This article appeared in the Listed@ASX email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

ASX Market Release - Cash Market Enhancements

In his commentary on its half-year results, Robert Elstone, ASX CEO covered a range of topics of interest to ASX listed companies and their advisers.  The following are some relevant extracts from that commentary.

In relation to ASX business development activities:

“….The passing of the 2,000th listed entity milestone (in itself a key measure of the attractiveness of ASX as a listing and trading venue) further highlights that a ‘one size fits all’ business model will not adequately service what has become an extremely diverse set of ASX customers.  For those customers seeking to raise capital, ASX is progressing a range of initiatives to meet their needs.  These include:

  • An equity research scheme (in conjunction with FINSIA) targeted at mid-cap stocks that will improve the quality and quantity of available research; [see article 4 of this newsletter ]
  • The development of new indices to cover different market sectors that will create important benchmarks and improve liquidity; and
  • Tailored capital raising rules to better facilitate the needs of smaller companies.

To meet the needs of customers seeking more efficient trade execution, ASX has begun exploring market micro-structure changes to improve liquidity and reduce market impact costs.  These include:

  • Revised block crossing thresholds to provide more flexible execution facilities and improve overall liquidity;
  • New central market functionality to better facilitate the execution of large orders; and
  • Revised rules to further facilitate direct market access (DMA) and algorithmic trading.

ASX expects to continue to incrementally refine the listing and trading regime it offers so as to improve liquidity across all listed entities and to ensure the most competitive cost of capital environment…”

In relation to the regulatory environment and overlaps between the listing rules and Corporations Act:

“…In keeping with a heightened consciousness of the costs of regulatory requirements, in March 2006 ASX commenced a review of its Operating Rules with a view to reducing complexity and compliance costs for listed entities and market participants.  A Guidance Note was developed and issued in December 2006 to assist issuers in understanding how ASX exercises some of the discretions it has in its listing rules.

Analysis has also been completed to identify areas of overlap between the Corporations Act and ASX listing and market rules, with a view to reducing duplication for listed entities and participant firms later in 2007…”

In relation to listings activity and the private equity trend:

“…During the first half of FY07 listing activity on the ASX equity market was very strong.

During the period there were:

  • 147 new listings (compared to 129 for the prior comparable period), with more than 40 additional issues in the pipeline waiting to come to market over the third quarter to March 2007.
  • As at the end of December 2006, 2,014 entities were listed in total, up from 1,873 at December 2005.

The market’s overall capitalisation grew strongly and issuers have continued to raise substantial amounts of capital:

  • At the end of December 2006, domestic equity market cap was $1.39 trillion – up more than 25% on the prior comparable period.
  • For the first half of the financial year, $9.95 billion of capital was raised through IPOs and $27.78 billion through secondary capital issues.  This is 36% greater than the total capital raised over the corresponding period last year.

Listing activity on the ASX therefore remained buoyant despite several high profile private equity transactions during the half involving major listed companies.

Notwithstanding the strength of listing activity throughout 2006, the growth in private equity activity does have supervisory as well as business implications for ASX.  The private equity trend has the potential to place additional stress on the public market’s continuous disclosure regime in a number of ways, for example:

  • Price sensitive information (about proposed transactions) may be kept from the market, creating potential for market abuse if information is leaked.  This is an issue because of the breadth of participants traditionally involved in private equity transactions who have access to price sensitive information.
  • Private equity approaches to listed companies are often incomplete.  In cases where the market is filled with speculation or rumour about such approaches, the company is placed under pressure to meet its obligations to immediately disclose material information to the public market while also trying to assess the value of a private equity approach.

These risks and their implications for the efficiency of the price discovery process as well as the market for corporate control, are counterbalanced by heightened supervisory activity by ASXMS.

Whilst some market commentators have argued that the coincidence of hedge fund trading styles and the growth of private equity heighten the risk of market disclosure abuse (or failure) and, correspondingly, strengthen an argument for market supervision to be conducted independently of market operation, such commentary ignores the alignment of ASX’s business and supervisory interests (akin to an airline’s alignment of its commercial and safety interests) and close co-operation with ASIC.

Exchange market monitoring practices are designed to ensure compliance with listing and operating rules.  Parallels drawn by some commentators between ASX market supervision and a civil police force function are inaccurate because they confuse the monitoring and referral activities for rule compliance conducted by the market operator (ASX) with the forensic and investigative powers given to an independent government agency (ASIC) to ensure legislative compliance.

