The ASX acid test

The changes announced this week by the Singapore Stock Exchange (SGX) to its proposed merger deal with ASX Ltd have been prodded and examined and found to be either more of the same or a sop to concerns over national interest.

Few have focused on whether these changes clarify the governance arrangements to ensure that market integrity is retained. Yet such clarity is required, because that goes to the heart of national interest.

Integrity is an essential ingredient in building liquidity and the depth of the Australian marketplace. We should all be in favour of that. Market licence obligations require the ASX to maintain a fair, orderly and transparent market and to maintain adequate supervisory arrangements. While market efficiency refers to the ability of investors to transact easily at low cost, market integrity refers to the ability of investors to transact in a fair and informed market where prices reflect information. The question, then, is whether the new deal provides the latter.

On the efficiency front, the arrangements announced this week confirm that trading fees in Australia will be set independently of what happens in Singapore, where trades are currently more expensive than here. And capital expenditure of at least $30 million will be outlaid each year for five years on enhancements to the Australian stock exchange, with new products introduced.

On the integrity front, the joint announcement by ASX and SGX was at pains to point out that existing regulatory oversight arrangements remain in place, with any changes to the listing rules and ASX operating rules subject to scrutiny by the Australian Securities and Investments Commission (ASIC). It's good to have it spelt out, but given that questions were raised about these issues last year when the merger proposal was first flagged, it helps to have it confirmed that the regulatory regime for the operation of the Australia market remains the preserve of the Australian government and its regulators. Ownership of the company ASX Ltd by SGX will not compromise the Australian regulatory framework.

ASX listing rules, for example, can't be altered except with ASIC and ministerial allowance. Any attempt to dilute or weaken them could only succeed with Australian regulatory and ministerial compliance, which is unlikely to happen. Moreover, holders of Australian market or clearing and settlement licences (be they ASX, Chi-X or subsidiary companies of SGX), will continue to have integrity obligations under the corporations law and be subject to oversight and annual assessment by ASIC and/or the Reserve Bank of Australia (on clearing and settlement). All good and well so far.

Drilling down a little further, questions arise as to the day-to-day management by issuers of matters such as continuous disclosure, the pricing of capital raisings and making announcements to the market. If ASX was to become a back office of SGX, would supervisory arrangements remain adequate? While ASIC has overall responsibility for regulating the market, ASX remains the point of contact (no matter how many market operators there are) for issuers when trying to work out if they should respond to media speculation or market noise or when they make an announcement to the market. It will be ASX that contacts a company in the first instance if it has queries about such matters, not ASIC.

While ASX must establish and maintain adequate issuer supervision arrangements, including arrangements to enforce compliance with its listing rules, interestingly, these arrangements may involve a self-regulatory structure (the current ASX model) or may be outsourced to an independent person or related entity.

It is reassuring then to note that all of ASX's subsidiaries, particularly ASX Compliance, which will presumably maintain its current supervisory role over listed companies, will maintain boards with a majority of Australian citizen directors and an Australian as chair and that the CEO and executive team in Australia will remain in place. All of the focus has been on the number of Australians on the board of the combined entity, but it's what happens further down the chain that usually matters most operationally. The Australian market can take comfort from the fact that ASX will continue to supervise the operation of its own rules with the expertise at board and management level to ensure it can do so. Clarifying that the Australian operations will continue to be managed and overseen by the existing Australian executives is recognition that market integrity does not rest only on a set of rules, but derives from the application of those rules.

I guess you could call it governance in action.

Tim Sheehy is the chief executive of Chartered Secretaries Australia.