Financial Market Notes PDF

CHAPTER 1: FINANCIAL MARKET Financial Market: A market in which people & entities can trade financial securities, commodities and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Examples of securities are stocks, bonds, and commodities. Function...

CHAPTER 1: FINANCIAL MARKET Financial Market: A market in which people & entities can trade financial securities, commodities and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Examples of securities are stocks, bonds, and commodities. Functions of Financial Market i. Facilitates Prices Discovery where the financial market helps the investors in giving the price of goods or services that are determined by supply and demand. ii. Provides Liquidity to Financial Assets where the investors can invest their money or convert their investments into money whenever they desire. iii. Reduce the Cost of Transactions as the Financial Market provides every type of information without spending any money. Market Money Market Foreign Exchange Market Name Definition Part of the financial market Buying foreign currencies with domestic currencies and where instruments with high selling foreign currencies for domestic currencies. liquidity and very short-term maturities are traded. Participants: Central banks, investment management firms, retail forex brokers, investors Instruments / - Treasury Bills: Safest - Spot Market: The quickest transactions involving Types money market instruments as currency in foreign markets due to immediate payment. (F.E.M) they are issued by the central government with zero-risk - Forward Contact: A transaction is concluded with instruments. the price fixed immediately, even though the delivery will be at a stipulated date in the future. - Commercial Paper: Short term debt instrument issued to - Swap: An exchange of 2 currencies on the spot with get money. The longer the the agreement to reexchange them back at some future maturity on a note the higher date. the interest rate. - Future Market: Foreign currencies may be bought - Repurchase Agreements and sold for delivery at a future date. Popular for firms (Repos): Purchased security involved in international trade and for speculators. from a dealer with the agreement that they will be - Option: Hedge assets and liabilities against changes in sold back at a future date for a future foreign currency by entering into a fixed forex higher price. rate for future transactions. - Bankers’ Acceptance: Bank guarantees that the buyer or bank’s customer will pay the seller at a future date. Functions 1. Exists to facilitate efficient 1. Transfer of purchasing power because international transfer of short-term funds transactions normally involve parties in countries with between holders and different national currencies. borrowers of cash assets. 2. Provision of credit since the movement of goods 2. Allow the government to between countries takes time and inventory in transit raise funds. must be financed. 3. Provides a good return on 3. Minimize foreign exchange risk by transferring their funds. (For foreign exchange risk to someone else via hedging investors/lenders) facilities.  4. Enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. (For borrowers) Capital Market -​ Typically involve issuing instruments such as stocks and bonds for the medium -term and long-term. -​ The capital market is a source of financing for companies around the world. The most famous of the capital markets are the stock market and the bond market. -​ Participants: Individual Investors / Institutional Investors (Pension or Mutual Funds) / Governments / Companies or Organizations / Banks or Financial Institutions. Stock Market -​ The central marketplace for the raising of equity funds by corporations and governments. -​ For example, in Malaysia (Bursa Malaysia Securities Berhad), USA (New York Stock Exchange) & Singapore (Singapore Exchange) -​ Separated into two; Primary Market & Secondary Market -​ Functions:  Primary Market Secondary Market Definition: New securities are bought and Definition: A market where existing sold for the first time between issuer and securities are traded among investors. Once investors. Securities are bought directly from the security begins to trade among investors, the company. New issues of debentures, it becomes part of the secondary market. preference share and equity securities are sold here. Functions: Functions: 1.​ Provides attractive issues to the 1.​ Provides regular information about the potential investors, allowing the value of securities. company to raise capital. 2.​ Helps to observe the prices of bonds 2.​ The securities issued in the primary and their interest rates. market can be immediately sold in the 3.​ Offer the investors liquidity for their secondary market with a high rate of financial assets. liquidity. 4.​ Low cost of transactions 3.​ Less risky if there is failure in investment as the company does not depend on a single investor. 4.