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Published on March 26, 2008

Demutualisation is a necessary offensive - a national agenda, even - for a small bourse like the SET, said Andrew Sheng, former chairman of the Hong Kong Securities & Futures Commission and now a capital market specialist with Asian Development Bank.

"Thailand cannot afford to be closed like China and India [where their large market sizes can support closed market policies]," said Sheng.

By demutualisation, a change from customer-owned member organisation to a shareholder-owned public company, the exchange could "unlock" values to the capital market, added Sheng, who led the process at the Hong Kong Stock Exchange in the aftermath of the Asian financial crisis.

The Hong Kong exchange is a case in point. Sheng said such a change would lead to more flexibility, since the bourse would have to be responsive to the needs of the market and competition threats.

There are plenty of other incentives to demutualise.

The Singapore Exchange (SGX), Asia-Pacific's first demutualised and integrated stocks and derivatives exchange, saw its share turnover ratio outperform DBS Holdings, one of SGX's largest companies in terms of market capitalisation, this year.

The value-adding aspect is therefore phenomenal, said Hsieh Fu Hua, chief executive of SGX.

While exchanges in other emerging markets grew at the rate of 35 per cent in the past five years, the SET crawled along at 8.5 per cent, according to SET chairman Pakorn Malakul Na Ayudhya. Demutualisation has led to accelerated growth, even in previously dry markets such as the Australian Stock Exchange.

Antonio Riera, senior partner with Boston Consulting Group, pointed to compound annual growth rates of 16 per cent and 23 per cent in market capitalisation and trading volume from 1998 to 2006.

Listed companies have grown by 5 per cent, compared to 1 per cent annually before the change. The cost-to-income ratio has dropped by 11 per cent.

With near-monopoly products, fixed business costs, high margins, which typically stand at 20 to 40 per cent, and high compound growth, the exchange sector has become something of a fertile M&A ground.

Simon Hewett, managing director of Citigroup Global Market, said CME Group, owner of Chicago Mercantile Exchange, a trans-national "super exchange" which has recently taken a 10-per-cent stake in Brazilian Mercantile and Futures Exchange and acquired New York Mercantile Exchange, posted a valuation of $25.3 billion as of last week.

Despite making the size of the pie bigger, demutualisation is not a "magic bullet", said Riera. It merely creates condition for growth, forcing brokers to review their business models, added Sheng.

Still, there is a lot at stake and many potential pitfalls in the SET's demutualisation.

Kampanart Lohacharoenvanich, president of Trinity Securities, wants structural reform to come first at the SET. He said the market was not ready yet to demutualise.

There are, for instance, too many fragmented companies within the SET, such as SET Trade, Family Knowhow, TFEX and TSD. By finding new owners for these companies, SET will then be ready to focus on demutualisation.

The main challenge lies in first changing the mindset of the exchange, said Hsieh.

The SGX took three years to rally its stakeholders and come up with its vision, he said.

Ki Nan Tsui,

Siriporn Chanjindamanee

The Nation