Singapore Exchange (SGX) operates a centralised electronic marketplace for trading, clearing and settling securities and derivative products. The trading which takes place and the prices established in the market enable issuers to value their businesses and raise capital, enable investors to make decisions on which securities to buy or sell and also enable those exposed to various risks to find a means of transferring that risk to other parties. The after-trade processes of clearing and settling the financial and delivery obligations of buyers and sellers ensure that participants can enter the market with the confidence that their transactions will be completed.
As the market operator, SGX seeks to secure the trust and confidence of its market users in the integrity of the various facilities and services which make up the marketplace. SGX builds trust and confidence through robust processes using state of the art technology for its trading, clearing, market surveillance and market information systems and by undertaking targeted, balanced, risk-based regulation.
As a major clearing house and central counterparty for the Singapore securities and derivatives markets, we undertake rigorous daily risk monitoring and identification of risk exposures with appropriate follow-up risk mitigation actions. Regular marking-to-market and proper collateralisation avoid the accumulation of losses. This gives market users confidence in the stability of SGX markets and the financial system.
REGULATORY OBJECTIVES AND ACTIVITIES OF SGX
The regulatory activities of SGX are directed at achieving a fair, orderly and transparent market, at having high quality market intermediaries and issuers and at maintaining safe and efficient clearing and settlement facilities.
To meet these objectives, SGX establishes listing rules for issuers and business rules for all members, which meet internationally accepted standards. Any amendments to these rules must be notified to the Monetary Authority of Singapore (MAS). SGX undertakes frontline operational activities to monitor and enforce compliance with the rules of the market.
Upholding a Fair, Orderly and Transparent Market
Regulatory rules directed at achieving a fair, orderly and transparent market include requirements for full, timely and accurate disclosure of information which might affect the trading price of securities and requirements concerning how trading activities must be conducted. We review information released to the market and monitor listed companies and other issuers to ensure there is a discipline of timely disclosure. Market surveillance professionals at SGX use advanced surveillance tools to monitor real time trading in both securities and derivatives markets to detect possible misconduct by any market participant. If suspected misconduct is detected, the matter will be investigated within SGX (if it appears to be a breach of SGX rules) or referred to the appropriate authorities for further investigation (if it appears to be a breach of the law).
Maintaining High Quality Market Intermediaries and Issuers
As member firms form the link between the market and its users, the quality of their performance is critical to the market’s integrity. SGX imposes robust criteria to be fulfilled by membership aspirants prior to their admission. This assures that the member firms admitted will possess the necessary financial, operational and compliance quality needed to safeguard the market’s integrity. SGX imposes rules concerning members’ financial strength, especially their capital adequacy, internal controls, market conduct and methods of business conduct, including how they deal with conflicts of interest. SGX monitors these matters in its periodic audits of members. In addition to its audits, SGX also monitors members’ financial performance and business conduct standards on an on-going basis to assess members’ regulatory compliance. Breaches of SGX rules are dealt with by SGX Disciplinary and Appeals Committees which are constituted from independent legal professionals and industry practitioners. Sanctions which may be imposed include public reprimands and fines. As part of SGX’s enforcement framework, less serious breaches of SGX rules may be dealt with through the imposition of a composition fine without the convening of a Disciplinary Committee.
The quality of issuers is also fundamental to the integrity of the market.
SGX sets listing criteria, procedures and guidelines and assesses applicants’ suitability for listings. SGX’s listing admission requirements are based on profit track record, size and cash-flow adequacy. Companies are brought to list by issue managers who conduct due diligence on the eligibility of companies seeking listing on SGX. SGX is also responsible for promulgating and administering corporate disclosure and other continuing listing requirements for listed companies.
Issuers making a public offering must lodge and register a prospectus with the MAS for its approval. Any proposed changes to listing rules must also be notified to the MAS prior to official implementation.
The continuous disclosure obligations contained in the Listing Rules are given statutory force pursuant to the Securities and Futures Act. In the case of Singapore incorporated companies, additional statutory obligations are imposed under the Companies Act.
SGX conducts investigation into possible infringements of listing rules. Where an infringement is established, SGX will take appropriate regulatory and enforcement actions, which may include private warning, public reprimand and delisting. Where there are possible breaches of the SFA, cases will be referred to the relevant regulatory and enforcement agencies.
Additionally, SGX imposes listing rules to cover specific matters relating to issuer responsibilities. These rules focus on various matters including continuous disclosure obligations, requirements relating to the fairness of transactions where they involve parties in a position of influence over the listed company’s decisions and where minority shareholders might be prejudiced. The rules also require listed companies to disclose their corporate governance practices including an explanation of any non-compliance with the Singapore Code of Corporate Governance. We monitor the issuers of listed securities, as well as issue managers, for compliance with the listing rules and take appropriate action in the case of breaches. Most matters are dealt with through positive engagement and interaction. In certain cases, it might be necessary to reprimand the company and the directors or executives responsible for breaches of listing rules.
