16%) and the weighting in the MSCI All-Country Asia ex-Japan Index has been lowered to 14.20% (from 14.30%). This is the twelfth consecutive quarter in which Taiwan’s weighting in the MSCI Emerging Markets Index has been reduced.

Taiwan’s weighting in the MSCI All-Country World Index has remained unchanged at 1.29%

Taiwan moves to align AML laws with international standards

Taiwan’s government issued a statement in late 2016, explaining that they are reviewing anti money laundering (“AML”) regulations, to bring Taiwan more closely into line with international standards. Premier Lin Chuan, said:

“The purpose of amending the law is mainly to follow global trends in strengthening anti-money laundering regulations while also strengthening the fight against cross-border telecommunications fraud”.

Amongst other measures, the government proposes to increase financial penalties and expand the scope of property confiscation, related to money laundering offenses.

The statement follows news in 2016 that the New York branch of Taiwan’s ‘Mega International Commercial Bank’ was been fined US$180 million over AML lapses, following an investigation which found that Mega Bank was indifferent toward risks associated with transactions involving Panama, which is a globally recognised high-risk jurisdiction for money laundering.

2016 Venue News

CFTC approvals received for futures trading

2016 saw the United States Commodity Futures Trading Commission (“CFTC”) grant approval for TAIFEX contracts in Nifty 50 futures and TOPIX futures, to be sold to US persons.

CFTC approval for Nifty 50 futures was granted on the 8th of November 2016 and TOPIX futures on the 26th of July 2016.

Both contracts are denominated in Taiwan dollars. Nifty 50 futures track the performance of the Nifty 50 index (one of the most well known Indian stock indices) and TOPIX futures track the performance of the Tokyo Stock Price Index (“TOPIX”), one of the most well known Japanese stock indices.

In total, the CFTC has granted Taiwan seven such approvals since 2004:

1. Nifty 50 Futures

2. TAIEX Futures

3. Mini-TAIEX Futures

4. Taiwan Stock Exchange Finance Sector Index Futures

5. Taiwan Stock Exchange Non-Finance Non-Electronics Sub-Index Futures

6. Taipei Exchange Capitalization Weighted Stock Index Futures

7. TOPIX Futures

TWSE launches new smart beta products and dual currency ETFs

During July and August of 2016, TWSE launched smart beta indices and dual currency-denominated exchange traded funds (“ETFs”) as follows:

i) ‘TIP TAIEX+ Dividend Appreciation 100 Index’, which tracks returns on the top 100 TAIEX-constituent companies with a history of increasing dividends over the past 10 years, as well as other operational metrics.

ii) ‘TIP TAIEX+ Dividend Appreciation 150 Index’, which tracks a larger group of 150 TAIEX-constituents using the same methodology.

In August 2016, TWSE announced the start of trading for dual currency denominated ETFs beginning with an RMB currency option. As a result, issuers of Taiwan dollar-denominated ETFs are now able to issue beneficiary certificates, denominated in RMB, for these ETFs. The ETF and its corresponding beneficiary certificate are exchangeable at a ratio of 1:1.

It should be noted that RMB denominated ETFs may not be used in margin trading, for short selling or day trading.

TPEx changes timing for disclosure of sensitive information

In late 2016, the Taipei Exchange (“TPEx”) announced amended timings for disclosures of material information, with the changes designed to bring their timings into line with those of TWSE.

Changes made by TPEx:

— Applications for trade suspension must be made before 7:00 am if the company’s announcement contains material information.

— Disclosures of material corporate action events must be made before 7:00 a.m. (currently at 8:00 a.m.).

— Listed companies have two hours to explain and provide information upon a media report of material information or TPEx request.

The new timings came into force on the 1st of September 2016.

2016 Personnel News

FSC chairman steps down following Mega Bank AML findings

On the 3rd of October 2016, Mr. Ding Kung-Wha resigned from his post of FSC Chairman.

In a statement issued the same day, Mr. Ding announced he was stepping down to assume responsibility for money laundering allegations involving Mega Financial Holding Co. Ltd., which were made public earlier this year.

Mr. Lee Ruey-Tsang has since been appointed new Chairman of the FSC.

Sources:www.fsc.gov.tw

www.ey.com

www.taipeitimes.com

www.focustaiwan.tw

www.mondovisione.com

www.leaprate.com

www.reuters.com

www.chinatimes.com

www.udn.com

Contact


27

Global Market Structure Japan


Global Market Structure Japan Newsletter Special Edition Issue 43, 2017



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FSA released plans for 2016-2017

In it’s recently released “Strategic Directions and Priorities” 2016-2017 financial agenda, Japan’s Financial Services Agency (“FSA”) reviewed its priorities from 2016 and outlined plans for 2017. The introduction outlines it’s Mission and Priorities to “contribute to the national welfare by securing sustainable growth of national economy and wealth” by:

Transforming the JFSA

1. New supervisory approaches

2. Unleashing the market mechanism

3. Governance, dialogue with stakeholders, HRM

Transforming the flow of funds

1. Households: realising the benefit of long-term, regular and diversifiedinvestment

2. Financial Institutions: Customer-oriented asset management andintermediation

3. Institutional investors: Engagements with investee companies

4. Market surveillance and disclosure

Towards creating shared value

1. Lending exclusion: Unavailability of lending to companies with solidbusiness prospects

2. Dialogue with banks utilising a new set of indicators, enhanceddisclosure to promote competition

3. Forward-looking prudential supervision

Other priorities

1. FinTech, cyber-security, and algorithmic trading

2. Global regulatory reforms, building global network

The FSA will be transformed through new supervisory approaches, moving from form to substance and seeking to discuss the sustainability of business models and adaptiveness to changing environment in addition to past balance-sheet numbers.

The paper also speaks of “unleashing the market mechanism [through] promoting competition and eliminating information asymmetry between financial institutions and their customers”. This will also include “enhancing disclosure on commissions and fees and business practice” due to concerns that financial institutions tend to prioritise products with high commission fees.

Fig 1. Equities turnover in Japan rose 32% and 18% in November and December 2016 respectively after the US elections. US is Japan’s largest economic partner and new government policies in US may help boost the volumes in Japan market.



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Fig 2. Japan ETFs experienced growth with a 30% increase in assets YOY, reaching US$ 175Bn, as market continues to benefit from increased ETF purchases from Bank of Japan and equity allocation from GPIF, according to DB research.

Fig 4. Chi-X launched its broker-neutral dark pool called Kai-X in October last year. TOSTNET filled volume in Japan has slowly increased from 10% to nearly 12% in January 2017.

Fig 3. Turnover in index futures has declined YOY by 23% aggregate across the three key listed index futures, however open interest in the futures at the same time has increased.


Fig 4: Market Share by Venue

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The JFSA will:

— Establish codes and principles for customer-oriented business conducts to ensure financial institutions fulfil their fiduciary duties in a broader sense of the term;

— Encourage enhanced disclosure on commission fees and improved explanatory materials on the risks of financial products; and

— Promote voluntary disclosure by financial institutions on their policy on customer-oriented business conducts.

The FSA’s agenda also focuses on the transformation of fund flows. The paper considers the composition of financial assets held by the household sector in Japan where 18% is held in stock and other indirect exposure via insurance and pension plans vs 45.4% in the US and 35.7% in the UK and 51.9% of wealth is held in cash and deposits vs 13.7% in US and 24.4% in UK. Improvements will be made to the tax benefits for Nippon Individual Savings Account (“NISA”) in order to encourage long term investment.

Note: Exchange rates at the end of 2015. ($1 = 120.3JPY, £1 = 177.3JPY)

Source:

FRB, BOE and BOJ

The FSA points to poor investment performance, lack of experience of investment success and lack of financial literacy as the main issues that will need to be addressed to help rebalance the asset composition. The NISA (Nippon Individual Savings Account) tax benefit scheme to promote long- term, regular and diversified investment see further improvements.

Please see the full agenda document from FSA at

http://www.fsa.go.jp/en/news/2016/20161130-1/01.pdf

HFT to move to an ID model

The prospect of additional algorithmic or high frequency trading (“HFT”) regulation in Japan seems to be coming closer with the FSA’s 2016-2017 financial agenda indicating that new regulation may be introduced in 2017.

Local media noted in November 2016 that the FSA is working to create a registration system for HFT under which a unique identifier (“ID”) would be associated with each trader and used by the exchanges to track HFT orders without relying on information from brokerages. In December the FSA published a working group report contained the following considerations:


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Fig 5. Average trade sizes in Japan’s benchmark index have reduced 17% and index spreads narrowed by 8% since January 2015.

Fig 6. Japan’s benchmark index was down 1.5% during 2016 and in January 2017 is up 0.2%.

Fig 7. As BOJs investment in ETFs continued through 2016, close auction volumes are up to 11.3% in 2016 versus 9.5% in 2015.

Average asset size (trillion

yen)

Sales fee Trust fee Rate of return

Average of the past 10 years

Japan 1.1 3.20% 1.53% -0.11%

US 22.6 0.59% 0.28% 5.20%

Five largest investment trusts in US and Japan: differences in size, efficiency and performance

Note1: The asset size of US is converted at USD/JPY = 112.43.

Note2: The sales fee in Japan is at the upper end of fees.

The sales fee in US is a weighted average based on the amount in each share class.

Note3: The rate of return is calculated subtracting sales fee, and assuming that the dividend is

not reinvested.

Source:

QUICK and published data from US asset management firms

Stock and Investment

trusts29.0 Stock and

Investment trusts11.6

Stock and Investment

trusts14.9

Insurance and Pension reserves

31.4

Insurance and Pension reserves

58.8 Insurance and Pension reserves

29.3

Cash and Deposits

13.7

Cash and Deposits

24.4

Cash and Deposits

51.9

Others25.8

US UK Japan

means share of stock and investment trusts including indirect investment via Insurance and Pension reserves.

45.4

35.7

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— Flagging of algo order.

— Registration of strategy.

— Management of trading system.

— Preparing and saving the trading data.

— Submitting financial documents.

HFT has received increasing attention in Japan over the last few years with it being mentioned in the FSA’s annual report for the first time in 2015. Press reports showed that in 2016, a number of market participants were surveyed and in April 2016, a position paper was released highlighting concerns that HFT had the potential to increase market volatility and create inequality between HFT and retail. The paper also considered how a regulator may best ensure stock prices reflect a firm’s fundamental value and ensuring an appropriate order to trade ratio.

In October 2016, the FSA were guiding that those who qualify as HFT would have to have a registered office in Japan. This requirement has been diluted to the appointing of an agent, the definition of which would be confirmed when the draft regulation is published.

Increased monitoring of HFT has been a global theme since the release of the International Organisation of Securities Commissions (“IOSCO”) released a consultation considering the risks posed by Direct Electronic Access (“DEA”) in 2009, preceding the flash crash of 10th May 2010, before releasing the conclusions in August 2010.

Although IOSCO does not have any regulatory powers, for a regulator to be a member of IOSCO they must adhere to certain standards and implementing regulation that demonstrates adherence to IOSCO principles is expected. So although the IOSCO paper is now approaching it’s seventh birthday, the principles still act as a good roadmap for national regulators.

MIFID Level 1, Article 4(1)(40) defines HFT as:

(a) infrastructure intended to minimise latency, inc co-location, proximity hosting or high-speed direct electronic access;

(b) system-determination of order initiation, generation, routing or execution without human intervention for individual trades or orders; and

(c) high message intraday rates which constitute orders, quotes or cancellations:

— at least 2 messages per second with respect to any single financial instrument traded on a trading venue;

— at least 4 messages per second with respect to all financial instruments traded on a trading venue.

It will be interesting to watch how the FSA in Japan takes this topic forward in the coming months.

Sources

FSA April position paper: http://www.fsa.go.jp/en/news/2016/20160513-1/01.pdf

FSA December report from working group (Japanese only)http://www.fsa.go.jp/singi/singi_kinyu/tosin/20161222-1.html

IOSCO DEA Principles, August 2010: http://www.iosco.org/news/pdf/IOSCONEWS190.pdf

Regulator considering margin trading rules in 2017 to bolster venue competition

In the April 2016 paper mentioned above with relation to HFT, the FSA also considered ways to improve competition between the trading venues, specifically through increased volumes on Proprietary Trading Systems (“PTS”) which act as an alternate to the primary venue.

Currently, 95-97% of all trades are executed on the Tokyo Stock Exchange (“TSE”) with the two lit PTS venues of Chi-X Japan and SBI Japannext matching the remainder. Dark trading is conducted by brokers who tend to report trades came to ToSTNET and so bring the executions under the TSE. According to TSE data, margin trading accounts for approximately 60% of retail trading volume.

The April paper considers the level of fragmentation in the US and the FSA noted that there are issues that can result from high levels of fragmentation. It seems that further competition is likely to come from strengthening existing venues rather than looking to increase the number of venues.

If margin trading were permitted on PTSs, that new liquidity that could give the PTSs a real boost and start the gravitational effect of liquidity attracting liquidity. Given the retain nature of margin trading flow, it seems likely that some form of additional regulation around best execution may accompany the permission.

In Europe, when market competition was first permitted through the introduction of MiFID in Nov 2007, a Best Execution regime was created allowing brokers to choose which venues they connected to and requiring them to disclose their venues.

ASIC in Australia similarly allowed brokers to choose whether or not to connect to Chi-X although the market has generally connected given their alternate liquidity makes between 15 - 18% of traded volume. The Hong Kong SFC in their May 2015 rules on Alternate Liquidity Providers decided to exclude retail from dark pools.

This possibility of allowing margin trading on alternate lit venues again referenced in August 2016, and most recently in the December FSA Working Group report. Local media noted that the FSA was still considering lifting the ban on margin trading on non-exchange venues.

FSA April position paper: http://www.fsa.go.jp/en/news/2016/20160513-1/01.pdf

FSA December report from working group (Japanese only):

http://www.fsa.go.jp/singi/singi_kinyu/tosin/20161222-1.html

New taxation agreements effective 2017

New double tax agreements between Japan and Germany as well as Japan and Taiwan came into force on 1st of January 2017. Under the new Japan and Germany agreement, withholding tax on dividends, interest and royalties is to be removed as follows:

Dividend Interest

Parent company (conditions)

REITs All others

0% (at least 25 % of the shareholding for 18 months)

5% (at least 10 % of the shareholding for 6 months)

15.315% 15% 0%

Please refer to Articles 10 and 11 of the following tax agreement for further details:http://www.mof.go.jp/tax_policy/summary/international/press_release/20151217de_b.pdf

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The tax agreement between Japan and Taiwan also applies from the 1st of January 2017. Under this new agreement, 10% withholding tax rate will apply to dividends, interest and royalties.

Dividend Interest

Government, central bank

Others

10% 0% 10%

Please refer to Articles 10 and 11 of the following tax agreement for further details:https://www.koryu.or.jp/ez3_contents.nsf/0/84d04e1b9ad3d03b49257f090009454a/$FILE/sozei-E.pdf

Improved corporate governance a priority for 2017

Local media have reported that the FSA is looking to amend its disclosure rules in order to prevent leaks of inside information. According to reports, this work follows Prime Minister Shinzo Abe’s push to improve corporate governance and encourage foreign investment.

The amendments will likely broaden the scope of current requirements and also clarify what constitutes material and insider information, such as unpublished financial information that could influence share prices if made public.

These potential changes would follow on from new guidelines which the JSDA (The Japan Securities Dealers Association) introduced in September 2016, on how analysts should gather information from listed companies, provided in a bid to prevent leaks.

2017 Venue News

New Year message from Japan Exchange Group CEO

Early in January 2017, Mr. Akira Kiyota, Group CEO of Japan Exchange Group (“JPX”) published his New Year message.

In his remarks, Mr. Kiyota noted some of the unanticipated events of 2016, including the Kumamoto earthquake, negative interest rate environment, Bank of Japan (“BoJ”) doubling ETF purchases, UK Brexit and the US presidential elections.

Mr. Kiyota went on to cover JPX highlights from 2016, including:

— That Japans Corporate Governance Code has resulted in over 80% listed companies having two or more independent outside directors.

— The technology update which significantly improved the core derivatives system (J-GATE).

— Development of the JPX-Nikkei Mid and Small Cap Index.

