The ASX-SGX proposal – in the national interest?

Posted on October 29, 2010
Filed Under ACFS Commentary, Banking, Financial Institutions and Markets, Funds Management & Superannuation, Media Release, Policy, Publications | 1 Comment

Contrary to Joe Hockey’s pronouncement that the ASX-SGX deal will see an end to Australia’s aspirations as a global financial centre, it may be just the opportunity Australia has been looking for to assume a major role in Asian financial markets.

As last year’s Australian Financial Centre Forum (Johnson) Report points out, despite our highly skilled workforce and excellent regulatory system, Australia’s imports and exports of financial services have been low by international standards. While our funds management sector is the fourth largest in the world, it manages only a small volume of funds from offshore. The integration of Australia’s capital market with an Asian exchange together with the introduction of a passport package for Australian businesses should assist in correcting this “inward focus” leading to a boost in trade for financial services and further improve the competitiveness and efficiency of the financial services sector. This should translate to reduced costs for business, wider choice for consumers, increased skilled job opportunities for Australian workers and the potential development of a wider range of business support industries.

The ASX-SGX proposal is representative of an international trend in stock exchanges which has occurred in two stages. First, there has been a widespread privatisation of what were formerly mutual or government-owned exchanges. According to the World Federation of Stock Exchanges, between 1998 and 2006, the proportion of for-profit stock exchanges increased from 38% to 75%. Second, these for-profit entities have moved to consolidate internationally for competitive and scale purposes. Better know consolidations have been the OMX which owns and operates 7 exchanges based in the Nordic and Baltic countries and the Euronext, which is a merger of Amsterdam, Brussels, Lisbon and Paris stock exchanges. In addition, there has been the OMX-NASDAQ merger, consolidation between London and Milan, mergers amongst derivative exchanges and numerous within country mergers as in Japan, India and Spain.

To date there is little research into the effectiveness of these consolidations, but a recent study by Ulf Nielsson of Columbia University, soon to be published in the Journal of Financial Markets, explores the impact on the Euronext. Nielsson found that bigger firms and firms with foreign sales benefited from increased liquidity, noting that the latter included most firms listed on the exchange. The study also found that the merger also led to an increase in Euronext’s market share at the expense of the London Stock Exchange, although there was no evidence of an increase in competitiveness with regard to attracting new listings.

On that basis one might expect advantages for the ASX, dominated as it is with large financial services firms and export-oriented resource stocks. One might also anticipate the combined strength of Singapore and Sydney, currently ranked fourth and tenth respectively as Global Financial Centres, in creating a stronger financial hub in the South Asia region to be at the expense of North Asian centres such as Hong Kong, Shanghai and Shenzhen.

From a strategic point of view, this merger would demonstrate a genuine integration of Australian and Asian financial markets and potentially reposition Australia. Despite Australia’s aspirations to be a leader in Asia, the broader public perception of Australia has not been as a part of Asia but more as part of a separate classification, usually grouped together with New Zealand as Oceania or Australasia. Had the ASX merged with Toronto or London exchanges as has been explored, the vision of Australia as a leader in Asia would become even more remote.

Ideally from Australia’s point of view, this proposal would have been more beneficial had it come three years ago when previously discussed. At that stage the ASX would have been the initiator of such a proposal, in more advantageous and appropriate position given that the SGX is smaller and less liquid than the ASX, and in a better position to hold the balance of power with the appointment of a Chair, CEO and Board members. One would also expect there to be some advantages in having a home-based stock exchange. Those with a long memory may remember the outcomes for the Melbourne Stock Exchange when merged into the ASX!

All of these issues and more will be explored no doubt in the regulatory impact statement that will be required to overcome regulatory hurdles such as Australian gaining government approval to lift the 15 % ownership cap on the ASX and approval of the Foreign Investment Review Board. Provided those obstacles can be overcome, further approvals will need to be sought from ASIC, under the Corporations Act, from the Monetary Authority of Singapore, from ASX and SGX shareholders, and for SGX shares to be listed on the ASX.
While the potential benefits of mergers are not always realised, there are two notable strengths in this proposal. First, the reported mutual understanding and good will between the two stock exchanges, and second the proposed and current CEO of SGX, Magnus Bocker, is formerly the head of the OMX and is therefore experienced in such consolidations.

On the other hand, the proposal would be more appealing were there a better representation of ASX interests in the appointment of management and Board. Both the proposed CEO and Chair are from the SGX and the proposed Board will have only 4 nominees, David Gonski, Russell Aboud, Jillian Broadbent and Alan Cameron. As a minority these Directors may not always be in a position to act in the best interests of Australian companies as new combined listing rules and regulations are developed.