Maintaining Safe and Efficient Clearing and Settlement Clearing Facilities
To assure the operation of safe and efficient clearing and settlement clearing facilities, SGX also has extensive rules governing sufficiency of financial resources, adequacy of operational capacity, robustness of internal controls and how and when participants must meet their obligations, for example by way of margin calls. SGX also has established default management process and procedures to safeguard the integrity of our clearing and settlement operations against financial shocks caused by extraneous events, such as the collapse of MF Global in the United States.
GUIDING PRINCIPLES
In conducting its regulation of the market SGX has adopted six guiding principles. The first three principles relate to how we target what we regulate, while the next three principles relate to how we will behave when we are devising our rules and conducting our regulatory activities.
Guiding Principle One: Disclosure-Based Regulation
SGX believes that market users should have a wide range of choice and that the decision on whether a particular security or product is suitable for an investor is largely a matter for the market users and their advisers. For this to work, it is necessary for the market to be provided with timely, accurate and adequate disclosure of all matters relevant to the making of informed decisions on the listed products. Thus we focus on facilitating fair access to information for all market users as the fundamental building block on which we seek to achieve a fair, orderly and transparent market. The disclosure of information alone will not be sufficient. It is therefore supplemented by high baseline standards on whether a particular type of listing or product is suitable for the different segments of our market.
Guiding Principle Two: Comprehensive Risk Management
Market users also need absolute certainty that their trades can be finalised. This is a fundamental basis for their trading. Any breakdown in the post-trade activities of clearing and settlement will result in a loss of confidence and can effectively bring the market to a halt. Consequently, SGX focuses regulatory attention on the safe and efficient operation of its clearing houses as a very high priority. It requires a comprehensive, integrated and reliable approach to the management of the counterparty risks from clearing and trading members, as well as other risks within the clearing houses.
Guiding Principle Three: Risk-Based Targeting of Regulatory Activities
In order to make an optimal allocation of regulatory resources, SGX adopts a pragmatic risk-based approach. Supervisory activities focused on principles one and two are tailored according to risk profiles we develop for issuer sponsors and our member firms. This is based on our assessment of their management systems and the risks inherent in their business models and products, while keeping in mind the responsibilities of their own management to provide proper and thorough risk oversight of their business activities. SGX then allocates resources to those matters which it considers pose the greatest risk to achieving a fair, orderly and transparent market and safe and efficient clearing outcomes.
Guiding Principle Four: Balanced approach to International Best Practice
The SGX market has strong international dimensions as reflected in its traded products, listed companies, market intermediaries and market users. In keeping with this, SGX aims to ensure that its rules and regulatory activities are consistent with international best practice for exchanges--for example, issuers are able to use International Financial Reporting Standards. At the same time, in pursuing regulatory outcomes, SGX seeks to strike an appropriate balance between internationally recognised practices and local needs and conditions. We do not adopt an unthinking mechanical approach and we focus on the substance rather than the form in the rules.
Guiding Principle Five: Transparency
SGX seeks to be open and transparent in all its regulatory operations to the extent consistent with its statutory obligations and the public interest. In addition to statutorily mandated public consultations on rule amendments, SGX consults market users, where appropriate, on the proposed introduction of new products and initiatives. The SGX website publishes feedback received from market users on the public consultations, has a public register of listing rule waivers, as well as publishes “grounds of decision” by Disciplinary Committees.
Guiding Principle Six: SGX as a Frontline Regulator and Regulatory Conflict
MAS is the statutory regulator and has oversight over SGX’s regulatory responsibilities. SGX performs a frontline regulatory role in maintaining fair, orderly and transparent markets, as well as safe and efficient clearing facilities.
SGX maintains ongoing dialogue with market users. This market proximity improves our understanding of the businesses of market users and the compliance issues which they face, enabling us to assess their compliance and to appropriately calibrate regulatory solutions and enforcement actions.
Further, SGX also maintains a close collaborative relationship with other regulatory and enforcement agencies such as the MAS, CAD and the Accounting and Corporate Regulatory Authority (ACRA) on matters such as regulatory policies, risk management, regulatory oversight and enforcement actions.
SGX is conscious that its dual role as both a frontline regulator and a commercial entity can create real conflicts between its regulatory responsibilities and its commercial objectives (“regulatory conflicts”). The Securities and Futures Act places a legal obligation on the Board and management of SGX to maintain effective governance arrangements for managing such conflicts. These include a Regulatory Conflicts Committee (“RCC”) of the Board which ensures the adequacy and quality of resources for SGX’s regulatory functions, the robustness of decision-making structure and the supervision of processes for identifying and managing regulatory conflicts. For instance, all waivers of rule requirements granted by SGX, as well as enforcement actions leading to Disciplinary Committee proceedings undertaken by it, are disclosed to the public and/or to its members. This transparency assures due process in the making of SGX’s regulatory decisions. The MAS exercises overall supervision of SGX and its management of regulatory conflicts.
SGX believes that this conflicts governance model is the most appropriate for our markets at this time. However, we are committed to vigilance in reviewing the operation of the model and in adapting it appropriately in the light of experience and market developments.