Looking forward, Mr. Kiyota stated that 2017 would be a pivotal year in the revamping of Abenomics and “though circumstances do not allow us to be unwaveringly optimistic, I do believe that wheels have been set in motion to part with deflation and generate growth, given that 2016 closed with crude oil prices peaking and the yen on a weak trajectory”.

The full press release can be found here:

http://www.jpx.co.jp/english/corporate/news-releases/0063/20170104-01.html


BOJ’s ETF buying in 2016

In July 2016, the Bank of Japan (“BOJ”) announced that it would double ETF purchases as part of its stimulus plan. As a result, the BOJ’s ETF holdings will increase annually by 6 trillion yen (US$58 billion), an increase of 2.7 trillion yen from the previous target (US$26 billion).

BOJ ETF purchases will reportedly be split as follows:

Recent history of BOJ ETF purchases can be seen below:

Source: http://www3.boj.or.jp/market/en/menu_etf.htm, http://www.boj.or.jp/en/announcements/release_2016/rel160921c.pdf

Governor Haruhiko Kuroda said that the move was to shore up confidence in light of post-Brexit volatility in financial markets and a slowdown in emerging markets.

“I don’t think we’ve reached the limits both in terms of the possibility of more rate cuts and increased asset purchases,” Mr. Kuroda told reporters.

The BOJ’s actions have raised questions from some analysts regarding the potential consequences for the companies who make up the constituents of the ETFs purchased by BOJ. There is potential for reduction in free float as these shares may be subject to long term lock up in order for ETF provides to hedges BOJ’s ETF purchases. This leads to further questions, including whether BOJs continued ownership of the ETF artificially supports the share price of the constituents?

Deutsche Bank’s Market Structure team are reviewing these and related questions, in a soon to be released paper on ETF trading in Japan. If you’re interested in this topic please keep an eye out for the paper.

Japan moves to curb material information leaks

The Japan Securities Dealers Association (“JSDA”) has issued guidelines on information gathering by analysts, in an effort to reduce leaks of sensitive information.

Under the guidelines, published in July 2016, analysts are prohibited from collecting data which could be used to calculate earnings results. The guidelines are not limited to analyst’s activity, with Brokerages now required to review the data gathered by their analysts and ensure that price sensitive information is not inadvertently passed to clients.

Investors’ access to non-public material information, such as earnings results, has been a focus in Japan in recent months, with the FSA censuring a number of firms for leaking earnings information to clients.

The guidelines (Japanese language only) are available on the JSDA website:

http://www.jsda.or.jp/index.html

BOJ’s ETF Purchases

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Broker fined for trading “without intention to execute”

In December 2016 the FSA fined a leading US broker, following an investigation into its trading patterns.

According to a press release from the FSA, the broker submitted orders to both sell and buy the stock in question but had no intention of executing the buy orders. Instead, these were submitted to inflate the appearance of demand in the market.

The cancellation rate for the buy trade was extremely high (over 95%), especially when viewed alongside an opposing sell order in the same stock for which the cancellation rate was around 40%.

The fine indicates the importance of ensuring that there is a legitimate rational for trading that can be evidenced.

A link to the FSA statement can be found below.

http://www.fsa.go.jp/sesc/english/news/reco/20161206-1.htm#attachments1

2016 Venue News

Japan’s newest dark pool ‘Kai-X’

October 2016 saw the launch of ‘Kai-X’, Chi-X Japan’s new latency neutral dark crossing pool. The new trading venue will source liquidity from multiple brokers, which Chi-X expects will provide the venue with more trading opportunities than is currently available through dark pools operated by single brokers.

Other key features of Kai-X include:

— Same speed access for all participants, through uniform use of standard fix connections, with no co-location possible.

— Liquidity protection through ‘Single Counterparty’ and/or ‘Minimum Fill Quantity’ order criteria.

— Matching logic which aims to ensure fair and equitable trading through priortising i) price, ii) same broker; and iii) time.

(“same broker” matches broker’s own orders to minimise the information leakage. Self trade prevention also available).

Chi-X has provided the following data showing the progress of Kai-X, in its first month.

JPX publish academic paper on frequent batch auctions

In December 2016, JPX released a paper on “Investigation of Frequent Batch Auctions using Agent Based Model”, discussing the impact of batch auctions to market liquidity.

The paper notes the existing conflicting views that the market has with regards frequent batch auctions (“FBA”), which on one hand find that FBA’s improve market structure through reducing the value and cost to investors of high speed access, but on the other hand, reduces liquidity through eliminating the role of the market maker.

The authors conducted what they referred to as “Artificial Market Simulation” to test the impact of FBAs.

In summary, the paper concludes that FBA’s makes it more difficult for market maker strategies to operate and as a result, such strategies cannot continue to trade, which in turn increases execution costs to end investors.

Summary Paper: http://www.jpx.co.jp/english/corporate/research-study/working-paper/b5b4pj000000i468-att/E_Summary_JPX_working_paper_No17.pdf

Full Text: http://www.jpx.co.jp/english/corporate/research-study/working-paper/b5b4pj000000i468-att/E_JPX_working_paper_Vol17.pdf

OSE 2016 platform upgrade

On the 19th of July, the Osaka Exchange Inc (“OSE”) announced the launch of its new derivatives trading platform, Japan Global Access Trading Engine (“J-Gate”).

The new system:

— Lowers processing latency from 2 milliseconds to 100 microseconds.

— Increases the number of orders processed per second from 12,000 to 100,000.

— Introduces mandatory pre-trade risk checks through ‘TradeGuard’.

— Provides enriched market information.

New derivative products also launched on the same date, including ‘Mothers Index Futures’. The changes increase the number of products the Osaka Exchange delivers to 27 from 23. According to the media, further new offerings being considered.

The OSE press release can be found here:http://www.jpx.co.jp/english/corporate/news-releases/0060/20160719-02.html

32


Short sells reduce to YE 2016

According to monthly short selling statistics produced by the JPX, the value of short sells peaked in August 2016 at nearly half of total value traded, but has since tapered towards the end of 2016.

Month/Year Selling excluding short selling Short selling with price restrictions Short selling without price restrictions

Total (d)

Trading Value (a)

% of Total (a)/(d)

Trading Value (b)

% of Total (b)/(d)

Trading Value (c)

% of Total (c)/(d)

Aug-16 30,331,315 58.5% 17,422,825 33.6% 4,095,051 7.9% 51,849,191

Dec-16 39,629,227 63.5% 18,698,453 29.9% 4,121,778 6.6% 62,449,458

Jan-17 31,859,768 61.6% 16,181,811 31.3% 3,648,665 7.1% 51,690,244

Notes;

According to media reports, short selling is highest in export related sectors, correlated to strengthening of the Yen.

JPX short selling statistics can be found here: http://www.jpx.co.jp/english/markets/statistics-equities/short-selling/01.html

Contact


Sources:

www.fsa.go.jp

www.jpx.co.jp

www.jsda.or.jp

www.nikkei.com

www.bloomberg.com

www.complinet.com

www.reuters.com

www.kpmg.com

1. Short selling with price restrictions covers selling of borrowed stocks (selling without owning stocks) and the like (transactions outside of those designated by Article 3 of the Ordinance of the Cabinet Office for Short Sale).

2. Short selling without price restrictions includes margin and loan transactions of 50 units or less by customers who are not “Qualified Institutional Investors”, sales for arbitrage and hedging of ETFs, individual equity options contracts and stock index futures contracts and the like (transactions designated by Article 3 of the Ordinance of the Cabinet Office for Short Sale).

3. Monthly trading value figures for short selling are calculated by summing each total of the daily trading value figures. Furthermore, these figures are not indicative of the open position of short selling at the end of the month.

4. Definition of short selling with price restrictions was revised according to the amendment to the Ordinance of the Cabinet Office for Short Sale on September 17, 2002.

5. Foreign stocks are included in monthly trading value figures for short selling beginning in April 2007.

6. Including transactions of JASDAQ issues from July 16, 2013.

Source: http://www.jpx.co.jp/english/markets/statistics-equities/short-selling/01.html

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Global Market Structure India


Global Market Structure India Newsletter Special EditionIssue 43, 2017



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Changes expected in India’s electronic trading market

The Securities and Exchanges Board of India (“SEBI”) ran a public consultation on the “Strengthening of the Regulatory framework for Algorithmic Trading & Co-location” which closed in the latter half of 2016 and is pending conclusion. Consultation followed the events in 2015, where 3 whistleblower letters were sent to SEBI highlighting unfair access to select participants at the National Stock Exchange (“NSE”) collocation site.

According to SEBI, changes to the market have become necessary in order to address concerns relating to market quality, market integrity and fairness.

The consultation asked respondents to consider the following wide range of options as potential improvements market structure:

— Minimum resting time for orders.

— Frequent batch auctions.

— Random speed bumps.

— Randomisation of orders.

— Maximum order message-to-trade requirement.

— Separate queues for co-located orders and non co-located orders.

— Review of tick-by-tick data feed.

Responses to the consultation have been received from both local and international brokers and industry groups. Comments from SEBI indicate that the respondents would have liked to have seen the consultation proposals tailored more specifically for the Indian market.

According to SEBI chairman Mr. U.K Sinha, “On HFT and Co-location, lots of strong comments have been made that SEBI should not borrow ideas from other parts of the world. SEBI should have its own data. Let me assure that some of the best technical brains are right now working and analysing the trading data to find out what is relevant and unique to our market”

The industry awaits SEBI’s formal response and decision regarding how best to move forward. No timeline has been given for this yet.

The consultation can be found here:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1470393485587.pdf

Source:http://economictimes.indiatimes.com/articleshow/55356681.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

India amends to tax treaty with Mauritius, Cyprus and Singapore removing CGT exemptionOn 30th December 2016, India amended its two-decade old Double Taxation Avoidance Agreement (“DTAA”) with Singapore. The amendment brought parity with Cyprus and Mauritius treaties which were amended earlier in the year.



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Fig 1. Turnover in equities market in India was consistent until last quarter of 2016 when volumes dropped. Introduction of new currency notes by government of India as a step to curb the use of fake Indian currency notes may have impacted to equities market since announcement in Nov and was followed by tax announcements in Dec that has also had relevance.

Fig 2. Renegotiated double taxation treaty with Singapore and GAAR, both of which will go live in April 2017, may have an impact on trading volumes from foreign investors on cash and derivatives market in India this year. India’s finance minister in January 2017 at the listing of CPSE ETFs said that ETFs are likely to remain preferred investment vehicle for divestment purposes.

Fig 3. Taiwan’s future exchange TAIFEX listed a Nifty 50 futures contract in November 2016 with a contract size of TW$50 per contract that trades from 8.45am to 6.15pm local time.Average turnover in the index futures is ~US$ 1.7Mn a day.

Fig 4. Market share between NSE and BSE has remained consistent over last two years with BSE market share occasionally spiking to the 20% mark.



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The DTAA preserves the existing tax exemption on capital gains for shares acquired up until the 1st April 2017. Following this, there will be a two-year transition period during which time capital gains on shares will be taxed at 50% of India’s domestic tax rate, equating to a 7.5% tax rate. After two years the rate will increase to 15%.

Note that the treaty amendments only apply to cash securities, derivatives and debt products will continue to remain exempt from capital gains taxation.

A summary of taxation agreements can be found following.

Country Capital gains

Capital gains (more than 10% equity stake)

Capital gains on other securities

Interest Dividend

Singapore Applicable see note (1,2 & 3) below

Not taxable in India subject to general anti avoidance rules (GAAR) under Indian domestic tax law not applicable

15% subject to beneficial ownership test

Not taxable in the hands of the shareholder. However, the company paying the dividend has to pay dividend distribution tax at the rate of 20.358% as per the domestic tax laws

Mauritius Applicable see note (2,3 &4) below

Not taxable in India – May subject to GAAR under Indian domestic tax law

7.5% subject to beneficial ownership test

Cyprus Applicable see note (4 &5) below

Not taxable in India – May subject to GAAR under Indian domestic tax law


Belgium Not taxable in India

Taxable in India

Not taxable in India


France Not taxable in India

Taxable in India



Spain Not taxable in India

Taxable in India



Netherlands Not taxable in India

Taxable in India on transfer to resident



Korea Not taxable in India

Taxable in India



Denmark Not taxable in India

Taxable in India


15%

Sweden Not taxable in India (subject to paying tax in Sweden)

Not taxable in India (subject to paying tax in Sweden)

Not taxable in India (subject to paying tax in Sweden)


1. Capital gains on investment of shares of Indian Company made till 31 March 2017 and sold post 1 April 2017 – Not taxable in India subject to Limitation of Benefit (LOB) clause

2. Capital gains on investments in shares of Indian Company made on or after 1 April 2017 but sold before 31 March 2019 – Taxable in India at half the rate of tax applicable per Indian domestic tax law subject to LOB clause (i.e. 7.5%)

3. Capital gains on investments in shares of Indian Company made on or after 1 April 2017 and sold after 31 March 2019 – Taxable in India as per Indian domestic tax law (i.e. 15%)

4. Capital gains on investment of shares of Indian Company made till 31 March 2017 and sold post 1 April 2017 – Not taxable in India

5. Capital gains on investments in shares of Indian Company made on or after 1 April 2017 – Taxable in India as per Indian domestic tax law (i.e. 15%)

For the full tax summary see here: http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/578/India-Singapore-Sign-Third-Protocol-Amending-DTAA-30-12-2016.pdf

Fig 5. Index spreads and trade sizes in India tread lower, down 9% and 21% respectively since January 2015.

Fig 6. Nifty index closed up 3% for full year 2016 and is up 4.6% in January 2017.

Fig 7. In absence of a formal closing auction mechanism, Nifty 50 stocks trade 20% of day’s volume spread over the last 30 minutes of trading.


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GAAR to take effect from 1st April 2017

The ‘General Anti-Avoidance Rule’ (“GAAR”) will come into effect from 1st April 2017.

GAAR provides tax officials the opportunity to deny tax benefits, if a deal is found without any commercial purpose other than tax avoidance.

After being deferred in three previous budgets, the Finance Minister Mr. Arun Jaitley finalised the implementation date for GAAR to be on 1st April 2017 as part of the 2016-17 budget. Mr. Jaitley also announced that when implemented, GAAR requirements would apply to investments made on or after 1st April 2017.

According to EY under GAAR provision an arrangement shall be considered as an ‘impermissible avoidance agreement’ where the main purpose is to obtain a tax benefits and it satisfies certain other prescribed conditions. GAAR will be applicable even if the main purpose of a step in, or a part of, the arrangement is to obtain tax benefit (notwithstanding that the main purpose of the whole arrangement is not to obtain a tax benefit).

35


GAAR provisions have the power to override double taxation avoidance agreements and deny benefits therein.

The Central Board of Direct Taxes (“CBDT”) issued a circular clarifying certain queries in a FAQ format on implementation of GAAR provisions. The circular also notes that adequate procedural safeguards are in place before FAAR can be invoked such as vetting by an approval panel so that GAAR provisions are applied only in deserving cases.

For the full report from EY click here: http://www.ey.com/Publication/vwLUAssets/EY-budget-connect-2017/$FILE/EY-budget-connect-2017.pdf

The CBTD circular is found at:

http://www.incometaxindia.gov.in/communications/circular/circular7_2017.pdf

2017 annual budget

According to EY summary on India budget, key policy announcements in 2017 annual budget from Government of India include:

— Abolition of the foreign investment promotion board over the next two years, exact road map for implementation would be announced in coming months.

— Liberalisation of FDI policy

— Listing and trading

— Extension of 5% concessional tax rate to non residents on borrowings made in foreign currency until 30th June 2020 under a loan agreement or by way of issue of long-term bond rupee denominated bond till 30th June 2020.

— Concessional tax rate of long term capital gains tax at 10% on sale of private company’s shares by non residents to be available retrospectively from 1st April 2012 (instead from 1st April 2016)

Read the full EY report here: http://www.ey.com/Publication/vwLUAssets/EY-budget-connect-2017/$FILE/EY-budget-connect-2017.pdf

India’s new GIFT city

The International Financial Service Centre (“IFSC”) at the Gujarat International Financial Tec (GIFT) City, which is located in state of Gujarat in India is India’s first Special Economic Zone. Launched in January 2017, GIFT city will offer foreign investors tax benefits on trading of dollar denominated Indian equities, commodities and interest rate derivatives that are listed on exchanges within GIFT city.

