Global exchange shake-up spreads to Thailand

Long-awaited moves to liberalise Thailand’s capital markets and demutualise its stock exchange will pose challenges for brokers, argues Pattera Dilokrungthirapop, chief executive of DBS Vickers Securities in Bangkok.

Brokerages will have to invest in IT to keep pace with changes to the market structure, which will be easier for those with critical mass and economies of scale, she says. This may lead to consolidation, which would probably be a good thing for fund managers and investors.

Another probable outcome of regulatory overhaul – lower trading costs – will likely benefit the buy-side more than the sell-side, argues Dilokrungthirapop, who also chairs Thailand’s Association of Securities Companies.

“Transaction costs are not all that high now, so the potential gain is bigger for others in the market [such as investors and fund managers] than for brokers,” says Dilokrungthirapop.

“If transaction costs come down, brokers will have to play a bigger role in developing their own business,” she adds. “They will need to be more creative and more proactive.”

Exchange fees are 0.5 basis points, meaning there's room for improvement, while the clearing fee is 0.1bp, which is already “quite low” and comparable regionally, so it may not fall much.

The first step in the rule changes – part of a broad restructuring – came at the start of last year, when brokerage commission rates were made freely negotiable at trading volumes over 20 million baht ($650,000).

Full deregulation of licensing and commissions is expected by next year, says Dilokrungthirapop. The preparation phase is under way, and brokers have been trying to differentiate their products and services.

As regards the SET, the law is being drafted and scrutinised by a parliamentary subcommittee, she says, adding it’s likely the authorities are preparing for full demutualisation.

Either way, the exchange will be restructured in some form. “The world has changed, and the stock exchange has to change, too, to prepare for greater competition,” Dilokrungthirapop says.

Consolidation and cooperation taking place among exchanges globally is one reason for Thailand to consider boosting its competitiveness, she adds.  

In the past week alone, deals have emerged between Deutsche Börse and NYSE Euronext, and between the London Stock Exchange and Toronto exchange operator TMX. That's on top of the proposed ASX/SGX merger, which came to light in late October.

The SET has until now had a dual role as both a trading platform and a proponent of market development. Dilokrungthirapop argues that the latter role has hindered the exchange from performing on a fully commercial basis and that the SET should focus solely on its commercial business.

Hence she supports the proposal that market development – including investor education, expansion of the investor base, and work on system development – should be transferred from the SET to a newly created unit responsible for capital-market development and driven by policymakers and regulators.

“When exchanges start concentrating on profitability and market competition, the development role will have to be reduced,” adds Dilokrungthirapop. That said, she does not think the Thai market is big enough to accommodate two exchanges, unless a specific niche can be found for another platform.

The demutualisation process is in the hands of the Office of the Council of State (OCS), notes Warut Siwasariyanon, head of research at Finansa Securities in Bangkok. The Cabinet has given a green light to the amendment of the SEC Act incorporating the demutualisation of the SET, and now the OCS is considering whether to give its own approval, he adds.

The SET's long-term plan had specified that this bill should become a law in 2011. But that will be “almost impossible”, says Warut, given that the amendment must be approved by parliament and Prime Minister Abhisit Vejjajiva plans to dissolve the House sometime this year.

Therefore, the SET board of directors has agreed to go ahead with all plans that can be legally done without the demutualisation, including setting up a private company as a subsidiary of the SET to take over some of its duties.

The SET expects its subsidiary to start operations next year as the amendment of the SEC Act continues. “We expect the amendment to be completed within the next two years,” he adds.

Warut is more positive than Dilokrungthirapop as to brokers' perspective of the plans. “Brokers see the ‘demu’ as a good thing, as they want to see an IPO of the SET shares,” he says. “What they are haggling over is how much they will get. I believe brokers support any idea that can bring in new clients, especially foreign investors."

Meanwhile, the Thai government is also looking at attracting new investors, potentially high-frequency traders (HFTs), for which it will need to enhance the exchange’s technology. Dilokrungthirapop acknowledges there are widespread concerns about the market impact of HFTs, but says the Thai market is not that deep or liquid, so it will be some time before such participants come in.

She also accepts that having other platforms or markets will fragment liquidity, which is something the regulators will have to keep in mind.

"My main concern is the liquidity pool,” she says. “There’s not enough depth yet for arbitrage and more complicated structures. A lot more work needs to be done to attract foreigners into the Thai market.”

Dilokrungthirapop also wants to see more participation in the equities market from big domestic institutions.

Are fund managers concerned about the potential arrival of foreign rivals on their patch to trade stocks? “I can’t speak for fund managers,” she says, “but I think they accept it, because only 15% of local funds’ AUM is invested in Thai equities.”

Fixed income assets form a much bigger part of a typical investment portfolio in Thailand than equities.

Thai asset managers will also face greater competition on fund sales as a result of the financial overhaul, which will make it easier for foreign firms to sell fund products onshore, as reported last year by AsianInvestor.

The changes will mean every qualified entity, including foreign fund managers, will be able to apply for a licence to sell fund products onshore directly without having to go through a local distributor.