​ Prospectus containing all details about the securities. Method to Raise Capital in Primary Market: Initial Public Offering (IPO), Direct Placement, Rights Offering, and Sale of Shares to Employee (ESOP) Bond Market -​ Issuance and trading of debt securities occurs. -​ Primarily includes government-issued securities and corporate debt securities. -​ Mostly occurs over-the-counter, through organized electronic trading networks. -​ The bond market is actually many times bigger and is vital to the ongoing operation of the public and private sector Derivatives Market -​ The market in which derivative securities trade. -​ Derivative refers to the security with a price that is dependent upon or derived from one or more underlying assets. -​ The value is determined by fluctuations in the underlying assets (e.g: stocks, bonds, commodities, currencies, interest rates and market indexes) Securities Market -​ an exchange where sale and purchase transactions of securities are conducted on the base of demand and supply. Stock Exchange: An organization which provides the market place or facility for the buying and selling of securities under strict rules, regulations and guidelines. In Malaysia, they are Bursa Malaysia Securities Berhad, Bursa Malaysia Derivatives Berhad, and The Futures and Option Exchange. Bursa Malaysia Securities Berhad’s Functions 1.​ Governs the conduct of its participants in securities dealings 2.​ Responsible for the surveillance of the market place 3.​ The enforcement of the listing requirements such as the criteria for listing, disclosure requirements and standard to be maintained by listed companies. SECURITIES INDUSTRY AND ITS SIGNIFICANCE TO THE MALAYSIAN ECONOMY Securities Commision (SC): Represented securities industries. primary resource for global securities industries. protect and advance the interest. Participants in the Malaysia Equity Market: 1.​ Institutional Investors (Pension / Unit Trust Funds & Corporate / International Investors) 2.​ Retail Investors (Short-Term / Long-Term Investors) 3.​ Intermediaries (Participating Organizations such as Universal Brokers or Non-Universal Brokers) Types of Securities Traded in BMSB: -​ Common Stocks / Preferred Stocks / Debentures / Bonds / Warrants CHAPTER 2: ETHICS AND REGULATIONS Ethical of Brokers/Dealers I.​ Always give higher priority to the client’s wealth than to his or her own. II.​ Always be aware of the trust that has been placed on him/her and act with prudence and care. III.​ Should not manipulate markets or try to influence or distort prices to mislead market participants. A Broker Should: I.​ Be forthcoming about how the investment analysis was done and the changes could affect the outcome. II.​ Not present himself/herself as a guru with a secret method of investment opportunities. III.​ Clearly explain the logic and grounding for all judgments. IV.​ Not try to pressure you into making an investment decision. V.​ Communicate regularly and clearly about portfolio performance and any market / economic changes that affect the performance Objectives of Regulations -​ Proactively design laws and regulations to address existing/anticipated practices that may affect the fairness and efficiency of markets. -​ Reactively design laws and regulations in response to a crisis or an event that resulted in significant monetary losses and loss of confidence in the financial system. -​ New law may reduce or even eliminate the existing activity while simultaneously creating an opportunity. Importance of Company Policies: -​ Setting expectations. -​ Keeping management accountable. -​ Ensuring compliance with the law. -​ Helping defend against legal claims. -​ Assisting with fair treatment of employees Consequences of Compliance Failure: -​ Fines -​ Imprisonment -​ Loss of Reputation -​ Loss of Current/Potential Staff -​ Loss of Productivity CHAPTER 3: REGULATORY BODIES IN MALAYSIA Securities Bursa Malaysia Bank Negara Companies Commission Berhad Malaysia Commission of Malaysia (Definition) (Definition) (Definition) (Definition) - Established on - Approved under - Established on - A statutory body 1/3/1993, the Section 15 of the 26/1/1959 under that regulates Securities CMSA 2007. CBA 1958. matters relating to Commission of corporations, Malaysia is a - Operates and - Reports to the companies and regulatory body regulates a fully Minister of Finance businesses in mandated by integrated exchange and keeps the relation to laws Parliament to develop offering a Minister informed administered, and regulate the comprehensive range of of matters including Malaysian capital exchange related pertaining to Companies Act market. facilities such as listing, monetary and 1956 (Act 125) trading, clearing, financial sector - Involved in the settlement and policies. rule-making, depository services. authorisation, supervision and enforcement aspects of the capital market, facilitating growth for the country’s economic prosperity. (Objectives) (Objectives) (Objectives) (Objectives) - Protecting the - Responsible to - Manage money - Enhance & investors observe the and credit promote the supply marketplace and for the of corporate - Encourage and