SEBI issued IFSC guidelines that apply to any entity including stock exchanges, clearing corporations and depositories operating in an IFSC. According to these guidelines, an asset management company of a mutual fund operating in the IFSC will have to maintain minimum net worth of US$2 million to be increased to US$10 million within 3 years from commencement of business in IFSC.

Intermediaries permitted by SEBI to operating within IFSC can form a company to provide financial services to select category of FPI and Non-resident Indian clients. The said clients can also avail investment advisory and portfolio management services from an intermediary based in IFSC. However for an Indian resident to use investment advisory and portfolio management services from and IFSC based intermediary, the person will need to have minimum net worth requirement of US$1 million.

BSE owned India International Exchange (“India INX”) and India International Clearing Corporation (“India ICC”), commenced operations at GIFT on 9th January 2017. NSE is due to start operations in end of February. India INX is an advanced trading platform, with a turn-around time of 4 micro seconds which operates for 22 hours a day to enable investors to trade across global time zones. Trading will open at 4 am India Standard Time (“IST”) when exchanges in Japan open, and close at 2 am IST when exchanges in the US close.

Trading on GIFT exchange listed products will be exempt from stamp duty, service tax, dividend distribution tax, commodity tax and securities transaction tax. Additionally, the minimum alternate tax for finance companies relocating to GIFT has been reduced to 9% from 18%.

More details on India INX can be found here: http://www.indiainx.com/static/giftifsc.aspx

http://www.indiaicc.com/download/SEBIGuidelinesonIFSCDated27thMarch2015.pdf

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9632&Mode=0

Other useful references http://www.ey.com/Publication/vwLUAssets/EY_Alert_SEBI_IFSC_Guidelines/$FILE/EY_Alert_SEBI_IFSC_Guidelines.pdf

http://economictimes.indiatimes.com/markets/stocks/news/how-does-gift-operate/articleshow/56803182.cms

http://trak.in/tags/business/2015/04/11/ifsc-finance-sez-gift-city-foreign-startups/

2017 Venue News

SEBI orders NSE profits of US$21.8 million be placed in escrow as systems are found to be prone to manipulation and market abuse

On 28th December, the NSE released a Draft Red Herring Report (“DRHR”), a document required for IPO, that described a number of actions taken over the course of 2016.

Firstly, in a letter dated 29th March, 2016, SEBI forwarded the interim observations of the team under the report, or the “CFT/IIT Interim Report”, to the NSE and requiring the submission of responses. The CFT/IIT Interim Report observed, among other things, that our co-location facilities and tick-by-tick, or TBT, architecture were vulnerable to manipulation and abuse, violated norms of fair access and compromised market fairness and integrity, as certain select trading members who availed of our co-location facilities were able to gain materially from the exploitation of our market feed dissemination architecture to receive market data more quickly than other trading members. The NSE submitted its response disputing these observations.

The NSE reportedly appointed Deloitte to perform an independent review. This report was filed with SEBI on 23rd December, 2016 and made the following observations:

a. The system architecture of the Company’s TCP-IP based TBT system was prone to manipulation. The Independent Agency’s analysis highlighted trends for certain periods where a few stock brokers appear to be the first to connect to specific servers significantly more often than others. The TCP-IP based TBT system architecture indicated that data was disseminated in a sequential manner whereby the stock broker who connected first to the server received ticks (market feed) before the stock broker who connected later;

b. The Independent Agency observed indications of potential preferential treatment to a few stock brokers. Different stock brokers were treated differently and there was no uniform approach applied across stock brokers with respect to allocation of new IPs across ports on existing servers and movement from one server to another. Ticks were disseminated faster to members connected to less crowded servers, thereby giving an advantage to such stock brokers;

c. The Independent Agency’s analysis indicated that one particular stock broker almost consistently connected first to the fall back or secondary server during the period from December 10, 2012 to May 30, 2014 and was very often also the second stock broker to connect during this period. The Independent Agency observed that the particular stock broker’s continuous access to the fall back or secondary server during the period from December 10, 2012 to May 30, 2014 may not have been possible without the knowledge of certain employees identified in the report, who did not take any action despite consistent connections to the fall back servers against protocol;

36


d. In order to ensure that norms of fair access were not breached, it was possible for our Company to negate the advantage of connecting first by implementing a randomiser for the TBT systems which would randomly pick a connection to begin dissemination of data, though a randomiser was implemented in another server;

e. The Independent Agency has observed that while it has not validated the performance of the Multicast TBT system (which was introduced in April 2014) in an operating environment, on the basis of a review of the architecture of the Multicast TBT, the issues related to benefits from early connectivity and sequential dissemination of ticks appear to have been addressed.

f. In relation to the question of whether we breached our own policies by permitting entities that are not internet service provider to lay fibre optic cables at our co-location facility for various stock brokers, the Independent Agency has observed that in the absence of a specific policy and operating procedure, it appears that our Company relied on such entities’ undertakings rather than satisfying itself about the entities’ status as a licensed provider of point to point connectivity;

g. While the Independent Agency observed indications of differential behaviour being shown towards a few stock brokers by certain employees identified in the report, the Independent Agency has stated that it is not in a position to comment on whether this would amount to collusion or connivance;

h. The Independent Agency observed lack of documented policies and protocols with respect to various aspects of the functioning of the TBT system; and i. After our Company confirmed completion of the data restoration exercise for all TBT servers, the Independent Agency came across additional TBT servers which had not been put through the restoration process, and the persons interviewed by the Independent Agency were unaware of them. The Independent Agency has also made observations that due to absence of protocols related to data retention, email and other information for certain former employees of our Company was unavailable.”

SEBI further instructed that “revenues from our co-location facility (including the revenue generated from trading activity from colocation facility) derived by our Company in fiscals 2015 and 2016 and for the six months ended September 30, 2016, were INR 4,512.4 million, INR 5,539.6 million and INR 3,029.1 million, respectively constituting 26.1%, 29.7% and 29.3% of our revenue from operations, respectively. Until receipt of final findings by SEBI or directed otherwise, the revenues generated by our Company from our co-location business since September 1, 2016 are required be transferred to a separate bank account and accordingly, our Company will not have access to such revenues. We cannot guarantee that our Company will have access to such revenues in the future.”

The NSE stated

“We intend to deposit the rack charges, connectivity charges and transaction charges to the sep

SEBI first released guidelines on co-location facilities in 2015 which stressed that access to co-location facilities should be provided on a fair, transparent and equitable manner, with fair and equal access to facilities and data feeds, ensuring similar latency within to those within the space. SEBI had reminded the market of previous co-location circulars in the September 2016 discussion paper on “Strengthening of the regulatory framework for algorithmic trading and co-location”.

NSE DRHR (see from page 21)


SEBI’s circular can be found here:


SEBI 2015 Co-location Guidelineshttp://www.sebi.gov.in/sebiweb/home/list/1/7/0/0/Circulars

SEBI 2016http://www.sebi.gov.in/cms/sebi_data/attachdocs/1470393485587.pdf

Sources:http://economictimes.indiatimes.com/markets/stocks/news/sebi-says-remedial-

actions-underway-in-nse-co-location-case/articleshow/57098364.cms

http://www.moneylife.in/article/sebi-finally-cracks-down-on-nsersquos-suspect-

algo-trading-what-does-it-mean/48281.html

http://www.business-standard.com/article/markets/sebi-spotlight-on-bse-nse-dark-fibre-116040400045_1.html

Bombay Stock Exchange goes public, NSE files its IPO prospectus with SEBI

Asia’s oldest stock exchange, the Bombay Stock Exchange (“BSE”) went public on 25th January 2017 on NSE at the face value of INR 2 per equity share. BSE’s IPO was subscribed more than 51 times and stock rose 33% on the first day of trading. The stock price has since dropped 22% as of 22nd February 2017.

NSE is also expected to go public this year and had filed its prospectus with SEBI in December last year. Existing shareholders of NSE will dilute a 22.5% stake in the exchange through an offer for sale. The share sale of NSE is expected to be India’s second-biggest IPO according to local media.

However, as further detailed below in the Venue News section, SEBI is pending action on NSE following the investigation into its collocation center where by NSE gave preferential and unfair access to some brokers on its algorithmic trading platform.

Source: http://economictimes.indiatimes.com/articleshow/56219490.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

http://www.livemint.com/Money/yzlCfEFtQneusvREJuzTRN/BSE-IPO-Shares-may-be-priced-at-Rs800850.html

http://www.livemint.com/Money/TV54vvYpX0NQPIqUBPNkUI/BSE-shares-rise-over-48-after-it-makes-debut-on-rival-NSE.html

2017 Personnel News

Ajay Tyagi Will Replace UK Sinha As SEBI Chairman

Senior Indian Administrative Services officer Ajay Tyagi has been appointed as the next chairman of the SEBI, according to a government notification. He will replace UK Sinha, who retires in March after a six-year term. Tyagi has been appointed for a period not exceeding five years or until the age of 65 years or until further orders, whichever is the earliest, the notification said.http://economictimes.indiatimes.com/markets/stocks/news/govt-appoints-ias-officer-ajay-tyagi-as-sebi-chief-for-5-years/articleshow/57084478.cms

Vikram Limaye, announced MD & CEO of NSE

The National Stock Exchange named Vikram Limaye, Managing Director of IDFC, as its new Managing Director and CEO. The board of directors of NSE, chaired by former finance secretary Ashok Chawla, cleared the decision on 3rd February.http://economictimes.indiatimes.com/markets/stocks/news/vikram-limaye-md-of-idfc-named-new-md-ceo-of-nse/articleshow/56955042.cms


F&O limits relaxed 20% of market wide position limit

In December 2016, SEBI announced changes to combined futures and options (“F&O”) position limits for brokers, mutual funds and foreign portfolio investors (“FPIs”) of category I and II, holding equity

37


derivatives. The limit was revised to 20% of the market wide position limit (“MWPL”).

The change brings uniformity to the market, which had previously been subject to a more complicated combination of percentage MWPL and monetary limits. Market volumes increased upon the announcement.

A detailed explanation of the position limit requirements can be found on the NSE website, here: https://www.nseindia.com/products/content/derivatives/equities/position_limits.htm

Source: http://timesofindia.indiatimes.com/business/india-business/sebi-eases-trading-norms-for-equity-derivatives-contract/articleshow/56202975.cms

India a standout IPO performer in 2016

Strong performance was seen in India’s IPO market during 2016, with a total of 83 IPOs raising US$3.8 billion. This represents a 38% increase in deal volume and a 79% increase in proceeds raised, from 2015 figures.

To put this in a global context, in 2016 the total number of IPOs issued worldwide fell 16% to 1,055 and capital raised fell 33% to US$132.5 billion.

“Continuing regulatory reforms and positive investment climate have helped India dominate in terms of number of deals,” said Mr. Pankaj Chadha, of EY Global, whose company published the information. Mr. Chadha added that continuous changes in investment climate and further policy improvements like implementation of GST could fuel even more demand resulting in need for equity and more action in the IPO market place.http://timesofindia.indiatimes.com/business/india-business/83-ipos-hit-indian-market-raised-3-8-bn-in-2016-report/articleshow/56201225.cms

Seven year high for mutual fund assets

Mutual fund assets under management (“AUM”) grew by 30% year-on-year, to approximately Rs17 trillion (US$250 billion) at the end of 2016, the best results since 2009.

According to media reports, the increase has been partially driven by retail investor’s interest in funds, especially systematic investment plans (“SIPs”).

Media reports note that contributions to SIPs grew to Rs40 billion (US$588.4 million) a month in 2016, compared to Rs18 billion (US$265 million) a month in 2015.

Overall, equity as an investment class continues to grown amongst both retail and institutional investors, indicating that investors are looking to mutual funds for long-term investments rather than for short term money making gains.

Individual retail investors held Rs7.56 trillion (US$111.2 billion) in assets as of November 2016 compared with Rs6.14 trillion (US$90.4 billion) in assets held during November 2015, an increase of 23%.

Institutional investors’ held R9.39 trillion (US$138.1 billion) in November 2016 compared to Rs7.28 trillion (US$107.1 billion) in November 2015, an increase of 29%.

Additionally, data from the Association of Mutual Funds in India showed that from December 2015 to September 2016, about 4.7 million investors opened mutual fund accounts.

Additionally, data from the Association of Mutual Funds in India showed that from December 2015 to September 2016, about 4.7 million investors opened mutual fund accounts.http://ignitesasia.com/c/1535733/178513/india_mutual_fund_assets_surge_year_high?referrer_module=issueHeadline&module_order=4

2016 Venue News

Positive moves to de-list long term suspended stocks

2016 saw action from both the NSE and BSE to decrease the number of long term suspended stocks on their exchanges. In July 2016, India’s Minister of Finance Mr. Arjun Ram Meghwal, said that:

“The exchanges have initiated the process of delisting those companies which have been under suspension for a very long time and have not complied with listing requirements.”

According to media reports, SEBI has identified 4,200 companies for potential de-listing due to their long term suspended status.

As can be seen in the charts following, the NSE had one of the highest rates of suspended stocks in the Asia region in October 2016.

Source: Bloomberg, IRESS, KRX, TWSE, WFOE, 7 October 2016

The de-listing process was kicked off on mass in November 2016 when the NSE initiated the de-listing for 132 stocks and the BSE 1,021 stocks, all of which had been suspended for over seven years.

Further information on stock suspensions across APAC can be found in the DB Market Structure paper “Stock Suspensions: Regulations, Risks and Remedies” available from your DB coverage. http://www.indiainfoline.com/article/news-top-story/bse-nse-starts-delisting-shares-of-companies-suspended-for-long-116113000184_1.html

Nifty 50 launched in Hong Kong and Taiwan

In an effort to further internationalise India’s capital markets, the NSE has launched products linked to India’s benchmark index Nifty 50, in both Hong Kong Stock and Taiwan.

In July 2016, the CSOP Nifty 50 Daily 2x (a leveraged product) and CSOP Nifty 50 Daily -1x (an inverse leveraged product) were launched on the Hong Kong Stock Exchange.

“The listing of Nifty 50 based leverage and inverse products in Hong Kong will ensure that investors in Hong Kong and China can participate in the India growth story,” said Mr. Mukesh Agarwal, Chief Executive Officer, India Index Services and Products.

38


Contact


Expansion continued into Taiwan when in November 2016, the NSE launched Taiwan dollar denominated Nifty 50 based futures, on the Taiwan Futures Exchange (“TAIFEX”).

“Going forward, investors from Taiwan can take a view on the top 50 Indian companies representing multiple sectors in India by investing in TAIFEX Nifty 50 futures,” said NSE Chief Executive Ms. Chitra Ramkrishna.

According to Ms. Ramkrishna, “Nifty 50 represents one of the fastest growing economies in the world. It’s an inevitable choice for global investors who want to invest in India”. http://economictimes.indiatimes.com/articleshow/55293194.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

http://www.business-standard.com/article/news-ians/nse-to-launch-two-l-i-products-in-hong-kong-stock-exchange-116071901361_1.html

BSE using AI to uncover rumors involving listed firms

In November 2016, BSE announced that it would be using artificial intelligence (“AI”) systems to track news regarding listed companies.

According to the BSE’s statement, they have installed a new system which aims to reduce information asymmetry arising from digital social media platforms and therefore mitigate potential risks of rumors and market manipulation.

Alerts generated by the system will be monitored by BSE staff and compared to legitimate publically released information from the listed company in question. If discrepancies are found the BSE will approach the listed company for clarification and the company’s response will disseminated on the company information section of BSE’s website.

BSE’s company announcements page can be accessed here: http://www.bseindia.com/corporates/ann.aspx?expandable=0

Source:http://economictimes.indiatimes.com/articleshow/55543896.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

2016 Personnel News

NSE CEO Ms. Chitra Ramkrishna resigns

On the 2nd of December 2016 the NSE Board of Directors accepted the resignation of Ms. Chitra Ramkrishna, from the position of CEO. Ms. Ramkrishna had tendered her resignation due to personal reasons and expressed her desire to step down with immediate effect.

