Taking stock of the exchange

The new CEO of Bursa Malaysia reveals his plans for the future and how he has to overcome the problems of the past.

Yusli Mohamed Yusof is the newly appointed CEO of Bursa Malaysia, the new holding company for all the stock exchanges in Malaysia, demutualized earlier this year. The company runs: three stock exchanges (the main board, the second board and Mesdaq); the derivatives exchange; the Labuan International Financial Exchange and also offers clearing and settlement services, as well as information services.

Encik Yusli is an accountant by training and has spent time in a number of leading Malaysian companies including Time Engineering and Renong. Most recently he was Chief Executive Director of CIMB Securities from where he also became the chairman of the Association of Stockbroking Companies Malaysia, the director of Malaysia Derivatives Exchange and a committee member of Bursa Malaysia.

At 45 years old, he is one of the young technocrats who are increasingly being put in prominent positions under the new administration. His task now is, quite simply, to get more investors to do more trading on the exchange. The performance of Bursa Malaysia over coming years will be a direct reflection of the success of the new reforms of Malaysia Inc that are the central economic platform of Prime Minster Badawi.

What was the rationale behind the demutualization exercise?

Yusof: We wanted to enhance the performance of the exchange. Being a mutual organization we were owned by our members and we didn't have the discipline of being owned by shareholders. In line with global trends and as part of the Securities Commission's capital markets master plan, the decision was made two years ago to consolidate the various exchanges such as the derivatives exchange and the Mesdaq market, and then demutualize.

Now we have a new structure in place and have close to 6000 shareholders. Our broker members got 30% of the shares, the Ministry of Finance 30%. The capital markets development fund got 30%. The remaining 10% went to the remisers, who are the dealer representatives on the exchange.

What's the focus of the exchange now?

We're now looking at commercial objectives so that profit and revenues become much more important. But at the same time, we need to carry on the normal roles of an exchange such as providing very good market infrastructure and having an orderly market from a regulatory perspective.

How do you balance having a regulatory oversight role for the listed companies with your commercial goals? Clearly there is a conflict of interest here.

Above us we have the Securities Commission, which is the regulator for the whole of the capital markets. And within our board we have public interest directors, who look at not just the exchanges' needs. We have independent directors as well. We only have four shareholder directors. So at the board level there is a level of independence.

The rules that we have are very transparent. Whatever actions or enforcements we make are pursuant to our rules. If we don't take action, it will be very clear to all the industry players. If there is any breach of the rules that we know about and then fail to take action, it will be clear. It is in our interest to make sure that the credibility of the market is enhanced and not just maintained. That is the very essence of why people want to trade on your market. They have to be confident that the rules will be properly enforced and that there will be consistency and fairness in terms of enforcement. If we compromise on this issues then the whole credibility of the stock market will be at risk.

Would it not have been easier just to give all your regulatory functions to the SC and then just operate the market, so that there is not the conflict?

That would be ideal. But this is something that most jurisdictions have to struggle with. Whilst it would be ideal from our perspective, from a cost perspective, the SCs of the world would find it difficult to take on all the costs. The exchange does get some good benefits from this regulation. There needs to be a balance between the income that we make from the market and the cost of regulating it. It's a fine balance. We are in discussions with the SC to streamline the regulatory function. In past years there have been areas of duplication and overlap.

While we are talking about conflicts, do you think there is a conflict with your new chairman, Tun Mohamed Dzaiddin Haji Abdullah also being the chairman of Deutsche Bank (Malaysia)?

Deutsche Bank is not listed on our exchange. It is regulated by the Central Bank. There are very strict rules to govern its operations. So I don't see there being a conflict. The central bank has to approve his appointment at Deutsche Bank so I am sure they took it into account.

What are your plans for growing the business of Bursa Malaysia?

We have a bit of catching up to do in terms of making ourselves more marketable. Malaysia as a country and the exchange as well suffer from issues arising from the crisis. We are on a road show now to meet fund mangers to get their feedback and we can see that there is still some negative perception towards the actions that were taken during the crisis, such as capital controls and the ringitt peg.

Of course capital controls no longer exist for foreign investors but people are still asking me when the capital controls will be removed. So we have a job trying to get the message across that there have been reforms. So we need to increase our marketability as well as the profile of the country and the exchange.