enforcement of its - Control the information under promote the listing requirements monetary system of any of laws development of the the country administered securities and - Provide and maintain derivatives markets in a financial marketplace - Create a facility Malaysia for the trading of shares where any for listed companies corporate information received by may be analysed and supplied to the public. (Functions) (Functions) (Functions) (Functions) 1. Supervising 1. Provide a 1. Banker for 1. Call for exchanges, clearing marketplace for the currency issue and information, houses and central transaction of securities to the banks conduct inspection, depositories investigations and 2. Provide a mechanism 2.Financial advisor call for persons to 2. Regulating all for determining the to the government be examined for the matters relating to price of securities and purpose of an securities and listing new securities. 3. Keeper of the investigation. derivatives contracts international 3. Provide information reserves and 2. Enforce the 3. Regulating the on security price and safeguarding the filing or lodging take-over and mergers volume of transaction value of Ringgit with CCM of any of companies and returns, accounts or anything related to unit others documents trust schemes. prescribed in the CA. 3. Take proceedings for any offence against the CA. CHAPTER 4: SECURITIES LAW Securities Commission Act 1993 (SCA 1993) An act that may sue and be sued in its corporate name, subject to, may enter into contracts, may acquire/take/hold, enjoy or deal with any movable and immovable property or any interest vested in the commission upon such terms as it deems fit. Functions: -​ Advise the Minister on all matters relating to securities and derivatives industries -​ Regulate all matters relating to securities and derivatives -​ Ensure that the provisions of the securities laws are complied with -​ Regulate the take-overs and mergers of companies -​ Promote and regulate all matters relating to fund management, including unit trust schemes General Penalties: -​ A fine not exceeding RM1 million or -​ Imprisonment not exceeding five years or -​ Both -​ Daily fine not exceeding RM5 thousand (continuous offence) Capital Market Services Act 2007 (CMSA 2007) An act to regulate and to provide for matters relating to activities, markets and intermediaries in the capital market, and for matters consequential and incidental thereto. Prohibited Conduct Securities: -​ Section 175 & 176 - Stock Market Manipulation -​ Section 177 - False / Misleading Statements -​ Section 178 - Fraudulently inducing persons to deal in securities -​ Section 179 - Use of manipulative and deceptive devices Penalties (for Section 175-179) -​ Imprisonment for a term not exceeding 10 years and to a fine of not less than RM1 million. Securities Industry (Central Depositories) Act 1991 SICDA An act to provide for the regulation of the central depositories, the deposit, the holding, the withdrawal of, and dealings in, securities deposited therewith and to provide for matters incidental thereto. Restriction on Establishment of A Central Depository (1) No person shall establish, maintain, operate or hold himself out as providing, maintaining or operating a system for the central handling of securities, whether or not listed on any stock exchange : -​ whereby all such securities are deposited with and held in custody by, or registered in the name of, the person or his nominee for the depositors and dealings in respect of those securities are affected by means of entries in accounts without the physical delivery of scrips; or, -​ which permits or facilitates the settlement of securities transactions or dealings in securities without the physical delivery of scrips; or -​ to provide other facilities and services incidental thereto. (2) Subsection (1) shall not apply to: -​ (a) a central depository; -​ (b) the Central Bank of Malaysia; and -​ (c) any person exempted by the Minister under section 62A Penalties: A fine not exceeding RM10 million or imprisonment term not exceeding 10 years or both. Companies Act 1965 (CA 1965) An act relating to companies. Financial Services Act 2013 (FSA 2013) An Act to: -​ provide for the regulation and supervision of financial institutions, payment systems and other relevant entities and the oversight of the money market and foreign exchange market -​ To promote financial stability and for related, consequential or incidental matters. Before FSA 2013, there were (i) Banking and Financial Institutions Act 1989, Insurance Act 1996, then (ii) Islamic Banking Act 1983, Takaful Act 1984, then (iii) Payment Systems Act 2003 and Exchange Control Act 1953. Functions: -​ Exercise the powers and perform the functions under this Act in a way which it considers most appropriate for the purpose of meeting the regulatory objectives of this Act and the Governor shall exercise such powers and perform such functions of the Bank on its behalf.  -​ Under this Act are in addition to, and not in derogation of, the powers and functions of the Bank under the Central Bank of Malaysia Act 2009. -​ From time to time, keep the Minister informed on matters relating to the exercise of its powers and performance of its functions under this Act. -​ May authorize a Deputy Governor or an officer of the Bank to exercise any of its powers or perform any of its functions under this Act. -​ May establish and authorize a committee consisting of members as the Bank may determine for the purpose of exercising any of the powers or performing any of the functions of the Bank under this Act. Penalties 1)​ No person shall make / cause to be made a false entry, omit to make / cause to be omitted, any entry or alter / extract / conceal / destroy, or cause to be altered / extracted / concealed / destroyed any entry, in any book or record, or in any report, statement or document related to the business / affairs. 2)​ No person shall evade the provisions of this Act by altering / forging / destroying / removing any document. 3)​ Any person who committed 1) or 2) will be liable to imprisonment for a term not more than 8 years or a fine of not more than RM25 million or both. Islamic Financial Service Act 2013 (IFSA 2013) An Act to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities to promote financial stability and compliance with Shariah. Functions: -​ Exercise the powers and perform the functions under this Act in a way which it considers most appropriate for the purpose of meeting the regulatory objectives of this Act and the Governor shall exercise such powers and perform such functions of the Bank on its behalf. -​ Under this Act are in addition to, and not in derogation of, the powers and functions of the Bank under the Central Bank of Malaysia Act 2009. -​ From time to time, keep the Minister informed on matters relating to the exercise of its powers and performance of its functions under this Act. -​ May authorize a Deputy Governor or an officer of the Bank to exercise any of its powers or perform any of its functions under this Act. Penalties: 258. Where the penalty of imprisonment has been provided for an offence under this Act, such penalty shall not apply to a body corporate convicted of the offence. Anti Money Laundering and Anti -Terrorism Financing Act 2001 (AMLATFA) (Act 613) RECORD–KEEPING BY REPORTING INSTITUTIONS: 1)​ Keep a record of any transaction involving the domestic currency / any foreign currency exceeding such amount as the competent authority may specify. 2)​ Records referred to in subsection (1) shall be in such form as the competent authority may specify and include the following information for each transaction: -​ the identity and address of the person in whose name the transaction is conducted -​ the identity and address of the beneficiary or the person on whose behalf the transaction is conducted, where applicable -​ the identity of the accounts affected by the transaction, if any POWERS OF AN INVESTIGATING OFFICER: An IO may, without a search warrant: -​ enter any premises belonging to or in the possession or control of the person or employee -​ search the premises for any property / record / report / document -​ inspect / make copies of / take extracts from any record / report / document so seized and detained -​ take possession of / and remove from the premises / any property / record / report / document so seized and detained and detain it for such period as he deems necessary Penalties: A fine not more than RM250k. Reporting of Suspicious Transactions: -​ A reporting institution must clarify the economic background and purpose of any transaction / business relationship if it appears unusual in relation to the reporting institution’s knowledge of the customer -​ A reporting institution must also consider whether the transactions involve a number of factors which when taken together may raise a suspicion that are connected with certain unlawful activities. CHAPTER 5: COMPLIANCE AND ETHICS IN SECURITIES Market misconduct / security offences are referring to a type of serious white-collar crime in which a person / company misrepresents information that investors use to make decisions. White-collar crime is a non-violent crime that is committed by someone for financial gain. 1. Section 98 (1) - Short Selling: A person shall not sell securities unless, at the time when he sells them: (a) he has or, where he is selling as agent, his principal has; or (b) he believes on reasonable grounds that he has, or where he is selling as agent, his principal has, The Process: 1.​ Short sellers borrow assets, namely stocks for a fee and agree to return it back at a later date. 2.​ Short sellers then sell the assets to someone else. 3.​ As the deadline to return assets is nears, the short seller buys new assets from the market to return to the original owner. 4.