Mr. J.Ravichandran, Group President, was appointed to fill the position until a permanent replacement has been found. Mr. Ravichandran has a long association with the NSE and brings with him a wealth of experience and full understanding of the functioning of the organisation.

Dr.Urjit Patel succeeded Dr. Raghuram Rajan as the governor of RBI

On the 18th of June 2016, Reserve Bank of India (“RBI”) Governor Raghuram Rajan, confirmed that he would seek a second term in the role, instead preferring to return to academia.

Dr. Rajan, a former Chief Economist at the IMF, has been popular with foreign investors for his efforts to tackle inflation and had won praise for helping India deal with currency issues.

Dr. Urjit Ravindra Patel was subsequently appointed RBI Governor on the 4th of September 2016. Dr Patel’s career includes five years spent working at the International Monetary Fund, four years within Indian Government and three years as deputy Governor of the RBI.

39

Global Market Structure South Korea


Global Market Structure South Korea Newsletter Special Edition Issue 43, 2017


Introduction of an omnibus account structure

2016 saw pilot testing of omnibus account structure in South Korea, following FSC approval of the concept at the beginning of the year.

In January 2016, the FSC announced its plan to introduce an ‘omnibus account’ in an effort to make it easier for foreign investors to trade locally-listed stocks in the Korean stock market. The system is expected to reduce transaction costs of global asset management companies and make foreign investors’ trading of locally-listed stocks through global securities firms more scalable and better demonstrate best execution through equal pricing to all funds.

Testing took place in the latter half of 2016. It was limited to mock transactions for a specified group of financial institutions. Four local custodians including Deutsche Bank, two local brokers, and one global broker-dealer as a foreign investor, participated in the testing.

At present omnibus accounts will only be allowed for equity trading. However, the FSC is reviewing this stance and may in time expand the scope to other trading instruments.

According to its earlier statement, the FSC intends to introduce the Omnibus account structure in 2017 although a detailed timeline is yet to be released.

Further information and the FSC’s statement can be found here:https://www.fsc.go.kr/eng/new_press/releases.jsp?menu=01&bbsid=BBS0048&selYear=2016&nxPage=4

Changes to short selling rules from Q1 2017

In late 2016, the FSC released a press statement, explaining plans to improve short selling and short sale disclosures, to strengthen investor protection.

According to the statement:

— Short sellers shorting during the period of paid-in capital increase will be prohibited from buying the newly-issued stocks.

— The Korean Stock Exchange (“KRX”) will identify “overheated short-selling stocks” and prohibit short-selling of those stocks on the following day.

— Financial sanctions against violation of short-selling rules will be strengthened.

— The deadlines for reporting and disclosure of short positions will be shortened from the current T+3 days to T+2 days.

— Among information currently subject to voluntary disclosure, important information that could affect investors’ decision such as ‘technology transfer and introduction’; ‘partnership agreement’; and ‘acquisition or transfer of patent rights’ will be made subject to mandatory disclosure, which should be made on the same day of such event.

— Maximum penalties on violation of disclosure rules will be raised by 5 fold to hold companies more accountable for accurate and timely disclosure



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Fig 1. Turnover velocity January 2017: 83% January 2016: 88% January 2015: 82%

Fig 2. KRX increased its trading hours by 30 minutes last year starting 1st August, additional trading hours have spread the liquidity over longer duration however overall trading volumes have not been impacted.

Fig 3. Average trade sizes and trading bid-ask spreads inline with the region have reduced 20% and 4% respectively.

Fig 4. KOSPI index closed the year up 8.2% and has gained 3.1% in January 2017.

40


Under the existing regime, disclosures are required when an investor has a short selling position in listed shares of 0.5% of a company’s share capital or over KRW 1bn (approximately US$867,000).

The new requirements are being phased in from Q4 2016. Further details can be found here: https://www.fsc.go.kr/eng/new_press/releases.jsp?menu=01&bbsid=BBS0048&selYear=2016&nxPage=1

FSC policy direction for 2017

South Korea’s Financial Services Commission (“FSC”) has released a statement outlining its key areas of focus for 2017, specifically:

(i) prompt and thorough response to financial market risks;

(ii) financial support for stabilisation of household livelihood; and

(iii) financial reforms and innovation to revitalize the economy.

Actions to be taken in 2017 include:

— Stabilisation of the corporate bond market, to facilitate better funding conditions for companies in response to increased volatility in financial markets.

— Changes to corporate restructuring to allow creditor-led debt workout and court-led rehabilitation.

— Introduction of a stewardship code for to a wider range of companies.

— Enactment of a financial consumer protection law.

— Financial reforms to promote competition and innovation in the financial sector.

— Encouraging financial institutions and FinTech firms to develop more innovative and convenient financial services.

— Launching of a ‘regulatory sandbox’ to test and experiment new services and business models.

Corporate tax exemption for foreign investment amended

Effective from the 1st of January 2017, the corporate tax exemption for foreign investment has been changed to allow a wider range of tax exemptions through inclusion of new-growth industries.

The changes increase the scope of income which qualifies for tax exemption and also the amount of exemption available, from 90% to 100%. Requirements for all income to be derived from the specified industry have also been relaxed.

The amendments provide tax relief for industries that target new growth and development. A representative of the Ministry of Strategy and Finance explained that:

“In order to nurture the new growth industry, we reformed the list of tax incentive support areas by focusing on technology in 11 major new industries”.

Foreign investors will now also be subject to new minimum investment thresholds to encourage long term investment. The specific thresholds have yet to be defined.

The proposed tax amendments (in Korean) can be found here:

http://src.bna.com/lgl.

FSC plans launch of fully computerised asset management systems

The FSC announced in August 2016, that they are considering the possibility of allowing fully computerised asset management systems. Such systems, known as ‘Robo Advisors’ would be a significant step for the industry.

“There have been market concerns about the trustworthiness and stability of robo-advisors. We will operate a test bed, inviting local financial services or technology firms to join the initiative” FSC said in a statement.

If the FSC does allow the initiative to proceed, they will pick specific firms to provide full-scale robo-advisor services, upon completion of a successful testing.

http://koreabizwire.com/regulator-set-to-launch-robo-advisor-test-bed/65102

2017 Venue News

Restructure of KRX still pending

Existing plans to restructure the KRX into a holding company for the KOSPI Exchange, the KOSDAQ Exchange and the Derivatives Exchange, have been delayed as the required act was not successfully received into law at the 19th National Assembly.

The FSC believes the restructure will bring about competition between each market and ultimately more offshore investment. According to FSC Chairman Yim Jong-yong, “by restructuring the KRX, a market infrastructure that can draw aggressive investments can be set up”.

The proposed restructure has not been without opposition. It is reported that the KRX’s own trade union opposes the FSC intervening in the Exchange’s management, and that there is political opposition from those who wish to see the headquarters move from Busan to Seoul (which would not occur under the proposed framework).

Source:

http://www.koreatimes.co.kr/www/news/biz/2016/10/488_216106.html


Foreign investments in Korean stocks grows 10%

Per information released by the KRX, foreign investors owned a total of 464.1 trillion won (US$424 billion) of shares listed on the benchmark securities trading index KOSPI and tech-heavy KOSDAQ as of 10th of August 2016. Their holdings accounted for 30.6% of total market capitalisation.

This is a 10.3% increase when compared to the end of last year.

Additionally, KRX data reveals that foreigners made a total of 8.87 trillion won (US$ 8 billion) net purchases to August 2016. http://www.koreaherald.com/view.php?ud=20160816000800



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Improvements to the derivative markets

On the 22nd of November 2016, the FSC announced measures to improve their derivatives market. Key aspects of the new measures are outlined as follows.

For exchange traded derivatives:

— Supply side: simplification of listing procedures, diversification of derivatives, adjustment of trading units for KOSPI 200 futures and options.

— Demand side: flexible requirements for investors, introduction of the ‘omnibus account’ for foreign investors.

For over the counter derivatives:

— Introduction of global regulatory standards such as margin requirements for non-centrally cleared derivatives and electronic trading platforms.

For the derivative linked securities market: — The FSC will strengthen risk management and investor protection, while pursuing more diversification of products to meet various investment needs.

The changes have been phased in since Q4 2016.

Full details are available on the FSC website:

https://www.fsc.go.kr

UK and Korea establish FinTech bridge

In late 2016, the United Kingdom (“UK”) joined with Korea to establish a FinTech bridge, aimed at supporting the international expansion of FinTech firms from both countries.

The FinTech bridge is expected to help UK FinTech firms and investors access the Korean market and involves sharing financial services, innovations and information between regulators of the two countries.

This initiative is a part of UK’s commitment to support the FinTech industry, in order to encourage new FinTech innovations. The UK has formed similar partnerships in the past, having signed the first ever FinTech Bridge with Singapore in May 2016.

“The UK attracts innovators from around the world and as a result we need to continue our support in this fast moving sector. These Co-operation Agreements are absolutely vital in fostering an environment of FinTech innovation on a global scale. We look forward to working closely with the FSC on our efforts to promote innovation in our respective markets,” Mr. Andrew Bailey, Chief Executive of the UK Financial Conduct Authority (“FCA”) said.

In a separate article, the FSC confirmed that South Korea is launching the world’s first FinTech open platform designed to boost FinTech developments within the country. The new open platform will take the form of a website, where FinTech firms can download program commands used for development of FinTech services and can run test operations of the programs they developed.

Source: https://www.crowdfundinsider.com/2016/08/89655-korea-financial-services-commission-launches-fintech-open-platform/

http://www.econotimes.com/UK-and-Republic-of-Korea-establish-FinTech-Bridge-239959

2016 Venue News

Extension of trading hours for KRX

On the 1st of August 2016, KRX extended its trading hours by 30 minutes across its equities, derivatives, gold futures and foreign exchange markets, enabling investors to trade from 9am to 3:30pm.

This is the first change to market hours since the year 2000, when KRX allowed stock trading during lunch hours.

“The global markets are moving in tandem, with information affecting the world. We need to have a market where investors can trade anytime” KRX CEO Mr. Choi Kyung-soo, said in a statement.

This move is reported to increase the the chances of Korea being classified as a developed market for MSCI index purposes, however other factors remain in need of address.

According to a statement from MSCI in June 2016, “The investment frictions related to the lack of convertibility of the Korean won and restrictions imposed by the local stock exchange on the use of exchange data for the creation of financial products remain unaddressed”.

http://www.koreaherald.com/view.php?ud=20160724000242

Cross-Listing of EURO STOXX 50 on KRX 2016 saw KRX sign an agreement with German exchange Eurex, to enable trading of EURO STOXX 50 futures on KRX.

The product launched mid 2016 and was the first derivative product based on a foreign equity index available on KRX. The first trading day saw a volume of 1142 traded contracts with a trading value of KRW 30.975 billion and an open interest of 18 contracts. Liquidity was provided by eight market makers and 30 brokers participated in the trades.

As part of this reciprocal arrangement, Mini KOSPI 200 Index Futures have been made available to trade on Eurex. This agreement further strengthens the partnership between Eurex and KRX which has seen KOSPI 200 Options traded on Eurex since August 2010.

KOSPI 200 Options on Eurex achieved a daily average of 108,801 contracts in the first quarter of 2016.

Exchange using artificial intelligence to monitor trade surveillanceOn the 24th of August 2016, KRX announced that it will be introducing an artificial intelligence based surveillance system to enhance its trade surveillance capabilities.

According to the KRX, the new system will incorporate cognitive computing and big data technology to keep a close watch on suspicious trades and respond faster to illegal market activities. The average time to detect and analyse each transaction will be reduced from two days to one hour.

The system is expected to be ready by April 2018.

http://pulsenews.co.kr/view.php?sc=30800020&year=2016&no=604280

2016 Personnel News

New CEO for KRX

KRX appointed a new CEO, Mr. Jeong Chan-woo, in September 2016.

Jeong joined the transitional committee of the Park Geun-hye government and served as FSC vice chairman from 2013 to January 2016. He replaces the outgoing CEO Mr. Choi Kyung-soo, who has taken on the role of KRX chairman. http://www.koreatimes.co.kr/www/news/biz/2016/10/488_216106.html

Contact


Sources:

www.krx.com

www.fsc.go.kr

www.koreatimes.co.kr

www.pulsenews.co.kr

http://src.bna.com/lgl.

42

Global Market Structure Australia


Global Market Structure Australia Newsletter Special Edition Issue 43, 2017



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ASIC proposes changes to Market Integrity Rules

Released 24th January 2017, ASIC are considering changes that will both simplify the structure of the regulatory framework and suggest some changes to the block crossing regime which would allow brokerages to risk fill a portion of the opposite side of a block, in aggregation with a client order.

5 priority areas were identified:

1. Management requirements and responsible executives. With the aim of reducing red tape, ASIC proposes to abolish several procedural requirements to enable Market Participants (“MP”) greater flexibility to carry out supervisory arrangements. ASIC proposes to update RG214 and RG 224 to provide guidance on the content of a compliant management structure. This will enable greater insight regarding participant’s supervisory, risk and compliance arrangements.

2. Dealing as principal. The obligations and prohibitions on those dealing as principal primarily deal with disclosure and management of conflicts of interest including consent requirements, prohibition on charging brokerage and commission fees to retail clients, and some restrictions on when the market participant may make bids or offers.

ASIC proposes a narrowing of the term principal by carving out market participants and related body corporate acting or trading as trustees where their beneficial interest is below 5%, or when beneficial interest was acquired in lieu of fees for administering the trust.

3. Block trades and large portfolio trades. The paper states that there is ambiguity in the current definition of block trades under Rule 4.2.1 (Competition), and also some ambiguity as to whether the participant may execute a transaction with one or more buying or selling clients on one side and the participant acting as principal on the other side. ASIC proposes to clarify the definition of a block trade in the market integrity rules so that it is the same as set out in RG 223 that states

“One side of the transaction may include a number of order from one or more clients, provided the other side of the transaction is the market participant acting as principal or as agent on behalf of one client.”

With regard to the pre-trade transparency exception for large portfolio trades, ASIC proposes to make clear that a large portfolio trade may only be executed off-order book as a crossing between

— one client and one client; or

— one client and the participant as principal

The market has expressed concerns that there is a signaling risk under the current rule 4.2.1 (Competition). The current position is that to use the pre-trade transparency waiver, you are not able to aggregate client and principal orders on the same side of an off exchange block, and the principal side of the order must qualify as a large principal transaction. If this criteria is not met, the trade must be reported immediately to the tape. ASIC proposes to select a following option for rule 4.2.1 (Competition):

— Option 1 – Amend rule to allow aggregation of client and principal orders on the same side of a block trade transaction


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Fig 1. Turnover velocity January 2017: 117% January 2016: 82% January 2015: 73%



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Fig 2. Australia’s equity market volume remained consistent through 2016, ETFs continued 2015’s growth trend in share trading volumes due to the popularity as a result of low cost, transparency, diversification abilities.

Fig 3. Chi-X’s market share in Australia inclusive of both lit and dark pool trading at ChiX has increased to ~18% as of January 2017.

Fig 4. Average trade sizes and spreads in Australia have not shrunk further as the participant types remain consistent in the market.

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Fig 5. ASX-200 Index finished the year 2016 up 7% and has dropped 0.8% in the month of January.

Fig 6. Australia trades highest percentage of day’s volume in close auction in the region, in 2016 that percentage increased to 15% of day’s volume.

5. Requires Market Operators eg ASX to maintain certain records.

ASIC has proposed consolidating 13 the 14 rule books currently in place into four rule books covering:

— ASX, Chi-X, IR Plus, NSXA and SSX securities markets, and competition between securities markets;

— ASX 24 and FEX futures markets, and competition between futures market;

— Capital requirements for ASX, Chi-X, SSX and NSXA securities markets; and

— Capital requirements for ASX 24 and FEX futures markets.

It is proposed that Market integrity rules governing APX, ASX, Chi-X, SIM VSE, and Competition be consolidated into a single rulebook. ASIC MIR (Securities markets), rules that derive from ASIC MIR (competition) are to be applied to SSX, IR Plus, and their participants.

With regard to capital requirements, ASX, ASX 24, Chi X, FEX, and SSX rules will be consolidated into 2 rule books distinguished by securities markets and futures markets.