At the exchange level we need to increase the volumes of trade, which today are below half of what they were pre-crisis. We know that foreign investors make up a third of trades on the market and retail investors in Malaysia only tend to come in in a big way when they see foreign investors coming in. Local institutions are fairly constant. But we have a strong dependence on foreign sentiment towards our market.

We also need to diversify our revenue base. Easily 80%-90% of our revenues today are dependent on equity trades. We need to increase revenues from derivatives trading and increase contributions from the sale of market information and other products. Then we can reduce our reliance on the cash market.

We also need to increase our efficiency and go for operational excellence. To that end we are implementing a new trading platform and we have bought a new system from Euronext in Europe. This will enable us to have a common platform for both equities and derivatives, which we don't have currently. The derivatives portion will be up by the end of this year and the equities portion six months after that. The new system will also make it easier for us to do linkages with other exchanges. We see a lot of potential in terms of improving market practices and being able to do new things.

Do you have a target for foreign participation in your market?

Not specifically. The trend that we see among foreign investors is that they tend to be more short term. The big hedge funds tend to come in and out quite fast. The long-term investors who hold core holdings, own about 15%-20%. So 50% overall is quite healthy.

What is your market velocity?

Market velocity is the ratio of the value of the trades done in a day or a year over the market capitalization of the market. So last year our velocity was quite low - about 33%. We have been up to 90% in the early 1990s. Hong Kong is about 60% and Singapore is about 80%. Korea and Taiwan have velocities well over 100% as their volumes are huge. We are trying to get up to the high 40 percentile this year. But our market capitalization is not small. We have over 900 listed companies but the liquidity and velocity does not reflect the value of the shares we have. That is because certain of the big caps do not trade as much as they should.

The moves announced last week to restructure and reform the government-linked companies should help that. It is designed to improve the performance of these companies. Foreign fund managers have told us that while we might have some big companies they are not that attractive as investment choices as they are not well run, or there is something wrong with the governance, or they have a small free float. So this move to make the GLCs more accountable for their performance will help make them more attractive for investors. When they become more attractive, that will have a significant impact in trading volumes and in attracting new investors.

Do you think there are too many companies listed in Malaysia?

Possibly. The listing procedure in Malaysia is not that straight forward. If you want to list on the second board or main board, there are very strict criteria. The only one that is more relaxed is Mesdaq, but there are only 30 companies listed there. The bulk of the shares are in the main board and second board. The reality is that perhaps we do have an issue with the quality of the companies; the quantity is not an issue. The move by the government is a start in making the larger stocks listed on the exchange more performance oriented.

Can you explain exactly what is happening with your tie up with SGX in Singapore?

What is driving this from our side is that we are looking at ways of increasing volumes on our market. We know that before the crisis there was a lot of trading volume coming from Singapore investors. But then we had the unfortunate CLOB episode and a lot of Singapore investors have not really returned to our market. I can understand that they had a very unfortunate experience.

So if we were to establish some form of formal link up with SGX that would make them more comfortable to trade in our market. We can set up mechanisms to trade our stocks from Singapore, without having to deal with a Malaysian broker. We are exploring the feasibility of this and are in discussions with SGX.

But also it is due to technology sharing. In this business there is a lot of investment in technology and so there is a lot of potential for us to share resource in things like common data centres. Some processes that are routine such as clearing and settlement are also areas where we can see whether there are synergies for us to exploit. But it is all driven by the commercial aspects of the business.

You made RM89 million in profit last year on revenues of RM233 million. That is a 38% profit margin. When are you going to list yourself and allow people to own a slice of such a profitable company?

We are looking at a listing by the beginning of next year. We have started the process and are appointing advisors. It is something that has been in our plans, but it was decided not to do it back to back with demutualization so we could get used to the new shareholder organization.

We will start with appointing local advisers. Over the next couple of months we will see if we need to involve foreign advisers. Chances are that they probably will need to be involved, as we will need to meet foreign investors to get their support. We know there is a significant level of interest in our shares. Last year was not even a very good year so we should be able to improve our performance.

What will drive your corporate activity over the next year?

We as an exchange can see the trends that are happening in the west and it is only a matter of time before they come here. These trends are things like alliances between exchanges and the convergence in the industry. If you look at Bloomberg or Reuters, and the linkages between them and exchanges, there are tremendous opportunities that can be exploited. If you look at what is happening in Australia for instance, they are trying to diversify their income base through corporate services work. It is not something we can ignore.

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