Monday, June 20, 2011

First Steps to an ASEAN Equities Market

Stock exchanges in Malaysia, the Philippines, Singapore and Thailand agreed on a common software program to allow investors access to trading on all four exchanges.  Trading is expected to begin next year.   Although far from being a merger of the four exchanges, and missing the active exchanges in Indonesia and Vietnam, this is a first step to an ASEAN equities market and would mean that intra-ASEAN financial flows could one day be as active as intra-ASEAN trade in goods. 

It is also impressive given the financial traumas of the not-so-distant past. During the Asian financial crisis in 1998 Malaysia unilaterally froze Singaporean trading and equity holdings in the Central Limit Order Book (CLOB) system through which Singaporeans were able to trade in Malaysian shares through indirect means.  Unwinding the trades and holdings required years of politically charged negotiations between the two ASEAN members.

That Singapore and Malaysia are now willing to participate in a more direct system of cross-border equities trading shows the great improvement in ties since 1998.  More importantly, it illustrates the direct effect of the ASEAN Comprehensive Investment Agreement (ACIA). Unlike its predecessor agreements, the ACIA covers portfolio investments and provides investors with protections such as investor-state dispute resolution.

However, achieving a broader ASEAN equities market will not just require bringing in Indonesia and, perhaps, Vietnam.  It will require greater cooperation among the ASEAN governments to regulate cross-border equities trading in the region. In this regard the ASEAN institutions have not progressed so much since 1998.   ASEAN regulators need to catch up or risk either a massive failure such as the CLOB dispute or the equally bad outcome of small but numerous regulatory failures.   Whether through increased cooperation on the national level or giving more oversight authority to the ASEAN Secretariat, this needs to be done quickly.