It' s proposing to take on powers to mete out public sanctions, except for fines

 

THE Singapore Exchange Regulation (SGX RegCo) is looking to sharpen its enforcement teeth by taking on some of the disciplinary powers that previously resided in what market observers say has been a rather ineffective industry-led Listings Disciplinary Committee (LDC).

 

On Thursday, the frontline market regulator unveiled proposed changes to the listing rules relating to its enforcement and disciplinary framework as well as whistleblowing regime. It said there is a need for SGX RegCo to be able to independently exercise a broader range of sanctions in order to deal swiftly with breaches of the listing rules. This would allow SGX RegCo to maintain investor confidence and preserve market integrity.

 

Tan Boon Gin, SGX RegCo' s chief executive officer, said the regulator' s current enforcement power is confined to private actions. Harder-hitting public actions - such as fines, suspensions or expulsions - can only be exercised by the LDC.

 

The latter consists of independent professionals and corporate bigwigs, and has not been able to act as quickly as investors would wish.

 

" SGX RegCo is acutely aware of the perception that few public enforcement actions have taken place in recent years. We are proposing to widen the scope of direct disciplinary actions available to us so as to speed up the disciplinary process," Mr Tan said.

 

" Our proposal is therefore for SGX RegCo to have the powers to impose all the public sanctions that the LDC can impose, except for fines. Fines are the most severe sanction in our arsenal and one of the reasons why we introduced the LDC, so the LDC will continue to have the exclusive ability to administer fines."

 

Delays in enforcement actions

 

Since the formation of the LDC in October 2015, there have been 18 notices of charges pending before the LDC. Only three have been heard.

 

" The process of arriving at an outcome for each public enforcement action has taken far longer than anticipated," Mr Tan said. " To the public and the media, this has been interpreted as a lack of enforcement altogether."

 

The LDC already has a heavy caseload as it has to hear all cases that involve public sanctions and fines. In addition, requirements to ensure the independence of the LDC members have caused delays in getting the quorum for a hearing.

 

This is compounded by the fact that the community of corporate finance professionals in Singapore is small. This results in conflicts of interests in the form of dealings or engagements with the alleged offender or their counterparties.

 

graphic

 

Giving SGX RegCo the powers to impose all public sanctions excluding fines will make " a very big difference" , Mr Tan told The Business Times.

 

" We are doing two things: Spreading the caseload out between RegCo and the LDC, and this will also address directly the conflict issue that is slowing down the process currently."

 

Mr Tan shared that the conflicts went beyond links to a company, but also links to the company' s bankers, lawyers, auditors, consultants and all the company' s counterparties.

 

When there are conflicts, members recuse themselves, even if they discover the conflict late and it means that the process of trying to form a hearing committee that satisfies quorum and independence has to start all over again.

 

Mr Tan said: " Because RegCo is independent, we will not face the same conflicts issues as the LDC. And by sharing a large part of the caseload, we also free up the LDC to focus solely on the cases involving fines, thereby achieving the speedier enforcement outcomes that the market is asking for."

 

Faster enforcement

 

The formation of LDC in late 2015 was largely welcomed by market watchers as it addressed the perception of conflict of interest between SGX' s own commercial and regulatory roles. But since then, SGX has hived off its regulatory function from its commercial operations with the creation of SGX RegCo in September 2017. As an independent office, SGX RegCo is able to enforce the requirements of the listing rules and fulfil its regulatory functions, as well as maintain market integrity and discipline.

 

Given that other regulators, such as the Monetary Authority of Singapore, the Accounting and Corporate Regulatory Authority, and the Commercial Affairs Department, have the statutory authority to impose civil penalties, criminal fines, and jail terms, SGX RegCo can place more emphasis on speed and clarity of enforcement outcomes.

 

It also wants to introduce a rule requiring an issuer under investigation to seek its approval before directors can be appointed or re-appointed to the issuer' s board.

 

Similarly, directors under investigation will need SGX RegCo' s approval before their appointment or reappointment to the board.

