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27 Dec 2006

Financial Markets

Securities Liberalization: Swift Fix Needed for Large Investors, Retail Investors Hard-Hit (Current Issue No.1934)

A meeting of the Securities Exchange and Commission (SEC)'s directors in early November resolved to liberalize the securities industry over the next five years. Starting January 1, 2012, the SEC will accept applications for new and unlimited securities licenses. In a bid to encourage greater competition, business diversification and upgrade service in the industry, applicants who meet the ;fit and proper” criteria for each category of licensing sought are being accepted. Moreover, the new licensing criteria allow for ;single licenses” where license holders could engage in a full range of securities business, while ;boutique licenses” would be issued for specific securities business. This would result in flexibility in the industry as securities companies would then be able to operate in a variety of businesses and transact in different types of securities, thus enabling them to diversify their operating income before liberalization of brokerage commissions on January 1, 2012. This move will pave the way for securities companies to operate their overseas in the future, as well. In the latest developments, the SEC is in the process of proposing initiatives and related rules and regulations on these matters to the Ministry of Finance.
Looking ahead into the next five years, major adjustments are expected to be seen in the securities industry. The current licensing scheme offers securities firms the opportunity to operate in almost all securities-related businesses, except for asset management and venture capital services that require the setting up of a new entity. In the midst of heightened competition, securities companies whose retail investors have majority shareholdings (where no commercial bank or financial firm, e.g., whether a finance company, foreign broker, Thai or foreign holding company, etc., is a major shareholder) are expected to most seriously bear the brunt of changes. Most of these would be small securities firms with registered capital falling short of the new requirement, or not reaching THB500 million, and whose income is mainly derived from brokerage fees. These securities companies are less competitive, comparatively speaking, given their lack of business partners to support distribution channels, plus their lack of capital, public relations, expertise and development of innovative products to keep them afloat. Looking ahead, a high capital base will be necessary in doing securities business amid an increasingly competitive environment, where they will no longer be able to rely chiefly on fee-based income as they have been. As a way out, they may have to seek business partners, develop other additional businesses or even end up merging with peers. Consequently, the number of brokerage firms will likely subside, while those remaining in business will become larger and tend to offer a fuller range of services and products. Some of them may focus on unique selling points to differentiate themselves from rivals.
Over the long-term, competition with liberalization in the securities industry may evolve into many factors other than unlimited new licenses. These variables include the surrounding environment in the capital market, stock trading, the government's measures – including financial liberalization – where securities firms will be allowed to invest overseas in ‘cross-border services', etc. These factors are viewed as being important to defining the number of new entrepreneurs that will be in this business in the future. Although securities industry liberalization will create the opportunity to enter the business more easily and reduce the cost of licensing compared to the present where licenses are still limited, forcing new investors to buy existing licenses from former brokers at high prices, the intensifying competition in the securities business and the liberalization of brokerage fees may result in brokers' profits falling in coming phases, and this may later affect the viability of this business in the eyes of potential new brokerage investors.
However, it is possible that regulatory statutes controlling investment overseas will be eased in the future, e.g., securities companies being allowed to invest overseas in their own interest or for customers' may help expand the business channels of securities companies and may encourage participants foreseeing business opportunities to set up business in Thailand, particularly foreign financial institutions that have expertise in overseas investment. This potential trend would inevitably affect the competitiveness of Thai entrepreneurs, despite some being backed by domestic commercial banks or financial business groups.
In the matter of the Bank of Thailand's measures concerning reserve requirements on short-term capital inflow that were announced last week, it is projected that these strictures will impact the Thai stock market, as well as the confidence of foreign investors and capital inflows only over the short-term. The impacts of these new rules on securities business, initially, may include an effect on trading volume by foreign investors, which would fall and thus have consequence to stock market indices, as well as on the overall investment climate and thus the profit of securities companies – who rely on securities trading, at present. Moreover, the measure also reduces the palatability of investing here in the view of international financial institutions in securities business, while also running counter to the intentions of securities companies that want to strengthen themselves by seeking business allies overseas.
Therefore, it is vital to revitalize the confidence of international investors. However, KResearch holds the view that the impact of the BOT's recent new laws toward securities business will only be short-term. Eventually, foreign investor confidence toward investment in the Thai stock market will take a better direction in the future and should likely return to normalcy in investment.

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Financial Markets