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A Swiss company is looking to acquire their main competitor based in Singapore. This
acquisition could create a company that represents 55% of the market share. An analyst
following this industry must be aware of potential anti-trust regulatory issues in:
A) Switzerland.
B) Singapore.
C) both Singapore and Switzerland.
RRT is a small democratic country in the South Pacific. Due to advantageous taxation rules it
has grown rapidly over the last ten years as an influx of overseas investment gave rise to a
significant financial services industry. Tom Wiggins, CFA, covers RRT for the investment firm
he works for in the U.S. He correctly predicted RRT's rapid expansion and as a result his
monthly research reports are widely distributed.
RRT is now facing a challenging period, however, as a high profile scandal has rocked the
finance industry and is likely to lead to a series of sweeping reforms. The scandal centered
on the two largest commodity futures exchanges which together processed 98% of
commodity derivative transactions in the country. A whistleblower revealed that the market
participants had colluded over a period of several years to keep spreads and commissions
artificially high. There has also been a significant increase in insider trading cases, and an
even more alarming increase in the number of such cases which have failed to result in a
successful prosecution.
Regulation of the exchanges had been the responsibility of the Market and Trading
Commission (MTC), a government agency which gained its authority from the Fair Market
Trading Act (1992), a wide reaching but out-of-date piece of legislation that still governs the
market today. The MTC in turn delegates responsibility to several other organizations. The
two organizations that have been most heavily criticized as a result of the scandal are the
Derivatives Trading Commission (DTC) and the Public Audit Commission (PAC).
The DTC is a self-regulating organization whose quoted mission is to 'protect market
participants from abusive practices and promote transparent and competitive markets'. In
carrying out this mission, the DTC has the power to prosecute under the Fair Market Trading
Act and hand out fines of up to the equivalent of USD 50,000,000, in addition to custodial
sentences.
The PAC was established by the previous government as a non-profit organization with the
aim of overseeing the audit of all public companies. It is funded through a share of audit
fees and staffed directly by the MTC.
The DTC has been criticized for failing to pick up on the market collusion and generally
failing to utilize its powers to their full extent. The largest fine it has handed out to date is
the equivalent of USD 2,500,000.
The PAC has had a troubled history since its formation. An independent review found that
the audits of the companies accused of collusion failed to identify 'clear evidence' of
collusion that they should 'reasonably' have been expected to uncover.
The PAC's response was that this kind of 'detective' work was not part of the statutory audit
requirements and neither audit opinion was found to have been inappropriate.
The suggested reforms will take the form of a new piece of legislation to replace the Fair
Market Trading Act (1992) and shake up the structure of market regulation. The reforms that
Wiggins thinks will have the biggest impact if enacted are listed in Exhibit 1.
Exhibit 1– Potential Reforms
Proposal 14a.3 Maximum Spread/Commissions on Futures Transactions
The government has suggested putting a ceiling on spreads and commissions to limit the
potential for the two exchanges to exploit their duopoly. Wiggins thinks that the limits are
very low and the government may end up having to subsidize losses that the companies may
make. His opinion is that the government is using the scandal as an excuse to reduce trading
fees and attract trading to the country from overseas.
Proposal 18.d.5 Increased Disclosure Requirements for Hedge Funds and Private Equity
Funds
Historically requirements in this area have been limited. New rules will require a large
increase in the amount of reporting required for both type of funds, with a fund's
prospectus and annual results likely to be subject to an independent audit.