27 July 2001

Pan Asian Markets: Possible or Pipedream?, Gold Coast

It is a great pleasure to be here today at Bond University.

Over the last decade we have witnessed dynamic changes in financial services and markets brought about by technological developments and the global nature of commerce.

I almost feel as if those words should be clich├ęs but I don't think that any of us can deny that we have witnessed an incredible pace of change over the last two decades. And there seems to be no sign of a slowdown.

One of the most interesting developments and one I think will change the face of world economies, is the increasing integration of world financial markets.

You need look no further than the international newspapers which routinely report the latest courtship of exchange around the world that are entering into joint ventures, linkages, alliances and mergers.

What ever you want to call them, they are driven by the same motivations, that is, the desire to increase liquidity, reduce trading costs, boost capital flows.

Basically, they want to harness the opportunities provided by globalisation.

And this I think is an issue that has the full attention of Australia's exchanges.

We need to be pro-active in these areas to ensure we take full advantage of our strengths, give the relatively small size of our markets.

Just to highlight this point, it's worth reminding ourselves of some of these size differences.

As you would know, the US financial markets hold a commanding position on the world stage, comprising nearly 50% of the Morgan Stanley Capital Index.

The three largest European exchanges together comprise nearly 18 per cent of the Index. The third significant area of activity is Japan which is 10.7 per cent of the Index.

Using this measure, Australia makes up just 1.3 per cent of the Index. If you combine our market with that of New Zealand, Singapore and Hong Kong, the picture is still small. Together we represent less than 3 per cent of the world's capital.

These differences show the task ahead of us. That is, to ensure our markets, domestic and regional, remain viable and can compete on the world stage.

And I think that the initiatives from our exchanges are positive steps towards securing this position.

This brings me to the title of today's speech.

I think it is fair to say that a Pan Asian Market is neither a possibility nor a pipedream but perhaps will be the natural progression of where our regional markets are heading.

Mind you, I think that the concept of a Pan Asian market could manifest itself in a number of possible ways, and will depend upon the needs and objectives of the exchanges involved.

Exchanges in the United States have been actively involved in a range of global alliances.

Nasdaq has recently acquired a majority ownership in Easdaq which is the Belgian-based, pan-European stock exchange.

This acquisition is the third leg of Nasdaq's objective to put in place a market whose operations span Europe, Japan and the US.

Through these arrangements, Nasdaq plans to consolidate order flow in Nasdaq-listed and other US stocks.

There is also the proposal put up by the New York Stock Exchange to form the Global Equity Market.

This would see the New York Stock Exchange and nine other exchanges around the world, including the Australian Stock Exchange, combine to create a 24-hour equity market offering investors access to a global network of blue-chip stocks through their domestic exchanges.

Over in Europe, exchanges have been pursing alliances and mergers, with 19 different cross-border deals announced in 1999 alone.

Yet many projects have succumbed to the inherent difficulties of getting the arrangements up and running.

Of the successful projects, the foremost are Euronext and Eurex.

Euronext is the result of a merger of the Paris, Brussels and Amsterdam exchanges. By the end of this year it is scheduled to operate on a single trading platform. It is the second-largest exchange in Europe by market capitalisation and turnover.

In 1998, the Deutsche Bourse and the Swiss Exchange merged their derivative exchanges to form Eurex, now the world's largest derivatives exchange by contract volume.

I know that market integration in Europe will continue to pick up pace as the European Union moves towards a single financial market with a common currency.

Back in Australia our markets may be small in world terms, but they are by far some of the most innovative and responsive in the world.

But being small means that we have to work that much harder to stay ahead of the game.

We are competing with markets that have the advantage of scale - with more investors, more listed companies and more opportunities to spread their costs.

In light, of this our exchanges have been busy putting in place initiatives to strengthen their position and improve their liquidity.

Recently, the Sydney Futures Exchange and the Hong Kong Exchange announced a strategic initiative to develop new derivative trading and clearing services.

The Australian Stock Exchange also entered into an agreement with the Singapore Stock Exchange in May 2000 to design and then set up a trading link.