Responses are due by 7th March. For the full consultation click herehttp://download.asic.gov.au/media/4137814/cp277-published-24-january-2017.pdf

Highlights from ASIC’s Corporate Plan 2016-2017

The Australian Securities and Investment Commission (“ASIC”) has released its corporate plan for 2016 and 2017.

The corporate plan includes the following highlights from 2016:

— AU$1.7 trillion (US$1.3 trillion) in domestic equity market capitalisation, as at July 2016.

— 6.5 million Australians own listed investments.

— AU$9.7 billion (US$7.3 billion) raised through initial public offerings (“IPOs”) and AU$33.3 billion (US$25.0 billion) through secondary raisings in 2015–16.

ASIC’s challenges and key risks are illustrated below:

Source: http://download.asic.gov.au/media/3997927/corporate-plan-2016-published-31-august-2016.pdf

The full corporate plan can be found here: http://download.asic.gov.au/media/3997927/corporate-plan-2016-published-31-august-2016.pdf

— Option 2 – Amend to allow aggregation of client and principal orders on the same side of a block trade transaction, once the block trade consideration threshold has been met by client orders on each side of a transaction.

— Option 3 – Maintain status quo whereby a participant cannot use the pre trade transparency exception for block trades if a principal and client orders are aggregated on the same side of an off order book crossing.

— In weighing options, ASIC will consider each for their potential benefits against the potential of risks to market fairness and efficiency.

Under options 1 and 2, participants can avoid signaling the market of a principal position. It additionally increases ease of conducting block trades where no exact match exists. By crossing off market, risks of adverse impacts in price volatility and higher execution costs from large orders may be reduced.

Under option 2, a participant may be prevented from pushing a trade into block trade size by combining a principal order with client orders that would not otherwise meet the block trade considering threshold. Even if market integrity rules were amended to allow aggregation of principal and client orders on the same side of a block trade transaction, a block trade of this kind would not be permitted on ASX unless ASX operating rule procedure 4810 is also amended.

4. Notifications about derivatives market contracts and whole sale client disclosure. ASIC proposes to remove class waiver relief provided in [CW 14-1091] and apply Rule 3.4.3 (1)(b) of the ASIC market integrity rules (securities Markets) to all securities markets. ASIC proposes this would ensure conflicts of interest arising from information asymmetry are appropriately managed.



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2017 Venue News

ASIC’s report on stock exchange outage

ASIC have released a report of their investigation into ASX’s trading outage which occurred on the 19th of September 2016.

During the outage, ASX experienced a hardware failure in its equities trading system, ASX Trade. The initial technology failure triggered a number of events that delayed the opening of the ASX market and caused it to close early. It also affected the operation of the Chi-X market and caused considerable uncertainty among market users, stifling trading volumes on the day.

ASIC’s recommendations for ASX can be found in table below.

Dependencies on ASX ASX to:— consider and formally map stakeholder dependencies

on ASX; and— make changes to mitigate the effect of ASX system

failures on these stakeholders.This includes dependencies on the listing function, trading session states, prices for reference products (e.g. derivatives) and closing prices. ASX to report to ASIC on its findings: see paragraphs 141–180.

Availability of a subsetof securities fortrading

ASX to review and report to ASIC on:— the circumstances appropriate for all or a subset of

securities to be available for trading or to be closed; and

— whether the open rotation process is still necessary.See paragraphs 80–84.

Business continuityand IT disasterrecovery

ASX to strengthen its business continuity management (BCM) and IT disaster recovery (ITDR) arrangements, and integrate proactive and frequent testing into its business-asusual operations. This should include system-specific recovery procedures and a central repository of key documentation: see paragraphs 113–120.

Technology statusmonitoring regime

ASX to implement more comprehensive and robust technology status monitoring, including review of its automated data integrity checking processes, and its monitoring tools and alerts of all applications, hardware, operating systems and network infrastructure: see paragraphs 125–134.

Enterprisearchitecture

ASX to enhance its key enterprise architecture artifacts to more fully describe ‘current’ and ‘target’ states for business processes, applications, data and information flows, and technology infrastructure: see paragraphs 135–137.

Communicationstrategy

ASX to review and then report to ASIC on:— its consideration of a central platform that

communicates a ‘single source of truth’ during incident management;

— whether its communications protocol considers and details the dependencies other market operators have on ASX infrastructure; and

— whether it is able to inform others of the status and condition of its infrastructure in a timely manner.

See paragraphs 97–112.

ASX’s operational riskarrangements

ASX to review and then report to ASIC on its current operational risk arrangements relevant to the outage, including the ‘four eyes’, pre-open period and cancellation policies: see paragraphs 58–91.

ASIC’s full review can be found here:http://download.asic.gov.au/media/4122347/rep509-published-21-december-2016.pdf

ASX’s outage report:http://www.asx.com.au/documents/media/asx-trade-outage-19-september-2016.pdf

ASX’s plans for 2017

The Australian Stock Exchange (“ASX”) has also released their plans for 2017, which were discussed in a presentation of the company’s full year results.

Key aspects of the exchanges 2017 plans include:

— A new futures trading platform to go live in February 2017 (further detail in next story).

— Further risk management and post-trade developments to be made in 2017.

— Developing distributed ledger technology for the post-trade equity market.

— Technology capital expenditure AU$50.2 million (US$37.7 million).

The full presentation can be found here:http://www.asx.com.au/documents/investor-relations/analyst_pres_fy16.pdf

New derivatives platform expected to go live in early 2017

According to the latest update released by ASX, their new derivatives trading platform is expected to go live early in 2017.

Per ASX published information, industry wide testing commenced on the 10th of October 2016, with the final ‘Go-Live Rehearsal’ having taken place on the 21st of January 2017.

Once implemented, the new system will reduce the time to market for new products and services, provide multicurrency capabilities and new market/risk monitoring functionality.

The latest update from ASX can be found here:http://www.asx.com.au/documents/products/asx-ntp-update-20160831.pdf


Australian market moved to T+2 settlement

The Australian share market has joined a number of major markets including Hong Kong and the United Kingdom in operating a T+2 settlement cycle.

The change was implemented on the 7th of March 2016 and according to ASX, was the culmination of an extensive two-year consultation and testing program, strongly supported by Australia’s securities industry.

According to ASX:

“Shortening the settlement period by one business day creates capital and margin savings for industry, and a faster settlement of transactions for investors. It also lowers systemic risk for the market as a whole by reducing counterparty risk for individual investors, participants and the clearing house.”

The New Zealand stock exchange transitioned to T+2 on the same date to ensure trans Tasman alignment.

Further information on the transition to T+2 can be found here:

http://www.asx.com.au/services/t2.htm

New listing rules in effect from the 19th of December 2016

During 2016 the ASX consulted on changes to its listing regime, with final amendment published in November.

The new rules sought to ensure that ASX continues to be a market of quality and integrity, and remains internationally competitive given the continuing trend in cross-border international listings.

45


The key changes for companies planning to list include:

— An increase in the requirement for consolidated profits for the 12 months prior to admission from AU$400,000 to AU$500,000 (US$301,000 to US$376,000).

— An increase in the net tangible assets test from AU$3 million to AU$4 million (US$2.3 million to US$3.1 million.

— An increase in the market capitalisation test from AU$10 million to AU$15 million (US$7.5 million to US$11.3 million).

— A new 20% minimum free float requirement.

— A single tier spread test requiring at least 300 security holders each holding at least AU$2,000 (US$1,500) of securities.

— New audited accounts requirements for assets test entities requiring the disclosure to the market of two full financial years of audited accounts for the entity seeking admission and any significant entity or business that it has acquired in the 12 months prior to applying for admission or that it proposes to acquire in connection with its listing.

— An AU$1.5 million (US$1.3 million) working capital requirement for all entities admitted under the assets test.

The amended rules can be found here: http://www.asx.com.au/documents/investor-relations/asx-listing-admission-requirements-market-response-2-11-16.pdf

Regulator warns of IPO conflicts

ASIC conducted a review in 2016 which focused on conflicts of interest between sell side research and corporate advisory activity. The review covered situations such as when a firm distributes research, while running an IPO for the same company. The review found the while most firms have policies and procedures in place to deal with these potential conflicts, cases of poor and inconsistent practice were identified.

ASIC found that “firms with key roles in IPOs generally initiate research coverage with a recommendation of ‘buy’”, and that research analysts would often be involved in marketing such transactions through the preparation and distribution of investor education and research materials.

As a result of the review, ASIC has warned investment banks to improve management of such conflicts of interests and will monitor such practices going forward.

ASIC’s full report can be found here:

http://download.asic.gov.au/media/3972833/rep486-published-9-august-2016.pdf

ASIC review shows a fall in market misconduct

In August 2016, ASIC published findings from a review of market ‘cleanliness’ which noted an overall improvement in market misconduct.

The document titled “Review of Australian equity market cleanliness” looked at possible insider trading and information leakage ahead of material, price-sensitive announcements, by analysing price movements before these announcements.

The review noted that “95% of material announcements exhibited no (or negligible) anomalous trading patterns”.

ASIC Commissioner, Ms Cathie Armour, commented that:

“We have seen a gradual improvement in market cleanliness indicators over time and across different segments of Australia’s listed equities markets. ASIC will continue to monitor market cleanliness and enhance our surveillance and enforcement capabilities against market misconduct”.

The full report can be found here:

http://download.asic.gov.au/media/3972840/rep487-published-9-august-2016.pdf

Australia sets up dedicated cyber-intelligence team

Australia’s financial intelligence agency, ‘AUSTRAC’, has set up a dedicated cyber-intelligence team to target terrorism financing activities, money laundering and financial fraud.

The AUSTRAC cyber initiative forms part of the Australian Government’s Cyber Security Strategy, announced by the Prime Minister in April 2016, in response to a governmental review of money laundering and cybercrime.

AUSTRAC released a statement in August 2016, in which they confirmed the need for a dedicated team:

“We know that the national security threat to our nation and globally is unprecedented and modern technologies are presenting new and evolving threats – none more so than from malicious cyber activity.”

The announcement is supported by Australia’s Minister for Justice, Mr Michael Keenan, who reiterated the Government’s stance on protection from cybercrime:

“Strong cyber security underpins Australia’s economy and is a major priority for the Australian Government”.

AUSTRAC’s press release can be found here:http://www.austrac.gov.au/media/media-releases/minister-justice-media-release-new-cyber-team-target-terrorism-financing-and

2016 Venue News

ASX reiterates stance on blockchain technology

As part of a presentation of the ASX’s full year results given in August 2016, the exchange reiterated its aims with regards updating its technology, stating that it wants to be a market leader in post-trade innovation and distributed ledger (‘Blockchain’) technology.

Earlier in the year, ASX increased its stake in Blythe Masters’ Digital Asset Holdings (“BMDA”) from 5% to 8.5% through exercising stock options. BMDA is the company which ASX selected to assist with updating its systems to distributed ledger technology with the aim of simplifying and speeding up post-trade processing.

ASX announced plans to gradually upgrade its infrastructure in 2015. In early 2016 it purchased a 5% stake in BMDA and announced that it had chosen the company to partner with it, in designing blockchain solutions for its venue,

The full presentation can be found here:http://www.asx.com.au/documents/investor-relations/analyst_pres_fy16.pdf

2016 Personnel News

New CEO appointed at ASX

In a press release dated the 1st of August 2016, the ASX announced that Mr. Dominic Stevens had been appointed Managing Director and Chief Executive Officer of the exchange.

Mr. Stevens joined ASX as an independent non-executive director in December 2013. He has served on the Audit and Risk Committee, and on a number of ASX’s clearing and settlement boards.

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Sources:

www.asx.com.au

www.asic.gov.au

www.austrac.gov.au

ASX’s Chairman, Mr. Rick Holliday-Smith, welcomed the appointment saying:

“Dom’s long involvement in financial markets, his experience as a CEO and his time as a director means the ASX Board is delighted and confident in making this appointment. He is popular and highly-regarded by ASX’s Board, staff and major stakeholders. Dom is ideally qualified to lead the company and build on ASX’s achievements.”

Mr. Steven’s appointment was effective from the date of the press release.

Sources:http://www.asx.com.au/documents/asx-news/ASX_appoints_Dominic_Stevens_as_Managing_Director_and_CEO.pdf

Greg Medcraft stepped down from IOSCO, remains chair of ASIC

ASIC Chairman Mr. Greg Medcraft did not seek to extend his existing term as Chairman of the board of the International Organisation of Securities Commissions (“IOSCO”) in 2016.

Mr. Medcraft was Chairman of the IOSCO board for three years. According to an ASIC press release, Mr. Medcraft has decided not to seek a third term, in line with his belief that the IOSCO Chairman should serve no more than two terms in the interests of refreshing the organisation.

Mr. Medcraft has remained actively involved in Australian capital markets, with his term as chairman of ASIC having been extended by the government by 18 months.

47

Global Market Structure Thailand


Global Market Structure Thailand Newsletter Issue 40, 2015


A royal transition

2017 will be ‘year one’ for Thailand’s new King, following the seventy year reign of his late father.

In December 2016 Crown Prince Maha Vajiralongkorn, succeeded his father King Bhumibol Adulyadej, who died four months prior.

King Bhumibol, was reported to have been a pillar of stability during decades of political turbulence and rapid development in the Southeast Asian nation.

“The king has helped add some legitimacy to the current military government,” said Capital Economics. “Without him, there are a number of times over the past decade where the country could have been plunged into civil war.”

While he had been unwell for a number of years, media speculated that his death could result in a period of political instability and slowdown of the economy.

Bloomberg reported that one immediate reaction to the late King’s death was foreigners selling Thailand stocks with net sales of US$514 million occurring the month that the late King died.

As is customary following the death of a Thai monarch the country will observe a year long period of mourning which may restrain economic expansion.

According to Bloomberg, the Thai government has confirmed that they will act to support the economy if slowdowns are seen as a result of the royal transition.

Bank of Thailand considering FinTech regulation

With continued growth of FinTech across Asia, the Bank of Thailand (“BOT”) is working to build FinTech specific regulations to prevent systemic risk and to protect customers.

Governor of the BOT, Mr Veerathai Santiprabhob has stated that “the businesses using FinTech need to be regulated”, while at the same time acknowledging that new rules should not be too stringent or impede innovation.

As a first step, the BOT will require that all FinTech operators be registered. Pending implementation of the new regulations, the BOT has issued several warnings regarding use of foreign FinTech, in an attempt to protect local users from unlicensed international operators.

Following on from this, the BOT announced in September 2016 that it will provide a ‘sandbox’ environment where FinTech companies can test their innovations in safety sometime in Q1 2017.



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Thailand

Fig 1. Thailand Futures Exchange’s 2016 derivatives trading volume reached an average of 285,189 contracts per day, a 43% increase from a year earlier, underpinned by the increasing transactions of stock futures and SET50 index futures according to local media.

Fig 2. SET 50 index, with a formal closing auction mechanism trades 10% of day’s volume in the closing session. 2016 saw an increase in trading volume in the opening hours of the day as well which could be due to an increase in volumes from overseas regions.

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2017 Venue News

SET strategic plan for 2017

On the 23rd of November 2016, the Stock Exchange of Thailand (“SET”) announced its strategic plan for 2017, with a vision “to make the capital market work for everyone” in conjunction with the government’s objectives for economic development, dubbed Thailand 4.0.

The SET’s 2017 targets include increasing market capitalisation by THB 550 billion (US$15.56 billion), with THB 280 billion (US$7.9 billion) coming from new listings and THB 270 billion (US$7.6 billion) expected from capital increases from existing listings.

SET plans a three pronged approach to achieve these targets:

1. Expansion of fundraising opportunities through:

— Attracting new listings within specific industries (such as food and energy, state-enterprises’ infrastructure, etc).

— Enhancing the quality of listed companies by encouraging them to adopt the environment, social, and governance principles.

— Increasing international recognition for listed firms through roadshows.

— Launching a start-up specific trading platform in Q3/2017.

2. Enhancing use of the stock market, through:

— Creating a long-term investor base, in keeping with an aging society.

— Educating Thai people to diversify investments and encouraging employers to provide employee’s choice schemes for provident funds.

