SEC delegates regulatory responsibilities
to the Thai bond market itself
By Jon Fernquest |
The best way to get a group of dedicated professionals to follow rules is to delegate the responsibility for enforcing the rules to the group itself.
Self-regulation is more cost-effective because once the group is checking itself, then it only needs to be checked or audited by higher level authorities periodically, to make sure the group is actually regulating itself.
This is the model being used for Thailand's bond market with the Thai Bond Market Association (ThaiBMA) being the self-regulated organisation (SRO) and the
Securities and Exchange Commission (SEC) being the higher authority that will check on them.
This also the way that the Alternative Investment Market (AIM) works, a sub-market of the London stock exchange, covered in a recent article.
This is also the way that academic departments in universities teaching subjects such as economics or chemistry work. Established lecturers and professors in the academic department decide whether the research publications of less established members of the department, who have doing research for a few years already, warrant hiring them permanently (academic tenure, peer review).
How exactly the Thai bond market is planning to regulate itself was a subject of an article in the Bangkok Post business section this week.
(See in photo, Ariya Tiranaprakit, a senior vice-president for the Thai Bond Market Association, discussing market trends at a 2007 briefing)
Here is the article in full:
BOND TRADING
Bond Association to regulate market
NUNTAWUN POLKUAMDEETuesday May 13, 2008
The Thai Bond Market Association (ThaiBMA) will become the Thai capital market's first self-regulated organisation (SRO) starting from later this year. Nattapol Chavalitcheevin, the president of the ThaiBMA, said the Finance Ministry had allocated 170 million baht last year to support the SRO programme.
Once complete, the ThaiBMA would takeover regulatory duties for the bond market from the Securities and Exchange Commission.
Eventually, the Association of Securities Companies, the industry body representing local brokers, would become the second SRO for capital markets, with a target for implementation by 2010.
Mr Nattapol said the ThaiBMA would begin using its new market surveillance system, called TMS, later this year.
The system would monitor transactions for irregularities and possible illegal action, such as price or volume manipulation, insider trading or "front-running", where intermediaries use the knowledge of client orders to benefit by executing in-house trades in advance.
"This system is the first of its kind in Asia for the bond market," Mr Nattapol said.
Ariya Tiranaprakit, an executive vice-president of the ThaiBMA, said volume manipulation and excessive markups and markdowns were the most common irregularities found following a review of 2007 transactions.
Dealers "churn" volume through techniques such as "wash sales" to help increase their turnover in the hope of improving their market position and being named a primary dealer for government securities by the Bank of Thailand.
Series trading, involving the trade of entire sets of series prior to key government bond auctions, is another form of manipulation by traders seeking to push or pull prices in the market.
Ms Ariya said the ThaiBMA could take action against market participants by issuing warnings, imposing probation periods and fines or withdrawing membership from the association.
Under the SRO concept, the ThaiBMA would have primary responsibility for regulating and monitoring local participants and market trade. The SEC would continue to have ultimate responsibility for enforcement of market rules.
Ms Ariya said the ThaiBMA would inspect seven or eight firms this year, including the most active dealers. The association has 52 members, of which 22 are not active in the market.
Mr Nattapol said withdrawing membership from any member would essentially cut them off from the market, as the SEC requires bond dealers to be members of the ThaiBMA.
He said the bond market in the first four months of the year averaged 65 billion baht in transactions per day, up 75% from the same period last year. In April, turnover averaged 84 billion baht per day. Foreign investors have been net buyers of 40 billion baht, with a current position of 90 billion.
Mr Nattapol said foreign investors were expected to exceed the all-time high of 130 billion baht in outstanding positions by the end of the year.
The central bank was the most active issuer in the market in the first four months of the year, with 2.5 trillion baht in debt issued compared with 1.3 trillion the same period last year.
"The market expects that the Bank of Thailand will continue to use the bond market as a tool for monetary policy over the next two years, or until the US shows an economic recovery," Mr Nattapol said.
Corporate debenture issues are expected to reach 300 billion baht this year, up from earlier targets of 200 billion, largely driven by new offerings from local banks. Some 65 billion baht in corporate debentures were floated in the first four months of the year, with over half raised by two banks.
Another 35 billion baht in bank-issued debt is scheduled to be issued this month.
Mr Nattapol said banks were raising tier-two capital ahead of the launch of the Deposit Insurance Agency in August.