ASX welcomes ASIC’s recently announced desire to upgrade its own surveillance activities for exchange-based and OTC markets, bringing it closer into line with equivalent agencies overseas, and looks forward to even closer ongoing co-operation with the corporate regulator. It is important for market commentators to understand the public benefits of a front-line supervision model before calling for centralised regulation (predicated on black letter law) based on perception rather than fact. 

A summary of the supervisory statistics for ASXMS for the half include:

  • 60,919 company announcements processed (14.4% increase on pcp);
  • 382 announcements made following on from 661 continuous disclosure-related queries;
  • 284 price queries made with 203 subsequent additional market announcements; and
  • 60 referrals in total made to ASIC:
    • 14 related to insider trading;
    • 5 related to market manipulation; and
    • 6 related to continuous disclosure

Notwithstanding ASX’s heightened surveillance activities and ongoing focus on the continuous disclosure regime, the private equity trend undoubtedly has the potential to reduce capital flows to the public equity market either directly (via delistings) or indirectly (via share buybacks, special dividends, etc, as part of a defence strategy to counter a private equity approach or bid).

On the other hand, the perceived challenge to the public equity market posed by private equity is likely to be an issue of timing.  An often preferred exit mechanism for private equity investments can be a return to the public equity market via an IPO, or a trade sale to an existing listed entity that might need to raise capital to fund the acquisition.

It is tempting and fashionable to conclude that the recent rise of private equity activity is a consequence of a rising agency cost to shareholders attributable to a heightened regulatory compliance environment.  Such a view, whilst not without merit and worthy of consideration, is somewhat partial.  The increased prevalence of private equity could just as easily be attributed to:

  • The short-term focus of much of the hedge fund and benchmark driven traditional investment community; and/or
  • The coincidence of low corporate leverage and nominal interest rates together with the non-discretionary investing behaviour of index funds.

In reality, it is too early in the evolution of private equity in Australia to form a view on the medium to longer-term impact on the Australian capital market from a public/private mix of ownership perspective.  What is important, however, is to monitor the finite ability of currently very thin credit spreads in debt markets to sustain valuation arbitrage vis--vis the public equity market.

The systemic risk implications of the private equity trend, recently touched on by the Governor of the Reserve Bank, are also relevant to ASX.  As a large central counterparty to the investment banking community, any increase in counterparty risk exposure has the potential to have an impact on ASX.

Any rise in the provision of leveraged finance by banks into private equity transactions (albeit risk managed through traditional risk syndication or use of the credit default swap market) or distribution of such debt to non-bank financial institutions or asset managers in the form of collateralised debt obligations (CDO’s), has the potential to increase systemic risk within the financial system.

ASX is one of several stakeholders with a direct interest in this issue alongside ASIC, APRA and the RBA, albeit ASX’s interest is of a supervisory, risk management and commercial nature.  ASX will continue to invest in its supervisory infrastructure and risk management practices as well as enhance its co-operation with ASIC and the RBA as this trend develops.  ASX will do this not solely because it is required to do so but also because it is in its reputational and shareholders’ long term interests to do so.

At the same time, ASX will seek to ensure that the ASX Corporate Governance Council guidelines strike the right balance between market efficiency and effectiveness such that the public equity market continues to thrive and that both public and private equity markets complement each other.

In November 2006, the ASX Corporate Governance Council released an Explanatory Paper for public comment on its proposed changes to the ‘Principles of Good Corporate Governance and Best Practice Recommendations’.  It also released an Exposure Draft of proposed changes.  The public consultation period ended on 9 February 2007.

The proposed changes, which took into account feedback from Council review groups and users of corporate governance information, sought to remove areas of regulatory overlap, assist understanding of how certain Principles are to be applied, and remove inconsistent terminology.  Importantly, the Principles remain non-prescriptive and the "if not, why not?" approach still applies.  A revised set of Principles and Recommendations is expected to become effective from July 2007, after reviewing the submissions received during the consultation process…”

The full text of the commentary on ASX results can be found at asx.com.au.  If you would like to discuss any of the business development activities, please call Eddie Grieve on (02) 9227-0519, or Richard Murphy on (02) 9227-0720.

Copyright 2007 ASX Limited ABN 98 008 624 691. All rights reserved 2007.
Information provided is for educational purposes and does not constitute financial product advice.  You should obtain independent advice from an Australian financial services licensee before making any financial decisions.  Although ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”) has made every effort to ensure the accuracy of the information as at the date of publication, ASX does not give any warranty or representation as to the accuracy, reliability or completeness of the information.  To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information.