 

These amendments would enable SGX RegCo to prevent potentially culpable individuals identified in special audit reports from remaining on the board of directors to impede regulatory investigations or actions. It also gives the regulator the discretion to take pre-emptive action to prevent the appointment or re-appointment of dubious characters.

 

In addition, SGX RegCo is proposing that companies disclose in their annual reports how they implement their whistleblowing policy and ensure that the identity of the whistleblower is kept confidential.

 

THE Singapore Exchange (SGX) is set to launch two international real estate investment trust (Reit) futures products, based on indices tracking Reits listed in Singapore, Hong Kong, Malaysia and Thailand. These products will be the first international Reit futures in Asia.

 

On Aug 24, SGX will launch the SGX FTSE EPRA Nareit Asia ex-Japan Index Futures, as well as the SGX iEdge S-REIT Leaders Index Futures, the bourse said in a Tuesday press release after market close.

 

The FTSE EPRA Nareit Global Real Estate Index series is a widely-followed global benchmark, with about US$340 billion of assets actively benchmarked against or passively tracking the indices. The iEdge S-REIT Leaders Index is the most liquid index-basket representation of the S-Reit market.

 

Both futures are designed in accordance with Commodity Futures Trading Commission guidelines, which would enable distribution to US and global institutional investors.

 

The launch of these Reit futures comes amid rising global investor demand for real estate-related investment products and trading solutions. It also &ldquo builds on the forte&rdquo of the local stock market, following the launch of Singapore Single Stock Futures in June, SGX said.

 

Michael Syn, head of equities at SGX, said in the press release that the bourse continues to focus on innovative products that capitalise on its cash equities and equity derivatives businesses.

 

&ldquo Singapore is the Reits growth capital of Asia, attracting global institutional investors looking for defensive returns, particularly in today&rsquo s volatile markets and low interest rate environment. Over the past 18 years since the first Reit listing on SGX, we have established a strong Reit ecosystem with increasing investor interest, deep liquidity and active issuer participation,&rdquo Mr Syn added.

 

Last year, close to 45 per cent of Reit initial public offerings worldwide debuted on SGX. Singapore is the largest Reit market in Asia excluding Japan, with 44 Reits and property trusts of a combined market capitalisation of S$98 billion.

 

The interim financial reports for the period ended 30 June 2020 may be the first reports on issuers&rsquo financial performance since COVID-19 took hold and brought on various challenges and restrictions. Significant uncertainty, or even threats to business prospects, have hit issuers across various sectors.

 

High quality and reliable financial statements, including interim reports, are fundamental to the integrity of Singapore&rsquo s capital markets. Singapore Exchange Regulation&lsquo s (SGX RegCo) 22 April 2020 Regulator&rsquo s Column emphasises immediate disclosure by issuers of material developments brought about by COVID-19. Issuers are also expected to increase scrutiny of high-risk areas such as cash balances and accounts receivables and other areas that require significant estimates like impairment.

 

In consultation with the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA), SGX RegCo is issuing this Column to assist issuers in the preparation of financial statements given the practical challenges they face at this time. ACRA and the Institute of Singapore Chartered Accountants (ISCA) have also published guidance to help issuers in this regard.

Negative assurance confirmation 

 

Underscoring the reliability of interim financial reports is Listing Rule 705(5). This rule requires issuers to confirm that to the best of their knowledge, nothing has come to the attention of the board of directors which may render the interim financial statements to be false or misleading in any material aspect. This confirmation provides the board&rsquo s assurance that all material information has been assessed to ensure the reliability of the issuer&rsquo s interim financial statements.

 

Complying with Rule 705(5) requires boards to provide a negative assurance confirmation about the interim financials without any attempt to carve out caveats or exceptions. While this may be difficult under current conditions, it is precisely in these circumstances that investors need reliable financial information to make informed investment decisions.

 

In providing the negative assurance confirmation, boards should consider whether the interim financial statements provide a balanced and fair view of any material factors that have affected the issuer&rsquo s business conditions and financial position, including the impact of COVID-19.