The Finance Ministry is still projected to raise 300 billion baht from the bond market this year, despite issuing just 70 billion from January to April.
(Source: Bangkok Post, business, 13-05-08, page B2, NUNTAWUN POLKUAMDEE, temp-link)
Vocabulary:
Thai Bond Market Association (ThaiBMA) - a securities business association under the SEC Act and a self-regulatory organization (SRO) responsible to aid in the fair and efficient trading of bonds, replaced the older Thai Bond Dealing Centre (Thai BDC) in September 2005 (See website; Source: Bonds Glossary at Asian Bonds Online)
dedicated - spends a lot of time, devotes a lot of attention to something
professionals -
delegate - give responsibilities and authority to people working for you (rather than trying to manage all the details (micromanage) yourself)
self-regulation - when a group makes and enforces its own rules on its members
cost-effective - at low cost
audited - checking to see if something has been done correctly, according to the rules
periodically - from time to time, at intervals, not continually
capital - money invested in a business (See glossary)
a security - an asset such as a stock share (equity) or a bond (debt) that is traded (usually on an exchange)
a capital market - a market where securities are traded
Self-Regulated Organisation (SRO), an SRO programme - an industry or profession that regulates itself to some degree
takeover Y - become responsible for doing job Y, after someone stops doing it
Securities and Exchange Commission (SEC) - the government agency in charge of regulating and policing the securities industry
target - what you aim to reach or achieve (See glossary)
implementation - execution of a plan, making sure that something that is planned actually gets done (See glossary)
surveillance - the careful watching of someone (usually to find evidence of illegal activity)
market surveillance system - a computer system that looks at buying and selling in the market and tries to find patterns indicating illegal activity
monitor - regularly checking something
irregularities - events that don't follow a regular pattern (and are therefore suspicious and may indicate illegal trading for personal gain)
transactions - a piece of business (for example, buying or selling something)
monitor transactions for irregularities - regularly check transactions for possible illegal activity
manipulation - control an event for personal gain (See glossary)
price or volume manipulation - controlling the price of a secutiry or the volume of trading for personal gain
insider trading - the crime of buying and selling securities with secret information about a company that is not available to the public (an illegal but fairly sure way to make a profit)
front-running - buying securities after learning that a large number of them will soon be bought which will increase their price
intermediaries - people working between the market and the customer, like brokers selling securities for them
in-house - a task is done within the organisation rather than hiring someone outside the organisation to do it (outsourcing)
executing in-house trades - doing trades within the organisation (not publicly on the exchange)
in advance - before some event occurs
a markup - an addition to the price (for example, the selling price of the goods in stores includes a 20% markup by the retailer)
excessive markups and markdowns -
dealers - a person who buys and sells securities without using a broker
a broker - a licensed person who buys and sells securities for other people
traders - people who trade securities on an exchange, trying to make a profit
churn volume - to buy and sell securities for customers more than necessary to earn more commissions for oneself
wash sales - buying and selling shares by yourself, to make it look like a lot of people are interested in them (this can generate sales and commissions for yourself)
a commission - the percentage of a buy or sell transaction that the sales person (broker) gets
turnover - the total amount of securities bought and sold on a securities exchange over a period of time
improving their market position - making themselves into a more important market participant (so that they can business from the Bank of Thailand, for instance)
probation - under tight supervision (as an alternative to jail time for breaking the law)
imposing probation periods - forcing a dealer to undergo tight supervision to make sure he or she is not breaking the law
ultimate - final (after a long series of things)
ultimate responsibility for enforcement - final responsibility for enforcement
a position of X in security Y - the total amount X of security Y that is owned
with a current position of 90 billion - currently owns 90 billion worth of these securities
outstanding positions -
a debenture - a long-term loan to a company with a fixed rate of interest
an issue - offering securities for sale
corporate debenture issues - offering for sale long-term loan agreements made with corporations
float - selling a company's securities publicly on an exchange for the first time
corporate debentures were floated - selling a corporation's loan agreement on an exchange for the first time
raising tier-two capital -
deposit insurance - when the government provides insurance for money people keep in bank accounts, this increases confidence of the public in banks and prevents bank runs during time of financial crisis (See powerpoint presentation)
a bank run - when the public suddenly loses confidence in a bank, runs to the bak, and tries to withdraw their money
Deposit Insurance Agency - the new Thai government agency being created to provide deposit insurance for Thai bank accounts