— Launching “FundConnext”- a technology-enabled fund service platform enabling investors to access mutual funds efficiently (expected in March 2017).

3. Through developing capital market infrastructure and standardise operational practices:

— Use of open architecture and cyber security in line with international standards.

— Standardising the clearing and settlement securities process, in preparation for preparing for reducing the settlement cycle to T + 2

The full strategic plan document can be found here: http://www.set.or.th/set/newsdetails.do?newsId=14798582238380&language=en&country=US

Reform of SET considered

Discussions are underway between capital markets organisations, the Securities and Exchange Commission (“SEC”) and the government, to agree the best way to reform the SET in order to clarify its ownership structure and increase competitiveness.

Options under consideration include, changing the board structure or introducing shareholders.

Of the first option, Secretary General of the SEC, Rapee Sucharitakul, has said:

“There is no change in the way the board operates. The amendment is only to make clear, by law, how the board is appointed and the ratio between public directors and directors named by brokers,”

The proposals, in the form of draft bills are pending Fiscal Policy Office consideration. If the Finance Ministry approves either of these bills, they will go before the cabinet before forwarding to the National Legislative Assembly for deliberation.


New law with civil penalty for market manipulation takes effect

Civil penalties for market manipulation came into effect in Thailand in December 2016.

The penalties include monetary fines for damages, the return of ill gotten gains and a ten year ban from trading. The offences which carry the potential for civil penalty are those affecting credibility and transparency of the capital markets, false disclosures or information concealment, failure to perform fiduciary duty, and the use of nominees in market misconduct.

Through introducing a civil penalty option, the SEC seeks to further deter market manipulation through being able to take action faster than was previously available via criminal sanctions.

Foreign direct investment in 2016

The latest figures released for H1 2016, show that ‘foreign direct investment’ (“FDI”) in Thailand has fallen to levels not seen since 2005.

FDI fell 90% in the first half of 2016. According to a report released by the BOT, total FDI for the period was US$347 million, whereas for the same period in 2015, FDI was US$4.2 billion. The report attributed the fall in FDI to the lackluster global economy, political uncertainty and the structure of Thai industry, which continues to produce low-technology products as wages rise.

Addition to external global factors, the Governor of the BOT, Mr Veerathai Santiprabhob, noted that the fall was partly due to the actions of one foreign company, who withdrew their equity investment in Thailand. He noted that if the net FDI figure excluded the outflow of this equity, the drop would not have been as large as 90%.

“The significant dip in FDI was partly due to the Big C deal worth about US$3.5 billion in which foreign investors sold their equity to Thai investors and repatriated those funds,” he said.

According to the Thailand Board of Investments, the biggest foreign investors in Thailand come from Hong Kong, with THB 23.2 billion (US$0.67 billion), followed by Japan at THB 19.27 billion (US$0.56 billion) and the Netherlands at THB 10.95 billion (US$0.32 billion).

2016 Venue News

Record high for dividend payments

Figures released by the SET confirm that dividend payouts have reached an all time high for firms listed on the SET and Market Alternative Investment (“MAI”). From 1st January to 11 March 2016, SET & MAI listed companies paid THB 381.65 billion (approx US$10.90 billion) to their shareholders representing a payout ratio of approximately 60%.

The 406 companies paying dividends included 328 SET-listed firms with dividends of THB 376.68 billion and 78 MAI-listed firms with dividends worth THB 4.96 billion.

SET Senior Executive Vice President Santi Kiranand said

“Thai listed firms have paid a record high dividend as their performances recovered with support from solid fundamentals, strong cash flows and liquidity management, enabling companies to maintain growth amid business environment uncertainties”.

For full details click here: http://www.set.or.th/set/newsdetails.do?newsId=14581657076330&language=en&country=US

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Contact


Sources:www.bloomberg.com

www.newsbtc.com

www.mondovisione.com

www.bangkokpost.com

www.globalcapital.com

www.finextra.com

www.nationmultimedia.com

SET first in ASEAN markets for 2016 H1 returns and liquidity

The SET has announced that they have topped ASEAN markets for the first half of 2016, in terms of both return and liquidity.

The exchange has maintained its position as the most liquid market in the region, held since 2012, with average daily trading value of THB 46.67 billion (US$1.33 billion). Combined market capitalisation rose by 12% to THB 14.1 trillion (US$400.57 billion) and the SET Index also rose by 12% to 1,444.99 points.

According to the SET, figures from the second half of 2016 will show an increased number of new listings and introduction of the new ‘sSET Index’ which replicates price movement of mid and small common stocks.

SET hosts 10th annual “Thailand Focus 2016” event

112 foreign institutional investors, managing assets worth US$370 billion, joined the three day ‘Thailand Focus 2016’ event which ran from the 31st of August until the 2nd of September 2016.

The event was designed to promote growth under the theme “A New Growth Strategy,” and allowed foreign funds to meet directly with almost listed firms.

SET President Kesara Manchusree, has described the event, saying that:

“Statistics showed that the two-thirds of listed firms who frequently participated in the event have had higher foreign trading values. Thailand Focus aims to showcase to global investors the Thai capital market’s growth potential and strong fundamentals of Thai listed companies’ various businesses as well as our sector diversification such as healthcare, alternative energy and logistics. In addition, the event can also enhance investor relations’ function, which will continuously help promote the company’s values in the long run”.

2016 Personnel News

New governor for the SET

The SET has announced the appointment of Prinn Panitchpakdi as the newest member of its board of governors.

Mr. Panitchpakdi is well known in the Thai finance sector, having appeared on both local and international news media in his role as Thailand Country Head of CLSA Securities.

Mr. Panitchpakdi joins Professor Kitipong Urapeepatanapong (Chairman, Baker & McKenzie) and Pichet Sithi-Amnuai (President, Bualuang Securities) who were both re-elected for the second term. The appointment was made the annual general meeting on 21st April, 2016 and is effective 28th May 2016 – 27 May 2018.

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Global Market Structure Si ngapore


Global Market Structure Singapore Newsletter Special Edition Issue 43, 2017



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MAS consultation on short sell order flagging and disclosures

2017 will likely see changes to short selling rules in Singapore, specifically the requirement to flag short sell orders and in the area of short sell disclosures.

The Monetary Authority of Singapore (“MAS”) launched a short selling consultation paper on the 15th of December 2016. Through this consultation, the MAS note that they are looking to bring Singapore’s short selling rules into line with international guidelines. Another driver for the change, as reported by local media, is the recent activity of short-sell research firms (i.e. Muddy Waters LLC) in Singapore.

The consultation seeks to introduce:

— Flagging of short sells (and therefore also a requirement to split orders if a portion is short).

— Reporting short sells equivalent to or more than, 0.05% of eligible shares or S$1,000,000 (US$700,000) in aggregate value. Reporting would be required by T+2.

— Reporting at legal entity level, or trading desk level (but must be consistent).

— Publication of aggregate short sell data by exchanges on a daily basis.

— Exemption for designated market makers.

The consultation closed on the 27th of January 2017 and once the new requirements are confirmed, it’s expected that the market will have four months to implement the new rules.

The consultation can be found here: http://www.mas.gov.sg/News-and-Publications/Consultation-Paper/2016/Consultation-Paper-on-Short-Selling.aspx

MAS eager to establish Singapore as a FinTech financial centre

MAS Managing Director, Mr. Ravi Menon believes that technology will fundamentally transform the financial industry and is actively promoting FinTech, through establishing an annual FinTech festival in Singapore and setting up a FinTech panel to advise the MAS.

In partnership with the Association of Banks in Singapore, MAS hosted the inaugural Singapore FinTech Festival in November 2016. The weeklong festival was the first of its kind in Asia, targeting startups, investors, financial institutions, local ecosystem partners and government agencies.

The Festival showcased solutions submitted by international teams to specific challenges solicited from the financial industry, with awards given for innovation.

Alongside the FinTech Festival, the MAS have established the International Technology Advisory Panel (“ITAP”) to review new technologies. The ITAP is comprised of Innovation and Science officers from major financial institutions, FinTech business leaders, venture capitalists and thought leaders in technology and innovation. To date,

it has discussed topics such as Blockchain, new business models and the importance of a regulatory regime to facilitate innovation while maintaining trust and confidence.

2017 Venue News

SGX consults public on dual class share structure

Following the 2016 amendment of the Company Act which enables a multiple votes (“MV”) share structure, Singapore Exchange has launched a public consultation regarding the potential introduction of listing under a Dual Class Share (“DCS”) structure, where certain shares possess greater voting rights. In particular, the exchange holds interest in consideration of appropriated safeguards where a DCS structure is introduced.

A DCS structure has potential to enable entrepreneurs increased flexibility in capital management, as well as provide greater investor choice.

It is of note that the Hong Kong SFC has ruled out such a structure as they feel it goes against the one share one vote principle, a position that lost them the listing of Alibaba to the US.

Fig 1. Average daily turnover in equities market at SGX averaged at US$761Mn for the year. In order to attract more listings SGX is considering a dual-class share listing framework that could make SGX a more attractive destination for tech firms that prefer to have more business control according to local media.

Fig 2. Opening auction in Singapore trades 3% of day’s volume while the closing auction trades nearly 7% of full day’s volume.

Singapore

51

Global Market Structure Singapore


As the structure increases in popularity for listing of tech companies, the exchange holds interest in evaluating the merits against the risks of entrenchment and expropriation of the controlling shareholder. As such the exchange also proposes safeguards to eliminate these risks including:

— Requiring an admission criteria over and above current mainboard prerequisites such as a minimum market capitalisation of S$500 million.

— Prohibiting the issuance of MV shares by already listed companies.

— Introducing a sunset clause where MV shares are converted to one vote (OV) shares after a certain time, or subject to OV shareholders.

— Subjecting the appointment of independent directors to a vote where MV shares and OV shares possess equal treatment.

The consultation will be open until 17th April and can be read here:http://www.sgx.com/wps/wcm/connect/sgx_en/home/regulation_v2/consultations_and_publications/PC/Consultation+Paper+on+Possible+Listing+Framework+for+Dual+Class+Share+Structures

Potential for introduction of dual class shares

Singapore’s Companies Act was amended in 2016 to allow for dual-class share corporate structure and the Singapore Stock Exchange (“SGX”) listing committee has since granted approval for such companies to be listed on SGX.

Dual-class shares carry different voting rights for different classes of shares. Typically, dual-class shares allow minority shareholders to retain voting control over decisions of the issuer’s business.

Introduction of dual-class listing could make the SGX more attractive as a listing location. Companies wishing to have more than one type of share can currently list in the United States but not in Asian markets such as Hong Kong, who has previously considered but do not currently allow, dual-class listing.

Dual-class listings could come with specific criteria or more stringent reporting requirements however this level of detail has not yet been released.

As recently as January 2017, local media has reported that SGX is close to publishing their specific proposals on dual class shares and seeking investor feedback.

SGX system issues

Trading on the SGX was suspended at 11:38am on Thursday the 14th of July 2016, following an issue with the generation of trade confirmations. SGX was unable to restore trading and the exchange remained closed throughout the day. SGX opened as normal the following day.

The outage has been attributed to hardware failure and longer than expected turnaround in reconciliation processes.

MAS has asked that the exchange undertake a review, stating that SGX:

“has a responsibility to ensure that its system and recovery processes are robust [...]We have instructed SGX to address the root cause of the problem, and to submit a thorough investigation report to MAS. MAS will review the investigation findings before deciding on the appropriate supervisory actions.”

A further derivative specific trading issue occurred in December 2016, when the open of trading was delayed by more than two hours for some derivative contracts, including Nikkei 225 index futures.

This was the fifth major interruption to trading on the SGX in recent years with the MAS previously reprimanding SGX for outages in 2014 and 2015.

SGX to transfer regulatory functions to subsidiary

Mid 2016, SGX and MAS announced the creation of an independent subsidiary of SGX with a separate board of directors.

Creation of the subsidiary would allow separation of the regulatory function from the commercial operation of SGX, to help avoid the potential for conflicts of interest between regulatory governance and commercial decisions.

“The decision to house our entire Regulation unit in a separate subsidiary with its own governance structure was made after a long and careful deliberation. The new arrangement and the October 2015 introduction of the independent Listings Committees demonstrate our commitment to do all that we can within the SRO framework to address potential conflicts between our commercial objectives and our regulatory responsibilities. This will further enhance the robustness of our SRO framework,” said Loh Boon Chye, CEO of SGX.

The announcement was made on the 18th of July 2016, however an effective date for transfer of responsibility is yet to be released.

The MAS press release can be found here: http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/Separate-Subsidiary-Will-Strengthen-Governance-of-SGX-Regulatory-Functions.aspx

The SGX press release can be found here: http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/SGX_to_transfer_Regulation_unit_to_subsidiary_company_with_separate_Board


2016 saw an increased focus on prevention of market abuse and money laundering

The MAS stepped up its efforts to penalise wrong doers in 2016, with its annual report stating:

“Upholding high standards of integrity in the financial industry is an absolute priority for MAS. There can be no compromise on this. This means having an effective regime against financial misconduct and misdemeanors, and money laundering and terrorism financing.”

To enhance its investigative powers, the MAS joined forces with the police’s ‘White Collar Crime’ unit. The first joint operation concluded in July 2016, with twenty-three counts of market abuse, including spoofing, laid against an investor. Prior to this, the MAS charged two men for insider trading in May and raided a number of local brokerages in April.

Alongside strengthening focus on market abuse investigations, the MAS are also investing in anti-money laundering detection. From August 2016, the MAS operated a specialised anti money laundering focused unit and a new team in charge of implementing enforcement activities.

MAS Managing Director, Ravi Menon said:

“As our financial centre grows in scale, sophistication and connectivity, so does the risk of criminal elements abusing our financial system”, adding that the “MAS is resolved to ensure that Singapore remains a clean and trusted financial centre.”

Singapore-based firms granted access to CBOE Futures Exchange

On the 17th of August 2016, MAS granted approval to allow Singapore-based firms to trade on the Chicago Board Options Exchange (“CBOE”).

With this approval, CBOE became a Registered Market Operator in Singapore, thus enabling professional investors, accredited investors

52


and expert investors, as defined under Singaporean law, to access CBOE’s market directly.

Under this arrangement, CBOE Volatility Index (VIX) futures will be available for Singaporean investors to trade in non-US trading hours.

“Singapore is the gateway to the Asian investment community, and the country has worked to establish itself as a key futures trading hub. Expanding customer outreach in the region and providing Asian customers with new opportunities to trade our products is a top priority for CFE and CBOE,” said Mr. Andy Lowenthal, Senior Vice President, Business Development, CBOE.

SGX decreases in size, despite higher IPOs

2016 saw a higher number of initial public offerings on SGX compared to 2015 however funds raised did not exceed the amount by which the market shrank.

SGX hosted 16 IPOs in 2016, five on the mainboard and eleven on Catalist, raising S$2.3 billion (US$1.61 billion) in total.

According to local media, the total value of delistings exceeded the total monies raised through new floats and privatisations.

While no figures for 2017 expected IPOs have been published, analysts have been quoted in the media as seeing a “continued pipeline” of both foreign and local entities looking to list in Singapore.

2016 Venue News

SGX revises minimum price rule

When SGX introduced a minimum trading price (“MTP”) threshold of S$0.20 in March 2015, listed companies were given one year to comply. SGX subsequently pushed out the compliance period for another six months, bringing the deadline for compliance to September 2016.

As a result of market conditions or otherwise, firms continued to slip under S$0.20 and the total number of firms on the MTP watch list has grown rather than reduced. Figures published by SGX in to the end of December 2016 show that 54 listed companies were valued under S$0.20.

As a result, MAS has decided to add a market capitalisation test to the MTP threshold. Firms with MTP under the threshold but with a six-month average daily market capitalisation above S$40 million (US$28.1 million) will not be placed on the watch list. SGX will review this data every six months going forward.

SGX encourages firms to increase disclosures

SGX has instructed listed firms to ensure that they make timely and detailed disclosures, specifically where information may be considered borderline in terms of materiality.

“The cardinal rule is - when in doubt, disclose,” said Mr. Tan Boon Gin, Chief Regulatory Officer of the SGX, in a speech given on the 16th of August 2016.