The link will facilitate the trading, settlement and holding of securities quoted on the Singapore Exchange by Australian investors and vice versa. This is expected to begin later in the year.

Really, it is these arrangements within our region that can be seen as the first step towards a Pan Asian market.

But Australian exchanges are also looking further afield at opportunities to tap into the US and European markets. In August 1999, the SFE, and its subsidiary the New Zealand Futures and Options Exchange, became the first exchanges to receive approval to place electronic trading terminals in the US.

The ASX and Nasdaq are discussing an alliance to provide co-listing of stocks and the development of remote access to each other's market.

Most recently the ASX also has established a one way trading link with Bloomberg Tradebook that enables Australian investors, through ASX brokers, to trade securities listed on the New York Stock Exchange and Nasdaq.

What is the role of government in all of this?

The alliances I have described are initiatives by our exchanges in response to competitive pressures, driven by commercial need.

But exchanges act within a legislative framework. And it is our role to provide a regulation which is flexible enough to help such initiatives, but strong enough to ensure market integrity and consumer protection

And I must say that it is not an easy job to identify the regulatory issues that arise with each linkage or merger. They very much depend on how the initiative is structured and what is intended to be done under each one.

But some of the common themes include whether the initiative triggers for example, the dealer and market licensing requirements in the home jurisdiction, how we ensure consistent disclosure to the market, and how we govern a body whose operations may span different jurisdictions.

Of course with complete mergers of markets across international boundaries there is the added complexity of the desire by many countries to maintain the national sovereignty of their markets.

While I think Australia has a pretty good record in working to accommodate various initiatives, I must emphasise that we are determined to retain Australia's high standards of market integrity and consumer protection.

We also been putting laws in place to help these market developments. In April, we introduced into the Parliament the Financial Services Reform Bill and I am hoping that these reforms can start in October.

One of the important changes that I want to touch on is the 5% ownership limit that now applies to the Australian Stock Exchange.

The Bill will remove this limitation and in its place, a 15% limit will be imposed on all markets and clearing and settlement facilities that are of national significance.

I have previously announced the intention that the limitation will apply to the Australian Stock Exchange and the Sydney Futures Exchange.

Flexible guidelines have been developed to help determine whether a market or facility comes within the 15% limitation. Consideration will be given to first, the significance to the national economy of the functions performed by the financial market or clearing and settlement facility.

Second, the size and importance of the financial market or clearing and settlement facility both in the Australian financial services industry and relative to other operations providing a similar service or function.

And finally, the competition between the market or facility and other already prescribed markets or clearing and settlement facilities.

I think that these arrangements will achieve a level playing field for operators of markets and clearing and settlement facilities.

It will allow our exchanges to pursue more diverse ownership and give them more flexibility to participate in arrangements that involve equity participation.

At the same time the arrangements recognise the importance of our markets and clearing facilities to the economy.

One final issue I would like to talk about is the mutual recognition project we have started with Hong Kong and Singapore.

While the initiatives do not so directly touch on exchange integration, they do more generally try to accommodate cross-border activity in financial services.

Basically I would like to see a situation where satisfying home country regulation will be taken to have satisfied requirements in a foreign jurisdiction.

For example, if I am an Australian issuer and I want to offer shares to the Singaporean public, I could do so on the basis of having satisfied Australian requirements.

This is just one of the initiatives we are exploring with Singapore. But I think the important point is that this is a first step towards creating what could be a common market in financial services.

Ultimately the task ahead is to ensure our markets, both domestic and regional, stay viable and can compete on the world stage.

I think that the initiatives from Government and those we are seeing from our exchanges are positive steps towards securing our position.

I can't give you a crystal clear picture of where Australian exchanges will be placed at the end of this process.

Certainly, it may find Australia as part of a Pan Asian Market. Possibly, it will find Australia as part of a wider global network.

What I am sure of is that Australian exchanges will bring to any deal they enter into, world-class market integrity and a responsive regulatory environment.

And it may be this, rather than our size, that is ultimately the more important determinant of where we end up.