As we are only too aware, Australia’s resilience through the GFC was in no small part a direct outcome of our trading partnership with China. Forward economic projections indicate that if there is a positive economic future internationally, it revolves around the dynamic Asian economies. Critical mass and economies of scale that result from the ASX-SGX merger would potentially provide a highly efficient international capital market linked to the vibrant economies of South Asia, and provide a gateway for Australian business to Asia and the rest of the world.

This proposal ticks all the boxes in terms of the Johnson Report. It has the potential to increase the size of the market, provide more diversified funding sources for Australian business, lower costs and widen choices for consumers and business, it will still adhere to strong regulatory standards, and will promote Australia’s role in the Asian region. It is therefore hard to argue that the proposed merger would not be in the national interest.

Media contact:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050

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Australian Centre for Financial Studies publishes the second Melbourne Mercer Global Pension Index

Posted on October 20, 2010
Filed Under Contracted Research and Consulting, Funds Management & Superannuation, Media Release, Melbourne Mercer Global Pension Index | Leave a Comment

Australian Centre for Financial Studies publishes the second Melbourne Mercer Global Pension Index

The Second Melbourne Mercer Global Pension Index (Index) published by the Australian Centre for Financial Studies (ACFS) today, highlights both the strengths and weaknesses of the Australian retirement system in an international context. In the 2010 Index, Australia ranks fourth out of 14 countries.

The Index, which is compiled in conjunction with Mercer, examines the adequacy of benefits, the sustainability and the integrity of retirement systems.  The other 13 countries considered are the Netherlands, Sweden, Canada, UK, Chile, Singapore, USA, Germany, Japan and China, and for the first time Switzerland, Brazil and France.

While Australia’s strengths in terms of widespread mandatory superannuation coverage, a strong regulatory system and large pool of invested funds contribute to its strong result, there is room for improvement. Weaknesses include the paucity of retirement income products to deal with longevity risk, and the small average scale of superannuation funds which leads to a cost disadvantage, especially with respect to large European funds. The inclusion of an operating cost factor in the 2010 Index has highlighted the latter.

The leading retirement system in the Index once again is the Netherlands, which has the advantage of a very well established retirement system with higher benefit levels, very large industry wide defined benefit schemes, and a consequent low cost structure. Even the Netherlands, however, does not rate as an “A grade” (score greater than 80%) system under the Index. Weaknesses in the Netherlands system include absence of a mandatory preservation age, poor household savings and low employment participation amongst older workers.

According to ACFS Director, Professor Deborah Ralston, “international comparative studies like this are an invaluable tool for policy makers and researchers as the Index provides a detailed analytical framework in which the relative merits of each system can be assessed.”

This second edition, the 2010 Index will offer greater insight into this complex topic, with the inclusion of new countries and broader terms of reference. The Index is based on more than 40 indicators which reflect features that are desirable in all retirement income systems. These indicators are grouped into three sub-indices: adequacy, sustainability and integrity.

“Each retirement system is quite different as this study highlights, with different age pension safety nets, mandatory or voluntary employment related pensions and varying levels of incentive for private saving. Western societies with lower birth rates and increased longevity and are increasingly challenged to provide an adequate benefit to retirees and generally meet the needs of an aging population. Retirement systems tend to be best developed in the Scandinavian countries, and least well developed in Asia. In Asian countries retirement systems tend to be in their infancy as governments strive to develop public policies which accommodate changing family structures and urbanisation which impact on how the aged are cared for.”

Professor Kevin Davis, ACFS Research Director said that “these cultural and social differences were a challenge in developing the Index and for this purpose the ACFS assembled a team of pension experts to oversee the process and guide its development. We believe that the final result presents a rigorous and balanced approach to that assessment.”

“For each country the Index examines the well accepted three pillars of a retirement system, which in Australia are the Age Pension, compulsory superannuation and voluntary super savings, as well as the World Bank’s fourth pillar of private savings through home ownership and personal non-super savings.”

Consequently, the final results, reflect not only the relative merits of each system but also to some extent the maturity of the retirement system.

About the Australian Centre for Financial Studies

The Australian Centre for Financial Studies (ACFS), formerly the Melbourne Centre for Financial Studies, is a not-for-profit consortium of Monash University, RMIT University, the University of Melbourne and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government. Funding for ACFS is also derived from corporate sponsorship and through research partnerships such as the one with Mercer which has led to this report.

The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia’s financial institutions and universities, and of Australia as a financial centre

Media Contacts:

Professor Deborah Ralston, Director ACFS

T: +61 3 9666 1010

info@australiancentre.com.au

Professor Kevin Davis, Research Director, ACFS

T: +61 3 9666 1050

info@australiancentre.com.au

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Melbourne Mercer Global Pension Index 2010 Launch

Posted on October 20, 2010
Filed Under Contracted Research and Consulting, Event News, Funds Management & Superannuation, Melbourne Mercer Global Pension Index, Publications | Leave a Comment

The Australian Centre for Financial Studies is hosting the launch of the 2010 Melbourne Mercer Global Pension Index at 6:30PM today.