​ If the stock’s price falls, the short seller makes profits. Penalty: A fine not exceeding RM5 million or imprisonment for a term not more than 10 years or both. 2. Section 175 (1) (2) (3) - False Trading and Market Rigging Transactions: (1)​Subject to section 180, no person shall create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active trading in any securities on a stock market within Malaysia. (2)​A person shall not, by means of purchases or sales of any securities that do not involve a change in the beneficial ownership of those securities. (3)​Without affecting the generality of subsection (1), a person who– (a) effects, takes part in, is concerned in or carries out, either directly or indirectly, any transaction of sale or purchase of any securities. 3. Section 176 (1) (2) - Stock Market Manipulation: (1)​Subject to section 180, no person shall effect, take part in, engage in, be concerned in, or carry out, either directly or indirectly, any number of transactions in securities of a corporation that have the effect of raising / lowering / fixing or maintaining. (2)​A reference in this section to a transaction, in relation to securities of a corporation, includes: -​ The making of an offer to sell / purchase such securities of the corporation -​ The making of an invitation, however expressed, that expressly / impliedly invites a person to offer to sell / purchase such securities of the corporation Types of Stock Market Manipulation:​ (i) Pools: An agreement made by investors to buy / sell stock in order to increase stock prices. (ii) Churning: An action where traders place buy / sell orders through different brokers in large quantities to create the demand in that particular security to increase the price.​ (iii) Stock Bashing: A situation where a person spreads fake claims against the specified public company, decreasing the price so that others can buy it. (iv) Painting The Tape: An illegal trading of securities by manipulators among themselves in order to create the illusion of heavy trading activities. (v) Bear Raid: A concerted effort to drive down the price of stock by heavy selling or short selling to drive the stock price down. (vi) Wash Sale: The selling and repurchasing the same securities through two different brokers. (vii) Corner: Own a significant enough amount of a stock to be able to manipulate its price by creating a situation where individual / group investors buy up a large amount of particular stock in the market. 4. Section 177 - False and Misleading Statements A person shall not make a statement, or disseminate information, that is false or misleading in a material particular and is likely to induce the sale or purchase of securities by other persons. Examples of false or misleading statements: -​ False statement made to the Securities Commission in connection with an application for a license renewal. -​ False report made with an intention to deceive. -​ False statement or information in a prospectus. 5. Section 178 (1) (2) - Fraudulent Inducing Persons to Deal in Securities (1) - A person shall not a)​ Making / publishing any statement, promise or forecast that he knows to be misleading, false or deceptive, b)​ Dishonest concealment of material facts, c)​ Reckless making or publishing, dishonestly or otherwise, of any statement, promise or forecast that is misleading, false or deceptive, d)​ Recording or storing in, or by means of, any mechanical, electronic or other device, information that he knows to be false or misleading in a material particular, e)​ Induce or attempt to induce another person to deal in securities (2) - Under paragraph (1)(d), in relation to the recording or storing of information, it shall be a defence if the defendant establishes that when the information was recorded or stored, he had no reasonable grounds for expecting that the information would be available to any person. Penalties for Section 175, 176, 177, 178, 179, 181, 182: Imprisonment not more than 10 years and a fine not less than RM1 million. 6. Section 183, 188 (1) (2) (3) - Insider Trading Information: Matters of supposition and relating to intentions of commercial dealings / dealing in securities, relating to the financial performance of a corporation and the future. (1) - A person is “insider” if he possesses information that is not generally available which on becoming generally available or knows / ought reasonably to know that the information is not generally available. (2) - An insider (principal or agent) shall not acquire or dispose of, or enter into an agreement for securities or procure, directly or indirectly, an acquisition or disposal of securities. (3) - An insider shall not directly or indirectly acquire, dispose of, or enter into an agreement with a view to the acquisition of information in (1) or procure a third person to acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of information in (1). Penalties: Imprisonment for a term not more than 10 years and a fine not less than RM1 million. 7. Section 354 (1) - Powers of Commission to Take Action Where a person: a)​ contravenes the provisions of this Act or, b)​ fails to comply with, observe, enforce or give effect to: -​ the rules of a stock exchange, approved clearing house or central depository, -​ any written notice, guidelines issued or condition imposed, by the Commission, or -​ any rule of a recognised self-regulatory organisation. 