 

Asset valuations

 

Boards and management should carefully assess if asset values are appropriately reported in the interim financial statements. They should review whether the effects of COVID-19 present any indication that the asset values as at the previous financial year-end have changed significantly. The assessment of the impact and its associated uncertainties should be clearly explained so that investors can better appreciate the significance of the numbers.

 

Issuers may decide on the best way to conduct a valuation assessment &ndash whether internally with the assistance of an external valuer or by performing an assessment of certain assets which are materially impacted. If in doubt, issuers should consider whether expert advice is needed.

 

Where adjustments to the inputs of the valuation models are made to reflect material changes in business conditions, issuers should disclose the key assumptions used, such as forward-looking information on earnings growth rates, as well as management&rsquo s basis for selecting those assumptions. Material uncertainties on the asset valuations should also be disclosed. 

 

If helpful, issuers can also consider providing illustrations on the potential impact a change in valuation will have on relevant financial metrics, such as net asset value, net tangible assets or leverage ratio.

 

We understand the present challenges faced by issuers in making significant judgements and estimates on asset valuation. Issuers should rely on the best available information in making well-reasoned and supported judgements and estimates. Boards should use best endeavours to ensure that the fair value of assets is not overstated, and engage management closely and question the appropriateness of key assumptions made in asset valuations. In the rare circumstances that the board is unable to quantify the impact to asset valuation, it should clearly explain why.

 

Going concern

 

Where there is a deterioration in business conditions, issuers should undertake an assessment of the ability to operate as a going concern and disclose these uncertainties and their plans to address such uncertainties. Where issuers are unable to continue as a going concern, they should make a request for trading suspension pursuant to Listing Rule 1303.

 

Disclosures

 

Disclosures are expected to be entity-specific, relevant and useful to investors. Issuers must eschew boilerplate disclosures, such as broad or generic statements that COVID-19 have negatively impacted the valuation measurements, without elaborating on the effects on each business segment. Disclosures must also be balanced and fair and avoid omission of important unfavourable facts.

 

Deterioration of financial performance that existed prior to the pandemic should clearly be disclosed as such and not characterised as COVID-19 related if this is untrue.

Alternative performance measures (APMs)

 

APMs, such as EBIT, EBITDA and free cash flows, can be useful to investors when they provide additional insight into the financial performance and condition of issuers and are often used to supplement information provided under relevant accounting standards.

APMs if used, should be presented consistently between periods with clear explanations on how they are calculated. Issuers must ensure that the APMs do not mislead investors and in particular, should not be used to present a more favourable view or to avoid presenting a less favourable view of the issuer&rsquo s performance.

 

COVID-19 and its far-reaching impact have led to discussions on whether EBITDAC, or earnings before interest, taxes, depreciation, amortisation and COVID-19 should be considered as a possible APM. SGX RegCo cautions issuers against presenting such a hypothetical APM that attempts to recast earnings as if the effects of the pandemic had not occurred. Such hypothetical APMs are unreliable and present a misleading picture of financial performance to investors.

 

Conclusion

 

Financial statements should provide comparable and relevant information that adequately reflects the impact of COVID-19 on the issuer. Timely disclosure of any changed circumstances will enable investors to make an informed investment decision. SGX RegCo will continue to review if further enhancements to our Listing Rules should be made to strengthen disclosures.

Regulator stresses that alternative performance measures should not be used to flatter results

 

ISSUERS here should not use what is now widely known as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports, said Singapore' s frontline market regulator, calling this hypothetical measure " unreliable" and one that presents a " misleading picture" of financial performance to investors.

 

" SGX RegCo cautions issuers against presenting such a hypothetical APM that attempts to recast earnings as if the effects of the pandemic had not occurred," said the Singapore Exchange Regulation (SGX RegCo) in a regulator' s column published on Monday.

 

The regulator stressed that alternative performance measures (APMs) should not be used by issuers to flatter their results, or to avoid presenting a less favourable view of their performance.

