AsianInvestor's regulatory roundup, June 11

Malaysia announces capital markets rule changes; Iosco brands investors "over-reliant" on credit ratings; Asic to reduce market surveillance; and new Cayman Islands regime comes in.
AsianInvestor's regulatory roundup, June 11

Malaysia: relaxing capital markets rules
As part of a raft of measures to broaden and deepen Malaysia’s capital markets, prime minister Najib Razak announced changes on June 9 aimed at accelerating the growth of the country’s investment industry.

Foreign corporations can now own 100% of shares in unit trust management companies; their shareholding was previously capped at 49%. This change was made with immediate effect.

This comes as Malaysia’s fund management industry saw growth of 16.5% last year, rising to RM588 billion ($180 billion) in assets under management.

In addition, from January 1, 2017, Malaysian corporates will no longer be required to obtain credit ratings for bond issues. “This will broaden the corporate bond market, and enable investors to further diversify their portfolios,” said Rajak.

Moreover, from the same date, international credit rating agencies with full foreign ownership will be allowed into the Malaysian market, rather than having to partner with one of the two domestic agencies. Foreign holdings in these rating agencies are currently capped at 10%, according to media.

International: investors “over-reliant” on credit ratings
The International Organization of Securities Commissions (Iosco) is consulting on how investors can avoid “over-reliance” on credit rating agencies (CRAs).

The consultation, which began on June 5 and will end on September 5, seeks views from the investment industry on how it uses rating agencies to help assess whether an investment is creditworthy. The findings will be used for compiling a good practice list and relayed to regulators and the market.

One proposal is that external ratings form one element of the internal assessment process for investments but do not constitute the sole factor supporting the credit analysis.

Another recommendation is that regulators encourage investment managers to disclose alternative sources of credit information about their portfolio assets, in addition to ratings.

“The role of CRAs has come under regulatory scrutiny, mainly as a result of the over-reliance of market participants, including investment managers and institutional investors, on CRA ratings in their assessments of both financial instruments and issuers in the run-up to the 2007-2008 financial crisis,” said Iosco, a supranational body.

Australia: Asic to reduce market surveillance
The Australian Securities and Investments Commission (Asic) is warning that its “proactive surveillance” of the market will substantially decline, and in some cases stop, in light of budget cuts by the government.

Over four years, around A$120 million ($112 million) will be cut from the regulator’s budget over the next four years, resulting in staffing levels being reduced by 209 to 1,573. So far, $44 million, or 12%, has been slashed from Asic's operating budget for 2014-15.

“For obvious reasons, we do not want to identify to the market the areas where we will not be conducting proactive surveillance,” said chairman Greg Medcraft to the senate estimates committee on June 4.

“We will rely more on the intelligence we get from misconduct reports and the complaints we receive,” he added.

Asic had started a consultation in early May asking financial institutions to suggest areas for deregulation. The regulator, for example, moots replacing the requirement for entities such as fund managers to lodge continuous disclosures to it with a requirement to publish disclosures on their respective websites.

The budget cut is in contrast to the situation in certain jurisdictions. For example, Hong Kong’s Securities and Futures Commission saw its expenditure grow by 120% between 2007 and 2013. Staff numbers have also increased by 51% during the same period, according to consultancy Kinetic Partners.

Cayman Islands: directorship licensing regime in force
The Cayman Islands Monetary Authority (Cima) on June 4 brought into effect a law requiring fund directors to be registered and in some cases licensed.

Under the new regime, directors who are board members to less than 20 Cayman-regulated entities, such as hedge funds, will need to submit to Cima basic information such as the person’s name, date of birth and nationality, as well as the names of the entities they are on the board of. This will form part of a register that will not be open to the public.

Meanwhile, a person with 20 or more directorships under the professional directors criterion, will have to be licensed by Cima by undergoing a “fit and proper” test.

Corporate directors, or corporate entities acting as directors, will have to be licensed by Cima regardless of the number of directorships they hold.

The move follows a report in late 2011 by the Financial Times about the prevalence of “jumbo directors”, or directors that sit on boards on hundreds of funds, limiting their ability to provide effective oversight.

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