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Tuesday, Dec. 21, 2010

Merits of a Singapore-Australian exchange


SINGAPORE — Australian regulators and politicians must decide soon whether the proposed $8 billion takeover of the main stock market operator, ASX Ltd., by the Singapore Exchange is in the national interest.

The merger of the Asia-Pacific's fifth- and eighth-biggest bourses to create the world's fifth-largest securities exchange would offer investors access to the second largest listing venue in the region, with more than 2,700 companies from 20 countries on the combined platform, including more than 900 mining and natural resource firms and the biggest number of real estate investment trusts and exchange-traded funds.

The deal was initially opposed by the Tokyo Stock Exchange, which holds 4.9 percent of the shares in the Singapore bourse. TSE President Atsushi Saito said issuance of new shares would reduce the value of his company's stake, but the TSE subsequently dropped its criticism, citing growth prospects for the merged entity.

Singapore Exchange Ltd. and ASX say that their businesses are complementary. Both aim to lower transaction costs. From an Australian perspective, a major point of controversy is that ASX will be a subsidiary of the Singapore Exchange. Yet, the Australian operations of a merged ASX-SGX would be subject to Australian regulation and have an Australian board.

Under Australian law, no single shareholder can own more than 15 percent of ASX, so the deal will have to be approved by Federal Parliament as well as by Australia's Foreign Investment Review Board and the Australian Competition and Consumer Commission. The latter is assessing whether a merged SGX-ASX could hobble development of competition between exchanges and trading vehicles in Australia. Formal scrutiny of the proposed deal is unlikely to conclude before May.

Apart from the emotive issue of foreign takeover, the two other major sticking points are likely to be the Singapore government's 23.5 percent stake in SGX, which would result in a 14 percent share of the merged entity, and the different approaches to market regulation.

The Singapore government has sought to play down its holding. Its stake is in the hands of Temasek Holdings, Singapore's national investment agency, and Temasek has no vote in SGX affairs.

The Australian Securities and Investments Commission is increasingly focused on ensuring transparency and stamping out insider trading and other stock market crimes. Singapore's approach to regulation and investor protection is less intrusive.

Australia and Singapore may agree to align their regulatory frameworks and listing requirements more closely. It is also possible that Temasek may agree to sell its SGX stake.

The merger may eventually be judged to be the best deal available to advance Australia's prosperity, or it may not. Asia, with 60 percent of the global population, is poised to generate much of the world's wealth. The economies of China and India, the two most populous nations, are forecast to grow at double the rate of the rest of the world in the five years to 2015.

A new wave of middle-class consumers is emerging. Many Asian countries have established pension schemes for their aging populations; this will be investible money. The region's 13 percent share of global funds under management is set to expand sharply.

The same forces that have driven globalization — faster and easier travel, trade, investment, communications, tourism and other exchanges of people, goods and services — have drawn Australia and Asia much closer together.

The old "White Australia" policy sought to repel and then to limit Asian connections, until it was formally abolished in the early 1970s. Current Australian policy, supported until now by both Labor-led and Liberal-led governments, is one of extensive engagement with a region that has become the main engine of global growth.

Meanwhile, Australia and nearly all Asian countries have adopted more open economic and trading systems. These have been formalized in a network of preferential trading deals linking Australia and Asia. More are under negotiation, including one with Japan.

Yet there remain gaps in the process of building closer ties between Australia and Asia. One of the most glaring is the lack of a two-way financial services funnel that would enable surplus money from Asia's rapidly growing reservoirs of savings to be invested in Australia as equity or bond capital, reducing the country's potentially dangerous reliance on short-term bank debt that dominates the present foreign capital inflow.

Australia, too, with one of the world's largest pools of superannuation savings under management, needs a reliable channel to diversify asset holdings through Asian investments.

Australia's politicians and regulators have a duty to consider carefully whether the ASX-SGX merger in the form proposed will be a financial services funnel into Asia that offers significant net benefits to the Australian economy.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.


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