 

The warning follows reports that a growing number of issuers overseas are using Ebitdac to " add back" profits that they might have made if not for the novel coronavirus. Some of these issuers have also used the hypothetical Ebitdac figure to argue that their allowable debt capacity should be higher.

 

While APMs such as Ebit, Ebitda and free cash flows can be useful to investors when read alongside other information that is provided under the accounting standards, issuers must ensure that APMs do not mislead investors, SGX RegCo said.

 

If used, APMs must be presented consistently between periods with clear explanations on how they are calculated.

 

The SGX joins other regulators such as the European Securities and Markets Authority and the UK' s Financial Reporting Council in calling for caution against Ebitdac adjustments.

 

Ratings agencies have also rejected the practice of using Ebitdac.

 

Fitch Ratings warned last month: " Substituting the current year' s earnings with those of the previous year is another way that some companies are presenting ' before coronavirus' earnings...Although investors may be accustomed to various Ebitda add-backs...the concept of excluding such a significant market-wide disruption with an as-yet-unknown duration and long-term economic impact is novel."

 

In Monday' s regulator' s column, the SGX laid out its expectations of financial reports amid Covid-19.

 

" Issuers must eschew boilerplate disclosures, such as broad or generic statements that Covid-19 has negatively impacted the valuation measurements, without elaborating on the effects on each business segment," it said.

 

" Disclosures must also be balanced and fair and avoid omission of important unfavourable facts. Deterioration of financial performance that existed prior to the pandemic should clearly be disclosed as such and not characterised as Covid-19 related if this is untrue."

 

The regulator acknowledged the " present challenges" faced by issuers in making significant judgements and estimates on asset valuation, but said issuers should rely on the best available information in making " well-reasoned and supported" judgements and estimates.

 

" Boards should use best endeavours to ensure that the fair value of assets is not overstated, and engage management closely and question the appropriateness of key assumptions made in asset valuations. In the rare circumstances that the board is unable to quantify the impact to asset valuation, it should clearly explain why."

 

Under current listing rules, issuers must have their boards confirm that nothing has come to their attention that may render the interim financial statements to be false or misleading in any material aspect. This must continue to be done " without any attempt to carve out caveats or exceptions" , said the regulator.

 

" While this may be difficult under current conditions, it is precisely in these circumstances that investors need reliable financial information to make informed investment decisions."

 

In a joint media statement with SGX RegCo, Singapore' s Accounting and Corporate Regulatory Authority (Acra) said that issuers are " strongly encouraged" to refer to a guidance published by Acra in May.

 

It set out what directors should question management and statutory auditors on, so that they can adequately assess the impact from Covid-19 on companies' financials.

 

SGX RegCo will continue to review if further enhancements to the listing rules should be made to strengthen disclosures, it said.

A NEW agreement between Singapore Exchange Regulation (SGX RegCo) and Nasdaq will facilitate the regulatory exchange of information on issuers that are dual-listed on both exchanges. This includes a streamlined framework for issuers seeking a secondary listing on SGX.

 

The agreement builds on an existing partnership between the two parties to help companies access capital markets funding in both jurisdictions.

 

The streamlined framework allows secondary listing documents required for an SGX listing to be based on information contained in the US listing and subsequent filing documents to the US Securities and Exchange Commission and/or Nasdaq, together with additional disclosure in compliance with Singapore prospectus disclosure requirements.

 

The regulatory cooperation will further enable the monitoring and assessment of issuers and the enforcement of regulatory actions, including referrals of cases to the authorities of the respective jurisdictions, said SGX.

 

&ldquo Protecting investors&rsquo interests is important to both SGX and Nasdaq. This Memorandum of Understanding (MOU) which SGX RegCo is entering into with Nasdaq will enhance the oversight of dual-listed issuers and streamline the relevant processes between both exchanges,&rdquo said Tan Boon Gin, chief executive of SGX RegCo.

ABOUT seven years ago, the Singapore Exchange (SGX) was not in the foreign exchange (FX) futures space.

