Market players hail the establishment of a separate subsidiary to handle regulatory functions in response to concerns about conflicts of interest in SGX’s self-regulatory structure.
On 18 July, Singapore Exchange (SGX) announced that it will hive off its regulatory arm from its commercial activities following criticisms about the conflict of interest inherent in SGX regulating its own clients. A new company—temporarily dubbed “RegCo”—will be set up as an SGX subsidiary by the second half of 2017 to house SGX’s current regulatory team.
This segregation enhances SGX’s corporate governance as a self-regulatory organisation by addressing potential conflicts of interest between its commercial objectives and regulatory responsibilities. In view of this, RegCo’s independence is an important factor for SGX’s success. Members of RegCo’s board will only be appointed by the Monetary Authority of Singapore (MAS) and a majority of directors must be independent of SGX, its subsidiaries, and any SGX-listed corporations.
MAS will continue to directly regulate SGX with respect to its obligations as a listed company and market operator. Oversight of RegCo’s responsibilities will also be maintained by MAS.
This development, coupled with SGX’s influential position in the market, sends a message about the importance of corporate governance. However, observers have noted that it is ultimately not the quality of SGX’s regulation that the Singapore market has its eye on, but whether the exchange can attract new listings. SGX continues to face difficult challenges with companies trading at low price/earnings ratios, along with a growing trend of ongoing privatisations. This move may complicate existing regulations, which would in turn discourage potential listings. As such, adopting a commercial approach to regulation and assuring the market that RegCo will not increase compliance costs and submission time is of paramount importance to SGX. In response to such concerns, SGX has stated that it will not add requirements to the current IPO listing process. This is also consistent with ongoing efforts to rationalise regulatory functions performed by MAS and SGX.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Bernard Lui, a solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan Lewis & Bockius LLP.