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5 Oct 2007

Financial Markets

Securities Business Expediting Adjustment after Liberalization (Current Issue No.1995)

On September 25, the Cabinet approved in principle a draft Ministerial Regulation on Licensing of Securities Business, B.E…, as proposed by the Ministry of Finance. This draft was subsequently forwarded to the Council of State for their review. The approval of this Ministerial Regulation marks a key step toward future liberalization of the securities business after a meeting of the Securities and Exchange Commission (SEC) held in early November of last year resolved to liberalize securities business licensing over the next five years (by 2012). To support adjustments by securities companies in preparation for full liberalization of the industry, related agencies and the SEC have begun to lay down a groundwork on this matter since late last year with:
- Deregulation of securities firms' operations – The opening of new branches that may provide a full range of securities business or provide services online will be permitted, plus off-business hour operations, etc.
- Expanded scopes of businesses – Securities companies will be allowed to operate additional businesses such as agricultural futures trade, etc.
- Support guidelines for Thai securities firms to engage in foreign securities investments – This is to help securities firms that want to involve in proprietary trading to gain greater income from investments.
- Encouragement for securities companies to promote good corporate governance practices.
- Support for the launch of innovative financial products in the Thai capital market – SET 50 Index Options and other products are likely to be traded in the future as a way to help securities firms earn more fee income.
Securities companies' adjustments in operations have been undertaken to cope with tougher competition. These efforts include diversification in revenue earning activities. The proportion of brokerage fee income has been declining steadily; meanwhile, securities companies are trying to increase income from investments in their own portfolios. Apart from increasing their investments, many securities companies have turned to offering wealth management services and are extending more into asset management business. In addition they are also seeking business allies including those from overseas, by entering into agreements with foreign allies to act as their broker or trading agent on listed securities through ‘exclusive partnerships'. For domestic allies, securities companies whose shares are held by commercial banks will rely more on their advantage of being in a large financial business network.
Taking traditional market shares into consideration, securities companies whose shares are mostly held by retail investors will be the hardest hit by competition. Indications show that their market shares will fall even more in the future. So it will be necessary for small securities companies with this mentioned weakness seek business allies to develop into other businesses or consider mergers. It is projected that a wave in securities business mergers will become more evident in the near future and will lead to a smaller number of these companies going forward. Entrepreneurs that survive in the market will be larger operators offering more fully-integrated services. They will also get a boost from the authorities easing strictures on them in getting new licenses to operate in as-yet unavailable business after new ministerial regulations are enforced. Moreover, they will rely more on allies' sales channels and business networks, other they may opt toemphasize specific sale points or create their new distinctions.

For the long-term overview toward securities business after the authorities liberalize licensing, it seems that competition in securities business will depend on many factors (other than the liberalization of securities business licensing by the SEC), such as the capital market business environment, transaction volume on stock exchanges at that time and other measures launched the government, e.g., those with reference to financial sector liberalization. With that trend, the government will allow investors to invest overseas or operate cross-border services. Hence, such factors will play a role in determining the number of prospective entrepreneurs in the future. However, KResearch views that although the liberalization of securities business licensing will simplify and increase opportunities for securities companies to enter into new business and decrease the cost of licensing. In addition, the easing of investment regulations will support the growth of Thai capital markets in the future. For example, it is possible that the authorities will abrogate short-term reserve requirements and ease regulations on investment in foreign countries by giving increased access for securities companies to invest in foreign countries for themselves and customers. This measure might increase opportunities for securities business. Then, it might attract foreign investors interested in setting up securities business in Thailand, particularly foreign financial institutions. When considering other conditions such as the intensifying competition insecurities businesses, the quite small Thai capital market with limited product availability and the liberalization of transaction fees that will affect the profit of brokers in the future, the investment decisions of prospective entrepreneurs will be affected. It is thus possible that the number of entrepreneurs will not increase. In addition, foreign securities companies have to consider certain advantages. They have to choose whether they will operate business directly in Thailand independently or choose to operate in partnership with domestic securities companies. No matter what their operations will be like, greater competition is inevitable for all.

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