In the race to develop new technologies, China stands front and center. In a recent conversation with Rebecca Smith of Managing Director, Asia Pacific, NASDAQ OMX, Terrance Philips of SVB asked for her perspective on the public markets in China.
SVB: What has NASDAQ learned from foreign exchanges? Are there specific rules that you believe U.S. exchanges should adopt from their foreign counterparts? Are there specific NASDAQ rules that foreign exchanges should adopt?
Smith: Domestic exchanges are operating in a manner that suits and serves their local market; however we have seen that they are modernizing rapidly, taking on board best practices from exchanges in other regions and in the U.S. They are also bolstering their infrastructure and market technology often using NASDAQ OMX as a partner, and are preparing for the possible introduction of competition and fragmentation. In terms of flexibility markets are also changing and the U.S. and NASDAQ has taken note. The Hong Kong SE, for example, has offered companies with a ‘place down and top up’ mechanism for secondary offerings for many years, which is an attractive, confidential and highly efficient mechanism for the placing of new shares. The U.S. market has refined its rules to introduce alternative mechanisms that offer a similar set up, making it easier for global companies listed in the U.S. to tap into U.S. investor reserves.
SVB: With differing ethical standards and regulatory schemes and the difficulty in conducting due diligence abroad, can investors be assured that the information provided by Asian companies listing on U.S. exchanges is complete and accurate?
Smith: Asian companies that want to go public in the U.S. are subject to the same level of legal and accounting due diligence as a company from anywhere else. In any regulatory regime and with any company, based anywhere, there is a risk that information supplied is neither complete nor accurate. However the SEC and exchange listing process does ensure that Asian companies are held accountable to the same standards for the most part as U.S.-based companies and that weaker companies by and large will not make the grade to become U.S.-listed public companies. The advent of Sarbanes-Oxley has also strengthened the U.S. system. Again, weaker companies that cannot comply with the necessary legislation will not make it to market. To date, we have not seen the type of fraud or misstatement in the U.S. that has occurred in the local markets. While the U.S. or any other system cannot be bulletproof, the established and professional regime in the U.S. coupled with the threat of litigation and criminal charges makes one careful.
SVB: Does NASDAQ regularly confer with its foreign counterparts on the development of new regulations or the evaluation of existing regulations?
Smith: Absolutely. We talk to most of the world’s exchanges most of the time. We are an active member of the World Federation of Exchanges and continually look at ways to collaborate and share information and best practices. For example, there might be growing demand here in Asia for cross-border trading or at least access to trade U.S.-listed stocks. We are looking at various cross border and cross listing initiatives including technology infrastructure to offer lower latency. NASDAQ OMX pioneered the idea of 24-hour trading over a decade ago under Frank G. Zarb, perhaps we are edging closer towards that goal.
SVB: How has the competitive landscape changed for U.S. exchanges? How is NASDAQ responding to those competitive challenges?
Smith: Enormously, the U.S. exchange landscape has changed beyond recognition since Reg NMS. New outfits are coming in, competing and challenging the established markets like NASDAQ OMX. It's a price war. Participants are fighting for liquidity. There are concerns, however — among which are potential price discovery issues should markets start to segment too far into dark and lit pools. NASDAQ OMX is doing what it does best, innovating. We continue to invest in our core systems — as well as introduce new pricing mechanisms order types and initiatives to safeguard the interests of investors and participants. For example, Volatility Guard, or single stock circuit breakers, will be introduced in the third quarter this year. We work closely with Capitol Hill and the SEC regarding reform measures to safeguard our markets for all participants. Exchanges have an important role to play in ensuring our markets are robust and offer the highest level of oversight and reliability.
SVB: We are beginning to hear reports of possible flaws in the Chinese juggernaut, including increasing disparity in wealth, increasing wages, housing bubble, inflation, currency revaluation, government preference to "buy China" etc. Do you believe that fears of these issues, together with an overconcentration of outsourcing to China, is beginning to cause U.S. and other Western companies to offshore in other countries such as the Philippines or India?
Smith: I think there is a natural evolution taking place in China. There is a drive to diversify away from basic manufacturing into high technology manufacturing and services. Also, many companies prefer to pay a premium for the quality of workforce in China. The government is by and large doing a great job of managing the economy. It remains to be seen whether there will be any fail out or bubble bursting; however, as with any cycle there is usually a correction at some point. Perhaps banks are over extended in some cases and loans with property attached as collateral might pose a problem.
SVB: Despite conflicting claims from all parts of the political spectrum, how do you assess the cost/benefit ratio of SOX almost ten years after its adoption? Have the early fears that SOX would significantly impact IPOs proven to be true or merely reactionary hype?
Smith: The majority of CFOs at public companies that I’ve talked to here in Asia are overwhelmingly in favor of SoX and the leverage it has afforded them to create a culture of compliance at their firms. They tell me the process of implementing SoX was without doubt healthy and helpful in uncovering potential weaknesses. As practitioners have grown accustomed to the provisions, the overall cost and execution time related to SoX compliance have decreased dramatically —, and it has not been the deterrent to companies seeking to go public that many feared. In fact it has helped the U.S. market. The issue affecting IPOs today is the same as in the past: investor sentiment.
|Rebecca Smith is Managing Director Asia Pacific for NASDAQ OMX Group based in Hong Kong - in charge of business development and maintaining client relationships in Australia, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Taiwan.
Rebecca has had over 12 years of experience in the Financial Services industry in the City of London. Rebecca joined NASDAQ in 2000 to form part of the team covering the EMEA region, adopting Asia sales responsibilities in October 2006.
Prior to joining Nasdaq International in May 2000, Rebecca formed part of the retail products administration team at BNP Paribas. From 1996-1997 Rebecca worked with Abbey National PLC Share Dealing Services from 1996-1997.
Rebecca read law at the University of Greenwich, London (LLB Hons) in 1996.