 

In fact, when it decided to launch its Indian Rupee futures in November 2013, it was late to the game - six years behind the incumbent Dubai Gold and Commodity Exchange (DGCX) where monthly volumes hovered around US$30 billion. Fast forward to present day, SGX has more than 60 per cent market share of the Indian Rupee offshore futures contract - a tool which offshore investors can use to manage currency risks associated with their exposure to the Indian market.

 

Similarly, when it launched its offshore Chinese Renminbi futures (CNH) a year after the Indian Rupee contract, SGX was two years behind the Hong Kong Exchanges and Clearing Market (HKEx) and the Chicago Mercantile Exchange (CME). Today, SGX has a dominant 80-plus per cent share of the listed futures market for CNH.

 

Being late has never held back SGX. In June, its total volume for FX futures stood at 2.19 million contracts, with a notional value of US$120 billion. Year-to-date, trading volume for SGX USD/CNH futures has exceeded US$531 billion.

 

In a short span of time, the new kid on the block has vaulted over its rivals to become Asia' s largest FX exchange. But there is no resting on its laurels and SGX has continued to innovate and expand its portfolio of products to meet clients' demand for risk management tools.

 

Led by chief executive officer Loh Boon Chye, SGX has been busy diversifying the past years in a bid to be a multi-asset exchange, offering FX, commodities and fixed-income as well. FX is soon expected to be " as meaningful as equity-index derivatives" , Mr Loh has said.

 

The recent US$128 million acquisition of the remaining 80 per cent stake in BidFX - a trading venue used by hedge funds and banks - may be small in the mergers and acquistion world of stock exchanges, but is nonetheless a significant move in SGX' s game plan to offer global investors a transparent, margin-efficient and well-regulated marketplace to manage seamlessly their Asian currency risks.

 

The acquisition may herald the start of an overhaul that should reduce the group' s reliance on domestic stocks and futures that track blue-chip equities in Japan, China, India and Taiwan.

 

The potential is huge. According to BIS Triennial Central Bank Survey 2019, the FX market is the largest financial market in the world, with average daily turnover in the over-the-counter (OTC) market amounting to US$6.6 trillion by traded volume. In comparison, the size of the exchange-traded FX derivatives market is only about 2 per cent of the OTC market. Here lies the opportunity for SGX to expand into the much larger global OTC market.

 

BidFX is strong in the OTC space. Its clients include asset managers, hedge funds and banks that trade bilaterally on the OTC market.

 

Cutting edge technology

 

Come September 2021, when tougher rules surrounding off-exchange derivatives kick in under the uncleared margin rule as part of Basel 3 reforms, bilateral OTC trades for big hedge funds and banks are going to be very costly. The new rules are expected to encourage them to switch to cheaper alternatives such as cleared futures. The magnitude of savings can be huge if one looks at the potential risks involved in OTC trading.

 

With its cutting edge technology - which includes pre-trade predictive models, in-trade benchmarking and post-trade synopses - BidFX will be the platform that propels SGX' s reach beyond FX futures into the global FX OTC market, where the bulk of the transactions take place.

 

BidFX also provides SGX the trading platform for its various product suite, including SGX FlexC futures - an innovative product that mimics bilateral trading in the OTC market, but offers a more effective way of mitigating counterparty credit risk within a regulated environment.

 

The possibilities are opening up now for SGX leveraging its BidFX investment. It can be the bridge between the formal exchange and that of the more popularly used OTC market, offering the best of both - flexibility of OTC market and transparency of a formal exchange.

 

SGX will be able to execute plans to develop more innovative products and hybrid ones that combine the OTC and the futures markets.

 

While many of its partnerships and acquisitions may not seem to have immediate impact on SGX, its " bolt-on" acquisitions as Citi calls them - such as BidFX and a 93 per cent stake in Scientific Beta for 186 million euros - are additive to and can enhance SGX' s core business as well as drive its strategic priorities which is to be one of multi-asset, multi-purpose and borderless.