The Index examines the adequacy of benefits, the sustainability and the integrity of retirement systems – highlighting both the strengths and weaknesses of the Australian retirement system in an international context. The launch of the first Index last year generated considerable attention and debate internationally. The response demonstrated the Index’s value to government, industry and academia in contributing to the understanding of how to best provide for the ageing population. With the Index expanded, ACFS anticipates to make a greater impact this year.

The 2010 Index also marks the beginning of a longitudinal study dedicated to the comparative analysis of retirement systems worldwide. To track the Index’s development, ACFS is proud to host globalpensionindex.com, the official Index website.

ACFS would like to acknowledge research partner, Mercer and Launch supporter, the Department of Innovation, Industry, and Regional Development, without whom this event would not be possible.

Visit globalpensionindex.com after 7PM today, 20-10-2010 to review the full 2010 report.

View 2009 report

Enquiries Contact
Prof Deborah Ralston
T: +61 3 9666 1010
info@australiancentre.com.au

Other ACFS Contracted Research

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Retail Finance: A path forward for education, advice and disclosure

Posted on October 13, 2010
Filed Under ANZSFRC, Banking, Financial Institutions and Markets, Media Release | Leave a Comment

The Australia-New Zealand Shadow Financial Regulatory Committee releases Statement No. 7 exploring what improvements in financial education, literacy, and disclosure arrangements should be considered to enhance principles-based financial regulation.

Even though the Australian and New Zealand banking sectors largely escaped the calamities of the Global Financial Crisis, there have still been substantial losses (albeit not necessarily GFC related) for retail investors outside the prudentially regulated sector. In Australia, losses to investors from failures of financial advisors and financial product manufacturers led to the parliamentary Ripoll inquiry whose recommendations included ensuring greater disclosure and improved investor education as well as specific suggestions on financial advice and commissions.  In New Zealand, there have been around fifty finance company collapses, involving accumulated losses of over NZD 6 billion affecting over 100,000 investors, the most recent being the August 2010 collapse of South Canterbury Finance. Aside from losses to individuals and taxpayers, these episodes have important implications for confidence in our financial system.

Regulatory changes are taking place. In both countries, there has been some recent movement towards a more rules-based approach in the retail finance area (which has costs in the form of inhibiting financial innovation), but the overall emphasis remains largely principles-based. The caveat emptor approach to financial regulation based on education, advice, and disclosure requires high levels of financial literacy and appropriate disclosure. In this Statement the Australia-New Zealand Shadow Financial Regulatory Committee (ANZSFRC) explores what improvements in financial education, literacy, and disclosure arrangements warrant further attention.

Summary:

• Emphasizes the importance of financial literacy for principles-based financial regulation that is based on disclosure and caveat emptor.
• Recommends that key financial concepts need to be fully integrated into, and emphasized by, the national mathematics curriculum.
• Recommends that the governments of Australia and New Zealand reconsider policies that allow school pupils to escape formal mathematics education at too early an age.
• Recommends that information about finance principles, products, markets, institutions and history be incorporated into national high school curricula within courses that are taken by all students, and, to the greatest extent possible, these topics be integrated with the tools and concepts taught in the mathematics curriculum, particularly through the use of case studies and experiential learning.
• Supports further development of public good services in the area of financial literacy, and encourages financial institutions to become more active in the promotion, development, and funding of financial literacy services and activities.
• Recommends the establishment of (i) a simple, minimalist and concise list of information designed specifically for retail investors be included in all disclosure documents for financial securities and products and (ii) an online forum designed to elicit information about a financial security or product offering during a pre-registration period.

This statement was presented at the 15th ACFS – Finsia Banking and Finance Conference held 30 Sep – 1 Oct 2010 in Melbourne. (Full statement available for download at our conference page)

Media contact details:
Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
Mob: +61 409 970 559
kevin.davis@australiancentre.com.au

About ANZSFRC
Following the example of the Shadow Financial Regulatory Committees in Asia, Europe, Japan, Latin America and the United States, a group of well known professors from Australia and  New Zealand, who are all experts in the fields of banking, finance, and the regulation and supervision of financial institutions and markets, set up the Australia-New Zealand Shadow Financial Regulatory Committee (ANZSFRC). The ANZSFRC had its inaugural meeting in Sydney in December 2006 when its first statement entitled “Managing Bank Failure in Australia and New Zealand: Rapid Access Matters” was issued during the 2006 Australasian Finance and Banking Conference. Co-chairs of the ANZSFRC are Prof. Glenn Boyle and Prof. Kevin Davis. Glenn Boyle is Professor of Finance at the University of Canterbury, Christchurch. Kevin Davis is Research Director of the Australian Centre for Financial Studies and Professor of Finance at the University of Melbourne.

View previous statements released by the committee

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