8. Section 357 (1) - Civil Liability of Person in Contravention of the Securities Laws A person who suffers loss or damage by reason of may recover the amount of the loss or damage by instituting civil proceedings against the other person whether or not that other person has been charged with an offence. 9. Section 360 (1) - Power of Court to Make Certain Orders Where: a.​ on an application by the Commission, it appears to the court that -​ there is reasonable likelihood that any person will contravene a relevant requirement, -​ any person has contravened a relevant requirement, or -​ any person has contravened a relevant requirement and that there are steps which could be taken to remedy the contravention. Penalties for Section 372 (1) & (2): (1)​A fine not more than RM1 million or Imprisonment for a term not more than 5 years or both (2)​A fine not exceeding than RM5 thousands per day OFFENCES DEALING IN SECURITIES UNDER THE RULE OF BURSA MALAYSIA RULE 510.1: All persons trading on the Exchange shall not commit or attempt to commit any or all of the offences stated hereunder. Offences under this rule shall be classified into MAJOR OFFENCES and MINOR OFFENCES. RULE 510.2: MAJOR OFFENCES -​ Being guilty of fraud or any Act of bad faith or of any dishonest conduct. -​ Making or reporting a false or fictitious trade. -​ Manipulating prices / attempting to manipulate prices / to corner / attempt to corner any contract in the market. -​ Knowingly acting as both buyer and seller in the same transaction except when permitted under the Rules. RULE 510.3: MINOR OFFENCES -​ Circulating / aiding in the circulation in any manner of rumors which cast doubt on the integrity of any Contract. -​ Violating any rule, the violation of which is not a major offence. RULE 508: ACTION AGAINST PARTICIPANTS -​ Decide that no action be taken. -​ Issue a private warning / public reprimand / a notice of censure / recommendations -​ Impose a fine against the Defaulting Participant not exceeding RM500,000 in respect of a major offence and RM25,000 in respect of a minor offence. RULE 508: DISCIPLINARY ACTION -​ Major offences may be dealt with by a termination of participantship / suspension / fine not exceeding RM1 million or by both suspension and fine or by any other action deemed appropriate. CHAPTER 6: SECURITIES REGULATIONS FOR ISLAMIC SECURITIES PRODUCTS Islamic Capital Market (ICM): A market where the capital market transactions / operations / activities are carried out according to Shariah principles and requirements. Prohibited Elements in ICM: -​ Riba’ (Interest) -​ Gharar (Uncertainty) -​ Maysir (Gambling) -​ Speculation KEY DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC CAPITAL MARKET EQUITY MARKET CONVENTIONAL ISLAMIC CAPITAL MARKET MARKET Business Activity Not limited in its business Must engaged in shariah activities compliant business activities Use of proceeds No restriction Shariah Compliance Market Exposure Not acceptable to muslims Enjoy a larger market base to investors both sets of investor Structure type Debt based only Asset, investment and debt based Asset requirement Not required, unless for asset Yes, required backed securities Functions and Objectives of ICM -​ Intermediaries between demanders and suppliers of funds. -​ Plays a complementary role to Islamic Banking and Takaful sectors. -​ Provide opportunity for diversification of risks. -​ Facilities the availability by enabling secondary trading of securities. -​ Makes available various financial services. -​ Contribute to economic growth. Principles of International Organization of Securities Commissions (IOSCO) Principle 1-8 (Principles Relating to the Regulators): -​ The SC has clear statutory authority over and responsibility for the Malaysian capital markets. Principle 9 (Principles Relating to Self-Regulation): -​ Both Bursa Malaysia and FIMM are subject to the oversight of the SC and are required to observe high standards of conduct in carrying out their tasks. Principle 10-12 (Principles Relating to Enforcement of Securities Regulation): -​ The SC has broad inspection, investigation and surveillance powers. Principle 13-15 (Principles for Cooperation in Regulation): -​ The SC has the ability and capacity to share information and cooperate with regulators, both domestically and internationally. Principles 16-18 (Principles for Issuers): -​ Extensive requirements are in place for initial offering and continuous disclosure documents for securities. Principles 19-23 (Principles for Auditors, Credit Rating Agencies, and Other Information Service Providers): -​ There is a regulatory system in place in Malaysia that subjects auditors of PIEs to appropriate levels of oversight. Principles 24-28 (Principles for Collective Investment Schemes and Hedges Funds): -​ All publicly offered CIS and their operators and distributors are subject to authorization and reporting requirements. Principles 29-32 (Principles for Market Intermediaries): -​ A framework is in place for