Hong Kong and Singapore are taking steps to curb the regulatory powers of their local bourses to remove a perceived conflict of interest and improve the quality of listed companies.
In Hong Kong and Singapore local exchanges act as front-line regulators, meaning they police the same companies that pay their revenues and shareholder dividends.
This conflicting role has led Singapore Exchange (SGX) and Hong Kong Exchanges & Clearing (HKEX) open to the trading of companies that later got embroiled in several accounting scandals.
To address the issue SGX and HKEX have unveiled radical shake-ups.
SGX announced this week it was spinning off its regulatory functions into an independently governed subsidiary. HKEX proposed last month to remove CEO Charles Li from the listing decision-making process, handing more power to the local securities watchdog.
"It's definitely a positive for investors. There has been a lot of concern that for-profit exchanges are not able to independently regulate the companies that list on their markets," said Jamie Allen, secretary general of the Asian Corporate Governance Association.
Governments globally have been slow to strip exchanges of legacy regulatory powers.
Even in the United States, usually at the forefront of best corporate governance practice, some exchanges have held onto statutory immunities afforded as part of their regulatory function. As such arrangements persist in the U.S., some have questioned whether the latest moves in Hong Kong and Singapore will successfully stamp-out conflicts.
"The test will come when (the change) is actually put into place," said David Smith, head of corporate governance at Aberdeen Asset Management Asia, an SGX investor.
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The HKEX and SGX enforce listing rules and oversee trading. They can reprimand, suspend or delist companies that breach the rules, compel companies to take specific remedial actions, censure directors and revoke trading and listing authorizations.
But accounting problems at Chinese firms in both Singapore and Hong Kong - such as insolvent steelmaker FerroChina and China Forestry Holdings, which is being liquidated - has sparked criticism that the exchanges have not adequately vetted listed companies. "There are numerous checks and balances in place to address any perception of a conflict of interest," said an HKEX spokesman. "These include HKEX's statutory duty to act in the interest of the public."
To woo big listings, both HKEX and SGX have been willing to allow share structures that limit investor voting rights.
Investors say conflicts are especially acute in Singapore which, unlike other major financial markets, does not have a dedicated securities watchdog. SGX is the front-line markets regulator and is itself regulated by the central bank.
Flaws in this structure were highlighted by Singapore's 2013 penny stocks scandal, when shares in three small firms that had seen huge run-ups plunged, wiping out S$8 billion ($5.90 billion) in two days. SGX was criticized for being too slow to act.
"Clarity and adherence to corporate governance clearly will make investors more comfortable," SGX CEO Loh Boon Chye told Reuters.