Mr Tan went on to say that market conditions can contribute to whether or not information could be deemed material and therefore need to be disclosed:

“When the industry is humming along, the macro-economic environment is stable, and there is no real volatility in your business, what might be considered material could be quite different from information investors might need when your industry is going through extreme volatility or a protracted down-cycle, such that the financial position of your company is at risk of deteriorating quickly.”

According to an SGX press release, SGX listed companies have been independently reviewed on the quality of their disclosures. The findings were considered by SGX to be satisfactory, but the Exchange notes that there is room for improvement.

“Good scores notwithstanding, there must be an urgency in this pursuit of better standards and compliance.” said Mr Tan.

The exchange’s actions follow an SGX investigation into Swiber Holdings, a company which surprised the market by putting itself into judicial management without making any prior disclosures to indicate financial distress.

Mr. Tan Boon Gin’s full speech can be found here: http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/speeches/state-of-corporate-governance-disclosures

Increased transparency for long-suspended stocks

On the 12th of May 2016, SGX issued a press release announcing the introduction of a half-yearly update on the status of listed companies who have been suspended for more than 12 months.

According the exchange, the report is designed to aid transparency of developments within these companies, particularly if they have not made company disclosures in some time.

The latest such report to be released, with information as at the 31st of October 2016, covered twenty-three companies, noting that:

— 10 companies are exploring trading resumption/ reverse takeover.

— (PT Berlian, Sinopipe, Eratat, Fung Choi, Fujian Zhenyun, JES, Changjiang Fertilizer, Golden Energy, CNA, REA)

— 4 companies are pursuing court action / investigating into past affairs. (Celestial, Anwell, DMX, China Essence)

— 6 companies are in the delisting process. (China Hongxing, Sino Techfibre, Sunmart, Lankom, Qingmei, China Hongcheng)

— 3 companies are yet to respons to exchange’s queries. (Fibrechem, China Sun, China Paper)

The latest report on long-suspended companies (released on the 9th of November 2016) can be found here: http://www.sgx.com/wps/wcm/connect/53dbfdb7-dd05-4275-905d-d70d397df639/Report+on+Long+Suspended+Companies_%2812+May+2016%29.pdf?MOD=AJPERES

SGX purchases the Baltic Exchange

SGX has completed its takeover of London’s privately-owned Baltic Exchange, completing an £87 million (US$108 million) deal for one of London’s oldest institutions.

After months of talks, SGX offered shareholders £160.41 per share (US$194.4) with shareholders also receiving £19.30 per share (US$23.4) as a final dividend.

The agreement came with various conditions, such as retaining the current location for the Baltic Exchange’s headquarters, maintaining existing member fees for the next five years, continuing to provide a range of member services, etc.

The acquisition was unanimously approved by the Baltic Exchange board and will give SGX access to a trading platform for the freight derivatives market.

The sale was completed in November 2016.

53


Sources:

www.sgx.com

www.mas.gov.sg

www.complinet.com

www.reuters.com

www.businesstimes.com

www.bloomberg.com

www.legalbusinessonline.com

Contact


2016 Personnel News

New Chairman for SGX

On the 30th of August 2016, SGX announced that Mr. Kwa Chong Seng will succeed the retiring Mr. Chew Choon Seng, as Chairman of the SGX Board.

The newly elected Mr. Kwa joined the board in September 2012 and was appointed Lead Independent Director in December 2013. He has also been the Chairman of both the Nominating & Governance, and the Remuneration & Staff Development, committees.

Tan Boon Gin to run SGX regulatory subsidiary

As part of its listing effort, SGX announced in July 2016 that it would transfer its regulatory functions to a new subsidiary. SGX’s Chief Regulatory Officer, Mr. Tan Boon Gin, was subsequently appointed as its CEO.

Mr. Tan was appointed SGX Chief Regulatory Officer in February 2015, having previously held the position of Director of the Commercial Affairs Department. Mr. Tan He is a qualified solicitor who holds degrees from the University of Cambridge and Harvard Law School.

54

Global Market Structure Philippines


Global Market Structure Philippines Newsletter Special Edition Issue 43, 2017


Draft reforms include increase in stock transfer tax

The President Duterte’s administration announced its draft tax reform package in late August 2016.

The package is split into four sections:

1. Personal income tax

2. Consumption tax

3. Corporate tax

4. Property tax

Under the heading of ‘property tax’ the government is proposing increasing the tax on stock transfers from 0.5% to 1%, of gross sale price.

The change to stock transfer tax is one of multiple changes proposed in the wide sweeping reforms.

The proposed reforms must receive governmental approval before they can be implemented. This process is ongoing and timeline for implem entation yet to be established.

Structured warrants to become tradable in the Philippines

The Philippines Securities and Exchange Commission (“SEC”) has released a draft framework that will allow structured warrants to be traded in the Philippines.

On the 16th of January 2017, the SEC launched a public consultation on the draft rules governing the way in which structured warrants would be listed and traded.

Key aspects of the draft rules note that:

— Structured warrants may be issued by registered investment houses, brokers and dealers with a minimum paid-up capital of P500 million (US$10 million).

— Issuers must comply with SEC requirements on risk management, sales and marketing and dealing with conflicts.

— Issuers are required to appoint a ‘warrant registrar’ to maintain accurate books for the recording of transfers of the structured warrants.

— A prospectus must be submitted to the SEC prior to issuance.

The consultation period runs until the 10th of February 2017.

The consultation paper can be found here: http://www.sec.gov.ph/wp-content/uploads/2017/01/2017Notice_RequestforCommentsOnTheProposedRules.pdf

Government plans to lift administrative limits on foreign investments in 2017

Media reports in November 2016 indicated that the government plans to lift ‘administrative restrictions’ on foreign equity investments in 2017, in an effort to encourage further foreign investment.

Comments from the Finance Secretary state that the changes would be effected through amendments to the ‘Foreign Investment Negative List’. This document lists industries in which foreign investment is restricted, such as utilities (which are restricted to 40% foreign ownership) and media (zero foreign ownership).

Review of the list is expected to be undertaken in May 2017.

Elimination of the minimum fund purchase threshold

To encourage growth in the retail fund space, the SEC has announced plans to remove the minimum investment requirement for mutual funds, currently set at Ps 5,000 (US$100).

Removing the minimum threshold will provide fund management companies with freedom to decided on the minimum investment amount.

Ms. Rachel Esther Remalante, Associate Director of the Corporate Governance and Finance Department at the SEC, stated that:

“The proposed change was introduced in order to encourage more retail investors to invest and expand financial inclusion in the country”.

Local media report that the proposed changes have been welcomed by the fund industry with managers saying that the change makes investment much more achievable for retail participants.

The draft SEC notice can be found here: http://www.sec.gov.ph/wp-content/uploads/2016/10/Draft2016-ICA-Rules_20Oct2016_for-exposure_v1.01.pdf



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Fig 1. Equities turnover in Philippines dropped through the course of the year, as global events impacted the market volumes, US interest rate hikes and presidential elections

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2017 Venue News

PSE to implement a new front-end trading system in May 2017

The Philippines Stock Exchange (“PSE”) issued a memorandum in January 2017, announcing plans to replace its current trading terminal, ‘PSEtradex Expert’, with a new front-end solution provided by Flexitrade Systems, Inc. Flexitrade is an American Information Technology company which provides execution management trading system in Asia Pacific, Europe & the U.S.

This initiative forms part of the PSE’s remediation project, put in place following trade disruptions in August 2015. Investigation into the disruptions found issue with the transmission of market data to the PSE front-end trading terminals, hence a new system was deemed necessary.

Target implementation date is May 2017.

PSE looking to merge equities and bonds exchange

PSE Chief Executive Officer, Mr. Hans B. Sicat confirmed during a press conference in August 2016, that merger plans for the equities and bonds exchanges have been revived.

The PSE currently owns 20.98% of the bond exchange ‘Philippine Dealing System Holdings’ (“PDS”) and has long sought full integration to put it on par with other exchanges in Southeast Asia.

With the backing of the government, the PSE commenced negotiations to buy out other shareholders of PDS in early 2013. However, it was not able to obtain the necessary approvals from the SEC and the takeover failed.

“We restarted talks with the regulator. What we want to be sure of is if indeed they are amendable to the concept of an integrated exchange,” Mr. Sicat said.

Mr. Sicat also noted that the PSE had discussed the matter with the Finance Secretary and other Finance Department officials, stating that they are “not at all negative about the combination”.

In addition to the SEC and the government, the merger proposal would also need approval from the newly formed Philippine Competition Commission.

PSE’s ‘plan B’ to set up its own depository unit

As noted above, the PSE has been looking to merge with the PDS since 2013. The merger requires multiple levels of government approval which are still pending. Should the necessary approvals not eventuate, the PSE’s backup plan is to set up its own depository unit.

“We’ve always said that was a backup solution in case the regulator did not approve the one integrated model,” PSE CEO Mr. Hans B. Sicat told reporters in November 2016.

Mr. Sicat went on to say that:

“We trade one-seventh the level of Thailand. Does it require two exchange operators? The answer is probably not. That’s exactly the reason why we looked at this from the start and we always said in case we are denied then we will move forth with the backup solution.”


Dollar denominated securities approved

In November 2016, SEC chairperson Ms. Teresita Herbosa confirmed the proposal for trading of US dollar denominated shares on the PSE.

Following this approval, the PSE has issued rules providing a framework for listing, trading, clearing and settlement.

PSE president Mr. Hans Sicat, commented that:

“With the newly-approved dollar denominated securities rules duly signed by the Securities and Exchange Commission, our goal is to provide a new investment product that both our issuers and investors can leverage to address their expanding requirements.”

The new products will enable companies to list US dollar denominated shares in addition to their peso common shares and are expected to be available in early 2017.

PSE trading rules can be found here: http://www.pse.com.ph/stockMarket/tradingParticipantRules.html?tab=0

Minimum public float requirement increased for new IPOs

New minimum requirements for public float came into effect in August 2016. Under the new rules, a minimum 15% public float is required for companies issuing an initial public offering (“IPO”).

Companies listed prior to August 2016 were required to have a minimum public float of 10%. According to the PSE, consideration is currently being given to mandating a 15% public float requirement for these firms as well.

The increase is part of the SEC’s phased plan to increase the minimum public float requirement by 5% each year until their target of 25% is met, which according to the SEC will bring the local market into line with other Asean countries.

Implementation of this plan was put on hold due to market volatility seen in 2015 but has since resumed.

Reprieve in liquidity requirements for mutual fund index trackers in 2016

Mutual fund index trackers have been granted an exemption from complying with the SEC’s rule requiring open ended funds to invest at least 5% of their assets in liquid/semi liquid securities, such as government securities or bonds.

A circular explaining the change was published on the SEC’s website on the 28th of June 2016, noting that:

“A Mutual Fund Index Tracker may be exempted from complying with the 5% liquidity requirement provided that it submits a notarised contingency plan signed by the President of the Fund and its Fund Manager. The plan must include a statement that:

“In making any redemption to meet a client obligation, the Fund Manager will exercise the requisite prudence and diligence necessary under the circumstances and taking into account all relevant factors that will ensure market stability”.

The exemption came info effect mid July 2016. Further information can be found in the SEC circular:http://www.sec.gov.ph/wp-content/uploads/2016/06/2016_memo_circular_no.08.pdf

Foreign Portfolio Investments yield net inflows for 2016

Foreign Portfolio Investment (“FPI”) transactions for 2016 yielded net inflows of US$354 million.

It has been reported that the inflow was largely due to:

— An initial public offering by an industrial company.

— Investments in shares of two holding companies and a universal bank.

— Renewed interest in Peso government securities.

56


Sources:

www.sec.gov.ph

www.mb.com.ph

www.thestandard.com.ph

Contact


These figures contrasted the net outflow of US$600 million for 2015, which at the time was attributed to growing concerns about the then impending interest rate adjustment in the U.S. and profit taking.

2016’s inflows totaled US$17.6 billion (11.8% lower than 2015) and outflows totaled US$17.2 billion (16.1% lower than 2015).

2016 Venue News

PSE publishes PPP rules

The PSE published rules for Public-Private Partnerships (“PPP”) in December 2016.

Under a PPP, private investors have the opportunity to fund public authority projects. To facilitate PPP in the Philippines, the PSE has established a set of listing and disclosure rules which allow equity market investors to invest in public infrastructure projects through the PSE.

PSE CEO Mr. Hans Sicat, commented that:

“We are excited about this new product especially as the government has committed to accelerate infrastructure spending”.

Investment in infrastructure is reportedly a key aspect of the presidential administrations economic agenda and this will provide opportunities for PPP investment in the likes of public highways, airports, power plants and other important infrastructure.

PSE named best South East Asia stock exchange for 2016

For the third time in four years, the PSE was voted best in South East Asia, according to institutional investment magazine Alpha Southeast Asia.

PSE CEO Mr. Hans Sicat, acknowledged the award in a press statement:

“We are pleased that Alpha Southeast Asia and the issuers and investors they surveyed for this award value the efforts of the PSE. We were cited for introducing more products and services for the issuers and the investing public and highlighting corporate governance in our role as regulator”.

57

Global Market Structure Indonesia


Global Market Structure Indonesia Newsletter Special Edition Issue 43, 2017


Regulators looking to reinvigorate money market derivative trading

Bank Indonesia, the Financial Services Authority (“OJK”) and the Finance Ministry are working on regulations to boost money market derivative trading, specifically promissory notes, according to press reports in August 2016.

Derivatives such as promissory notes have not been actively traded in Indonesia since the Asian financial crisis in 1997-8. Current regulations allow for trading of these instruments but may not provide sufficient comfort against default risk, which regulators are now looking to address through amended regulation.

Authorities are now finalising regulations to ensure that interbank promissory notes would be based on either loans with underlying collateral or trade transactions, which would reduce default risks.

A time frame for release of the new regulations has not yet been published.

Indonesia to set up FinTech ‘sandbox’

Following in the footsteps of other Asian markets, Indonesia is setting up a designated testing service (‘sandbox’) for Financial Technology (“FinTech”) startups.

According to media reports of September 2016, the testing service will be overseen by the Bank of Indonesia, who has established a dedicated office to monitor the sandbox.

Simultaneously, Indonesia’s OJK is creating guidelines which FinTech firms will be required to adhere to. The proposed guidelines prioritise consumer protection and seek to integrate the application of technology across banks, non-bank financial institution and capital markets and will cover major financial institutions and stand-alone FinTech companies.

2017 Venue News

IDX considering removing stock price threshold

The IDX’s director for transaction monitoring and member compliance Mr. Hamdi Hassyarbaini told media in October 2016 that IDX is considering removing the rule which limits price moves for low value shares.

Under the current framework:

— shares worth Rp50-Rp200 (US$0.0037 - $0.015) per unit may rise up to 35%;

— shares worth Rp200-Rp5,000 (US$0.015 - $0.37) per unit may rise 25%; and

— shares worth more than Rp5,000 (US$0.37) may rise 20%.

Alongside revocation of the rule, IDX plans to create a dedicated ‘penny stock’ board for trading low priced stocks.


Fig 1: Equities(Cash) and Futures Monthly ADV

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Prior to implementing the change, IDX are required to obtain approval from the OJK, which is still pending.

IDX and Bursa Malaysia plan Sharia stock trading link

According to information published by Bloomberg in September 2016, the Indonesia Stock Exchange (“IDX”) and Bursa Malaysia plan to cross list Sharia compliant securities, as early as mid-2017.

The link comes as a natural alliance between Indonesia who has the largest Muslim population in the world and Malaysia who has been a front runner in Sharia finance with 669 stocks, or 74% percent of the total shares listed on Bursa Malaysia, compliant with Sharia trading principles.

Islamic finance is a US$2 trillion industry with the MSCI World Islamic Index having a market capitalisation of US$11.7 trillion.

A Memorandum of Understanding supporting the initiative was signed by the two countries in August 2016.

IDX looking to further relax margin trading

A senior OJK official has confirmed that the number of stocks available for margin trading on IDX will shortly expand from 57 to 179.

Brokers with net capital above 250 billion rupiah (US$18.72 million) will be allowed to conduct margin trading in all 179 available stocks, while those with capital below this level would only be allowed to conduct margin trading for 45 of the available stocks.