licensing and to apply on-going requirements for market intermediaries. Principles 33-37 (Principles for the Secondary Markets): -​ Exchanges are subject to authorization by the Minister with the advice of the SC. CHAPTER 7: SECURITIES LISTING IN MALAYSIA The listing requirements of Bursa Malaysia Securities Berhad are based on the following general principles: -​ all applicants will be of a certain quality and have a record of operations of adequate duration -​ investors and the public will be kept fully informed by the listed issuers of all facts or information that might affect their interest. -​ directors, officers, and advisers of listed issuers will maintain the highest standards of integrity, accountability, corporate governance and responsibility -​ directors of listed issuers will act in the interests of the corporation as a whole, particularly where the public represents only a minority of the shareholders or where directors or major shareholders have material interests in transactions entered into by listed issuers. Listing Criteria for Local & Foreign Companies: -​ Main Market provides an ideal platform for established companies to raise funds. -​ ACE Market is an alternative sponsor-driven market designed for companies of all business sectors looking for a conducive growth platform. QUANTITATIVE CRITERIA ASPECT MAIN MARKET ACE MARKET a)​ Profit Test Uninterrupted Profit After No minimum operating track Tax of 3 - 5 full financial record or profit requirement. years with at least RM20 million and Profit After Tax at least RM6 million for the most recent full financial year. b)​ Market Capitalization A total market capitalization Test of at least RM500 million upon listing and incorporated & generated operating revenue for at least 1 full financial year prior to submission. c)​ Infrastructure Project Must have the right to build Corporation Test and operate an infrastructure project in or outside  Malaysia: -​ with project costs of not less than RM500 million; and -​ for which a concession or licence has been awarded by a government or a state agency, in or outside Malaysia, with remaining concession of licence period of at least 15 year d)​ IPO price Minimum RM0.50 each No minimum e)​ Public Spread At least 25% of the At least 25% of the Company's share capital and Company's share capital and minimum of 1,000 public minimum of 200 public shareholders holding not less shareholders holding not less than 100 shares each than 100 shares each f)​ Bumiputera Equity Allocation of 50% of the No requirement upon initial Requirement public spread requirement to listing Bumiputera investors on best effort basis Allocation on best effort basis of 12.5% of their enlarged issued and paid-up share capital to Bumiputera investors: -​ within 1 year after achieving Main Market profit track record or -​ 5 years after being listed on ACE Market, whichever is the earlier QUALITATIVE CRITERIA ASPECT MAIN MARKET ACE MARKET g)​ Sponsorship Not applicable -​ Engage a Sponsor to assess the suitability for listing -​ Sponsors need to remain with the company for at least 3 years post listing h)​ Core Business -​ An identifiable core Core business should not be business which it has holding of investment in other majority ownership listed companies and management control -​ Core business should not be holding of investment in other listed companies i)​ Management -​ Continuity of Continuity of substantially Continuity and substantially the same the same management for at Capability management for at least 3 full financial years least 3 full financial prior to submission or since years prior to its incorporation (if less than submission 3 full financial years) -​ For market capitalization test, since the commencement of operations (if less than 3 full financial years) j)​ Financial Position & -​ Sufficient level of Sufficient level of working Liquidity working capital for at capital for at least 12 months least 12 months; -​ Positive cash flow from the operating activities; and -​ No accumulated losses based on its latest audited balance sheet as at the date of  submission k)​ Lock-up Period -​ Promoters' entire -​ Promoters' entire shareholdings for 6 shareholdings for 6 months from the date months from the date of admission of admission, -​ Subsequent selling subsequent selling down with conditions down with conditions for companies listed under Infrastructure Project Corporation test l)​ Transaction with -​ Must be based on -​ Must be satisfactorily related parties terms and conditions addressed before which are not submitting any listing unfavourable to the application to the company Exchange Sponsor -​ All trade debts must ensure all trade exceeding the normal debts exceeding credit period and all normal credit period non-trade debts, and all non-trade owning by the debts, owning by the interested persons to interested persons to the company or its the company or its subsidiary companies subsidiary companies must be fully settled must be fully settled prior to listing prior to listing Reasons for Listing 1.