Taiwan’s stock exchange operator hopes a newly-announced cross-border trading link with the Singapore Exchange (SGX) will serve as a blueprint for similar connections with other bourses.
In an exclusive interview with FinanceAsia, Taiwan Stock Exchange (TWSE) president Michael Lin (pictured) said the experience of setting up stock trading connections with SGX would allow more cost-effective and efficient establishment of links with other stock exchanges in the future. “We can replicate the success this time so that we can execute similar plans within a shorter time in the future.”
The two Asian exchanges announced last month they would establish a cross-border trading link that would allow TWSE member brokers to trade Singapore-listed securities directly. Talks about setting up the link have been going on for years but it was not until early this year that the details were finalised.
“We have had discussions [about setting up trading links] with Singapore, Japan and Australia for more than 16 years ago but the regulatory environment and technology at that time were not favourable for execution,” Lin told FinanceAsia.
Before the establishment of the TWSE-SGX trading link, Taiwanese investors who wish to trade Singapore-listed securities would typically have to call up a local broker, who would then forward the request to a broker in Singapore to execute the trade. For investors, each step of the trade increases the costs.
“Currently for local investors, the cost of trading overseas securities is as much as 10 times the cost of trading Taiwanese stocks,” Lin said. “One of the main purposes of establishing the trading link is to reduce transaction costs for local investors.”
Lin said the programme was designed for retail investors who had shown interest in trading stocks in other markets. “As technology improves it is now easier for retail investors to obtain and analyse information across different regions,” Lin said. “As a result many Taiwanese retail investors are able to invest on their own instead of buying through financial institutions.”
Under the TWSE-SGX partnership, trading of securities will be limited to Taiwanese investors trading Singapore-listed stocks - described as southbound trading - but the two exchanges have also sealed an agreement for northbound trading in the future, Lin said.
The TWSE-SGX partnership came one and a half years after the commencement of the Shanghai-Hong Kong Stock Connect in November 2014. Stock Connect linked two of Asia’s largest stock exchanges and allowed bilateral market access for investors.
“We hope that this type of cooperation between exchanges will make it easier for brokers everywhere to offer streamlined and cost effective cross-border investment services,” TWSE chairman Lee Sush-der said in a statement.
The Taiwan-Singapore trading link is pending final approval from the respective central banks and is expected to go live in the second quarter of this year.
Corporate governance
Taiwan’s stock market is geared towards large cap companies, with the top 30 companies accounting for 56% of the exchange’s total market capitalisation in 2014, according to TWSE data. Foreign investment in Taiwanese securities has typically been concentrated in these companies because of their higher liquidity and stronger corporate image internationally.
“Many small companies in Taiwan are run by entrepreneurs who put the company’s operation as their first priority, while shareholder relationships are not a big concern to them,” Lin said.
As part of its attempt to improve the corporate image of smaller Taiwanese companies in the international markets and protect the interests of investors, TWSE unveiled a five-year corporate governance roadmap in December 2013.
“The measures are designed for foreign institutional investors because they are the ones who really care about corporate governance,” Lin said, highlighting the vital role that foreign investors play in the Taiwanese market.
Foreign institutional investors, which owned 38.65% of stock in Taiwan-listed companies as of the end of July last year, could help stabilise the stock market because they tended to hold stock for longer than retail investors, Lin said.
Under the roadmap, the exchange aims to complete a corporate governance evaluation system by 2017, under which listed companies will be ranked based on the non-financial aspects of the operations. They include information disclosure, investor communication as well as corporate and social responsibilities.
The exchange is also pushing forward measures including electronic voting and live broadcasts of corporate roadshows to increase transparency of listed companies.
Listed companies with good corporate disclosure will be included in a corporate governance index that serves as a new indicator for investors, according to the plan.
TWSE is also working closely with the Financial Supervisory Commission (FSC) to introduce a stewardship code in the first half this year. The code will outline the principles under which institutional investors must fulfil their responsibilities to monitor the management of companies.
"Institutional investors play an increasingly significant role in stability and development of the market. As such, they are expected to leverage ownership rights and discharge their stewardship responsibilities to drive investee companies to elevate their quality of governance and eventually, bring values to the markets," according to a consultation paper published by the FSC.
To tackle low trading volume in some small, illiquid companies, TWSE is also considering following some other Asia stock exchanges by imposing a free-float limit on listed companies, Lin said.
It is also mulling a flexible listing system whereby companies with smaller market capitalisation will be subject to higher profitability requirements at the time of the listing.
Foreign listings
Taiwan started a program in 2008 to allow foreign companies and Taiwanese-owned businesses to conduct secondary listings on TWSE through the issuance of Taiwan Depositary Receipts (TDR). A number of Hong Kong- and Singapore-listed companies flocked to issue TDRs for funding in the first few years after the plan was established, although many of them did not have businesses in Taiwan.
But the programme never really took off because many investors after 2011 turned back to the companies’ home markets, where liquidity was much higher. The trading volume of TDRs shrink significantly and there has not been any new TDR issuance since then.
Lin believes there is little chance of any breakthrough in the TDR programme in the near future because of the technical difficulties of listing in two markets, such as different trading hours and trading rules.
Now the exchange is targeting foreign companies that are willing to conduct primary listings in Taiwan. The number of companies offering so-called F-shares has grown steadily and accounted for approximately 8% of all listings on TWSE as of the end of last year.
Lin hopes TWSE will remain as an important fundraising hub for small- and medium-sized non-Taiwanese companies but insists that they must have operational ties locally in order to be successful.
Chinese auto parts manufacturer Cayman Engley Industrial is the latest company to list in Taiwan in the form of F-shares. The Jilin-based company operates a joint venture with Taiwan’s China Steel Corporation and Hongli Auto Parts.
Having ushered in the 50th primary listing by a foreign company in December last year, TWSE has the third largest proportion of foreign listings among Asian markets, trailing only Hong Kong and Singapore.