Following the change, IDX expects to see increased transaction volume of approximately 30%, according to IDX Chief Executive Mr. Tito Sulistio.

IDX is expected to issue new regulations in February 2017 to facilitate this change.


Response to first phase of tax amnesty

The Indonesian government established a tax amnesty program last year (launched on the 28th of June 2016) designed to encourage tax evaders to repatriate their funds into Indonesia through application of a reduced tax rate for these funds.

Fig 1. Indonesia’s benchmark index rose 15.3% in 2016, which was second-best performance in Southeast Asia after Thailand’s SET index, according to Indonesia stock exchange.

58


The program, which runs up to the 31st of March 2017, is divided in three phases with the most attractive tax tariffs offered in phase one.

At the conclusion of phase one on the 30th of September 2016, the Indonesian government had collected IDR 97.2 trillion (US$7.5 billion), or 58.9% of the nine-month program’s full target (IDR 165 trillion).

The recovered funds are expected to bolster the financial markets as the scheme requires that repatriated funds stay within Indonesia for at least three years, with investment in the financial market an approved holding option.

2016 Venue News

IDX chasing 28 companies to comply with minimum 7.5% free float rules

Minimum free float and shareholder requirements were announced by IDX in early 2014. Under these rules, listed companies must maintain a minimum free float of 7.5% (at least 50 million shares) and need have at least 300 shareholders.

The start of 2016 saw 90 companies unable to comply with this requirement. This figure has reduced, however 28 companies remain non-compliant, with 6 unable to meet the 7.5% free float, 17 companies unable to meet the minimum shareholder requirement and 5 failing to meet both requirements.

The OJK has the authority to remove these stocks from IDX but has yet to take any action.

IDX launches IPO service to encourage listings

On the 27th of June 2016, IDX launched an online information service called ‘Go Public’ to educate private firms of the benefits of listing on the stock exchange.

According to the IDX, companies have in the past failed to apply for listing as they have believed the process to be complicated, costly or time consuming.

With introduction of the new ‘Go Public’ service, IDX hopes to counter those concerns through the provision of information and by facilitating meetings with IDX, regulators, underwriters and stock market experts. According to IDX, the cost of an IPO is approximately 3.16% of the total funds raised.

IDX Director, Tito Sulistyo, said:

“With this information, we believe companies that need funding will understand the process of going public as it is not as complicated and expensive as one might imagine”.

The percentage of companies listed in Indonesia is very small compared to the total number of companies in operation. Mid 2016, 529 companies were listed on IDX, while there may be more than 60 million business units active in Indonesia.

Sources:www.reuters.com

www.bloomberg.com

www.complinet.com

www.regulationasia.com

www.indonesia-investments.com

www.globalcapital.com

Contact


59

Global Market Structure Malaysia


Global Market Structure Malaysia Newsletter Special Edition Issue 43, 2017


SC unveils five-year blueprint for wealth management and Islamic funds

Malaysia’s Securities Commission (“SC”) has published a five-year ‘Islamic Fund and Wealth Management Blueprint’ to drive development and growth of Malaysia’s Islamic capital market.

According to the SC press release:

“The Blueprint aims to leverage Malaysia’s well-developed Islamic capital market ecosystem to establish the country as a leading international centre for Islamic fund and wealth management.”

Initiatives outlined in the blue print include:

— Creation of a framework for Shariah sustainable and responsible investments.

— To establish a multi-currency Shariah compliant investment fund.

— To increase the value-add and talent base within the Islamic capital market.

According to press reports, Malaysia currently leads the global Islamic capital market with its asset managers holding approximately 132 billion ringgit (US$30 billion) in Shariah compliant assets.

The Blueprint was launched by Mr. Datuk Johari Abdul Ghani, Second Finance Minister of Malaysia, at the International Fund Forum 2017 held on the 12th of January 2017.

SC’s press release and the full five year plan document can be found here: https://www.sc.com.my/post_archive/sc-unveils-five-year-blueprint-to-further-strengthen-malaysia-as-a-leading-international-centre-for-islamic-fund-and-wealth-management/

IPO figures expected to be better in 2017

According to SC Chairman Mr. Ranjit Ajit Singh, big improvements are expected in Malaysia’s IPO market in 2017.

“The global IPO markets are improving and so is the IPO market (here)…About MYR7 billion (US$1.56 billion) is estimated from the IPO segment this year” Mr. Singh said.

With 11 listings in 2016 raising US$230 million, the estimates for 2017represent a signification increase from last year’s results.

According to media reports, the estimates are driven by a strong IPO pipeline, with the largest contenders for IPO in 2017 currently being Eco World International, Serba Dinamik Holdings Bhd and QSR Brands.



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Rule changes for REITs following public consultation in 2016

Mid 2016, the Malaysian SC consulted on changes to the ‘Guidelines on Real Estate Investment Trusts’ (“REITs”).

The key changes included:

— Allowing REITs to invest in a wider range of real estate asset classes.

— Allowing REIT managers to enter into long term leases with registered proprietors of real estate.

— Strengthening corporate governance practices and enhancing the level of disclosures and reporting to unit holders.

The proposed changes aimed to foster sustainable growth and meet the evolving needs of investors.

According to the SC, as at the 30th of June 2016, domestic REITs had a total market capitalisation of RM41.07 billion (US$10.07 billion), having seen steady growth over the past 10 years. The market consisted of 17 REITs, including four Islamic REITs with the remainder covering a wide range of real estate, including office buildings, retail malls, hotels, healthcare establishments and industrial properties.

The consultation period has since closed and the industry awaits the SC’s next moves.

The consultation paper can be found here:http://www.sc.com.my/wp-content/uploads/eng/html/consultation/160714_PublicConsultation_3.pdf

Fig 1. Malaysia’s benchmark index closed the year down 3% as overseas investors sold over US$ 668.7 million in local shares. Equities average trading value on the exchange rose 30% from 2015 to 7.49 trillion rupiah ($554 million) per day in 2016.

60


Business to business financing platform to be launched

Following in the footsteps of equity crowdfunding, the SC have published regulatory framework to allow for peer-to-peer financing platforms per their amended ‘Guidelines on Recognised Markets’.

The framework provides an avenue for businesses to access market-based financing, via an electronic platform.

“Parties who are interested to operate a P2P platform may submit their application to the SC… They must be locally incorporated and have a minimum paid-up capital of MYR 5 million (US$1.12 million),” per SC comments delivered during a technical briefing.

SC estimates that P2P financing will likely start operating in early 2017.

2017 Venue News

Bursa Malaysia looking to enhance CIS framework

On the 19th of July 2016, Bursa Malaysia published a consultation paper seeking feedback on changes relating to Collective Investment Schemes (“CIS”).

The proposal aims to enhance the attractiveness and competitiveness of Bursa Malaysia as a destination for capital raising and investment in relation to CIS, through improving the quality of disclosures, strengthening unit holders’ protection and facilitating greater operational efficiency and flexibility.

The CEO of Bursa Malaysia, Mr. Datuk Seri Tajuddin Atan, said that the proposals are part of Bursa Malaysia’s ongoing market development initiatives:

“The proposed streamlining of the regulatory functions between the Securities Commission and the Exchange will promote greater market efficiency and business efficacy, improve the time-to-market especially in secondary fund raisings and thus, enable our CIS to become more competitive” he said.

The consultation was open for public comment until the 19th of September 2016 and can be found here:

http://www.bursamalaysia.com/market/regulation/rules/public-consultation/

Bursa Malaysia has yet to publish its findings from the consultation.

Bursa Malaysia may spin off its regulatory function to a subsidiary

Bursa Malaysia may be considering setting up a governance structure similar to that recently established by the Singapore Stock Exchange (“SGX”), where the exchange’s regulatory functions are segregated to a subsidiary.

This format has been used by trading venues such as SGX and the New York Stock Exchange, as a way to resolve potential conflicts between operating a commercial venture and regulating the activities of exchange participants. Some regulators have seen this as a necessary precursor to allowing stock exchanges themselves to be publically listed.

An SC spokesman commented in July 2016 that:

“The SC continues to work with the board to progressively strengthen governance arrangements of the exchange, including ways to further strengthen the independence of the regulatory function, and will introduce appropriate changes, taking into account the evolution of market structures and the findings of the SC’s assessments”.

Further announcements are pending.


SC launches new guidelines on management of cyber risk

In November 2016, the SC issued new guidelines, seeking to enhance cyber resilience within capital markets by requiring capital market entities to establish and implement effective governance measures to counter cyber risk.

The Guidelines stipulate:

— Roles and responsibilities of the board of directors and management in the oversight and management of cyber risk.

— Cyber risk policies and procedures that should be developed and implemented by capital market entities.

— Requirements for managing cyber risk.

— SC reporting requirements.

The new Guidelines will be implemented in phases. Entities will be selected for the different phases based on their size, nature of activities and market share.

Please see the full document for further details: https://www.sc.com.my/wp-content/uploads/eng/html/cyber/31102016_Guidelines_Cyber_Security.pdf

Revised takeover and merger rules effective 15th August 2016

The SC has updated its rule book to facilitate changes to the takeovers and mergers rules.

According to the SC’s press release, the enhancements seek to ensure that the takeover framework will be sufficient to allow for commercial realities, while providing protection to shareholders.

The changes include removing the limitation that takeovers can only be initiated by parties holding over 50% equity and providing clear guidance on required conduct during a takeover offer.

The SC worked with market participants and investors prior to amending the rules, “to ensure the incorporation of the markets’ view in the formulation of the enhanced framework”.

The new rules came into force on the 15th of August 2016 and can be found here:

http://www.sc.com.my/legislation-guidelines/take-overs-code/

Corporate governance standards tightened to strengthen boards

In light of the growing number of money laundering and corruption cases globally, Malaysia’s Central Bank has tighten corporate governance standards for Malaysian registered companies.

The changes give more power to company Boards of Directors and require that the majority of Board members be independent directors, in order to maintain credibility and reduce the likelihood of corruption.

In a statement released in July 2016, representatives from the Central Bank said:

“The revised standards strengthen the conditions for strong and effective Boards, with greater emphasis on a sound risk culture and remuneration system in promoting prudent risk-taking”, adding that:

“The standards address issues arising from more complex organisational structures and business models of financial institutions that have expanded in size and across borders”.

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Sources:

www.bursamalysia.com

www.sc.com.my

www.thestar.com

www.gulf-times.com

Contact


2016 Venue News

Listing rules amended to improve transparency

2016 saw Bursa Malaysia take action to provide shareholders with greater transparency into the operations of listed companies, through amendments to key listing rules.

The amendments included introducing more substantial mandatory non-financial information disclosures and mandating poll voting for all resolutions in company annual general meetings.

The requirement for greater non-financial information disclosure saw the introduction of minimum contents for management discussion and analysis (“MD&A”) in a bid to improve the quality and depth of disclosures made. The MD&A disclosure was introduced on a voluntary basis in 2011 and all annual reports published from November 2015 must have contained some form of MD&A statement. The latest rules however specify details which need to be provided for in the MD&As.

The amendments were implemented on a staggered basis from April 2016.

Full listing requirements can be found here:http://www.bursamalaysia.com/market/regulation/rules/listing-requirements/main-market/listing-requirements

Malaysia Exchange and IDX agree to develop Islamic capital market

On the 2nd of August 2016, Bursa Malaysia and the Indonesia Stock Exchange (“IDX”) signed a memorandum of understanding (“MoU”) to develop a ‘World Shariah Stock Market Centre’.

At present, a global centre for Islamic capital market products does not exist. The two exchanges intend to join forces to conduct studies and develop the necessary infrastructure to facilitate such a market.

IDX President Director Mr. Titl Sulistio, believes that it makes sense that both nations combine their strengths, saying:

“Malaysia has the biggest market share globally in Islamic finance, and Indonesia has the biggest Muslim population in the world. Both of us agreed to develop Shariah-compliant capital market products, which will become benchmarks for future such products in the world”.

Initially the two exchanges will work together to launch Shariah compliant bonds and financial securities products, as well as other Shari’ah-compliant financial products. Once developed, the ‘World Shariah Stock Market Centre’ will serve as a research, development and trading hub for global Shariah compliant products.

The MoU will see both exchanges stage events and promotions; provide human resources and product development programs.

Bursa Malaysia and TWSE sign MoU

Bursa Malaysia and the Taiwan Stock Exchange Corporation (“TWSE”) have signed a second MoU to jointly study capital market opportunities relating to potential cross border cooperation. The studies will focus specifically on exchange traded funds (“ETF”s), indices, market connectivity, and market promotional activities.

The MoU was signed in mid 2016 and is the second signed by the two parties, the first of which was signed in 1999. This second agreement will expand the scope of cooperation between the two trading venues.

A representative from Bursa Malaysia, confirmed that:

“We look forward to the possibility of having greater cooperation with TWSE, which would unlock the capital market potential and opportunities in both our markets. The joint cross-border study under the second MOU will enable TWSE and Bursa Malaysia to assess and prioritize potential collaborations that would provide greater access to

investments and investors in both our markets.”

Bursa Malaysia’s press release announcing the agreement can be found here:

http://www.bursamalaysia.com/corporate/media-centre/media-releases/4317

2016 Personnel News

Malaysia has new chief of anti-corruption

Mr. Datuk Dzulkifli Ahmad has been appointed as the new Chief Commissioner of the Malaysian Anti-Corruption Commission.

Mr. Dzulkifli previously held the posting of Head of the National Revenue Recovery Enforcement Team. His term began on the 1st of August 2016 and will run until the 31st of July 2021.

Mr. Muhammad Ibrahim appointed governor of Central Bank

After leading Malaysia’s Central Bank for 16 years, Ms. Zeti Akhtar Aziz has stepped down. Her successor was announced by the Malaysian Prime Minster as Mr. Muhammad Ibrahim, who has been with the central bank since 1984 and deputy governor since 2010.

Mr. Ibrahim was appointed for a five-year term that started on the 1st of May 2016.

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Global Market Structure Newsletter Special Edition Issue 43, 2017

Chart DefinitionsVolatility: Standard deviation of index price returns over last 30 day period

Market Share: Percentage distribution of total value traded (USD) on the exchange/venue year to data

Estimated Cost of Trading: Expected arrival price impact calculated using Deutsche Bank’s internal market impact model for all index constituents, weighted average

Turnover Velocity: Ratio of USD volume traded on the exchange versus exchange market cap for the given month, annualised

ETF Volume: Total traded value (USD) of listed equity ETFs for the given month, average

Futures Volume: Total traded value (USD) of equity index futures for the given month, average

Equities Volume: Total traded value (USD) of listed stocks on equity exchanges in respective country for the given month, average

Primary Index* Spread: Primary index bid/ask spread, averaged over the trading day

Average Trade Size: Bid/Ask size of primary index constituent averaged over the day, across constituents

Index Price Change: Monthly percent change in country’s primary index level benchmarked to beginning of the year level

Market Movers: Stock constituents of the primary index with biggest change in price levels in the given month

Total IPO Volume: Aggregated US$ size of all new equity listings in the given month

Exchange Market Cap: Aggregated US$ market capitalisation value of all individual equity instruments listed on the exchange

IPO Performance: Percentage change in price level from day of listing of the equity instrument, until the close of next following day (1day), month (1month) and last trading day of previous month (current)

*List of primary indices by country:

Australia S&P/ASX 200 IndexChina Shanghai Shenzhen CSI 300 IndexSingapore FTSE Straits Times IndexHong Kong Hang Seng IndexIndonesia Jakarta SE Composite IndexMalaysia FTSE Bursa Malaysia KLCI IndexKorea Korea SE Kospi 200 IndexIndia CNX Nifty IndexPhilippines Philippine SE Composite IndexThailand SET 50 IndexJapan TOPIX Stock Price IndexTaiwan Taiwan SE Weighted IndexUnited States S&P 500 IndexEurope Europe 600 EUR Price Index

Deutsche Bank may from time to time modify the methods, processes and parameters used in the analyses and/or as described in this material. Any descriptions of such models, processes, or parameters, or the analyses resulting from them, are only represented to be accurate as of the date of this material. These materials are generic in nature. There may be regional differences in the processes, parameters and models in Deutsche Bank’s products.

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