​ Access to Capital for investors to meet the company’s expansion plans & goals. 2.​ Facilitate Growth as investors offer shares as currency to facilitate the acquisition and growth strategies. 3.​ Enhance Credibility, enabling investors to conduct business on more advantageous terms. 4.​ Enhance Profile and Visibility where the company will be perceived more positively in terms of financial and business strength. 5.​ Incentive for Employees to align the interest of employees with the goals of the company. 6.​ Widen Shareholder and enables existing investors to realize the value of their investments. Factor to be Considered for IPO a.​ To raise capital in order to expand the company / reduce the amount of debt b.​ Increase in regulator liability c.​ Cost in relation to the time spent d.​ Understanding the entire process of taking a company Who was involved in the IPO process? a.​ A senior director that has the authority to make commercial decisions on behalf of the whole board is required. b.​ An in-house lawyer or company secretary to advise the company on the legal matters relating to the company listing and the IPO with appointed external legal advisers. c.​ An in-house financial officer that can coordinate and advise on financial matters. Corporate Disclosure Policy 1.​ Policy in Immediate Public Disclosure of Material Information 2.​ Policy on through Public Dissemination 3.​ Policy on Clarification of Confirmation of Rumours and Reports 4.​ Policy on Response to Unusual Market Action 5.​ Policy on Unwarranted Promotional Disclosure 6.​ Policy on Insider Trading CHAPTER 8: THE TRADING SYSTEM IN SECONDARY MARKET Trading System in Malaysia 1961: Open Outcry System = Manual system-bids/offer shouted by the trading room clerk to the board writers 1989: Semi Automated Score (System on Computerized Order Routing and Execution) = Central computer engine responsible for the matching of all orders. 1992: Fully Automated Score 1994 - until now: WinScore = Responsible for credit control management, order ,trade routing and confirmation. TRADING ON BURSA MALAYSIA SECURITIES BERHAD 1.​ Quotation 2.​ Trading Days 3.​ Trading 4.​ Trading Lots Hours -​ All securities -​ Monday to -​ Morning -​ Trading must must be Friday (except Session (9:00 be in a board quoted by on public a.m - 12:30 lot or an odd BMSB holiday) p.m) lot. -​ Afternoon -​ Board Lot – Session (2:30 100 Unit of p.m - 5:00 shares (Max: p.m) 5,000 lot) -​ Odd Lot – less than board lot Trading Orders: Open trading account & CDS account with one of the Participating Organizations (PO). All trading must be effected through the automated and computerized securities trading system (ATS) established by Bursa Malaysia Securities Berhad. Types of Orders: Market Orders Limit Orders An order which is to be matched at the best An order which stipulates a maximum buy available price until all quantities of the price / minimum sell price (the stipulated market order have been matched. price). Limit orders shall be matched at the stipulated price / at a better price than the stipulated price. A PO may enter market orders during the A PO may enter limit orders during the main trading phases. pre-opening, pre-closing, the main trading and trading at last phases. Transaction Cost: I. Brokerage fees – maximum 0.7% of the value of total shares traded, normal practice is 0.6%. II. Clearing fees – 0.03%of contract value subject to cap of RM200. III. Stamp duty – RM1 for every RM1,000 worth of value. Purpose of Trading Share: -​ Dividend -​ Capital Gains Central Depository System (CDS) Account: -​ A system that is fully owned and operated by Bursa Malaysia Depository Sdn. Bhd, a wholly owned subsidiary of Bursa Malaysia Berhad. -​ Securities bought / sold will be credited / debited into the account. -​ It is used to transfer securities from one CDS account to another. Dormant Account vs Inactive Account Dormant: An account is designated as dormant when there is nil balance in the account and there has not been any debit or credit entry in the depositor's account in the 36 months after the date of nil balance. Inactive: An account is said to be inactive when there are deposited securities in the account but with no debit or credit entries in the depositor's account for at least 36 consecutive months from the date of the last entry made. Clearing – The process of determining obligations and accounting for the exchange of money and securities between market counterparties to a trade. Settlement – The completion of a transaction wherein securities and corresponding funds are “delivered” and credited to the appropriate accounts. T+3 Basis (originally T+5 by shortened to T+3 in December 2000) Objectives: -​ Shorten the settlement cycle -​ Increase efficiency -​ Reduce settlement risk -​ Enhance competitiveness. Benefits: -​ Less time taken between trade execution and settlement -​ Generate Liquidity -​ Standardized settlement system in line with other major stock exchange -​ High operational efficiency so that the market more cost effective Ready Basis vs Immediate Basis