ASX SGX AccessReport

ASX-SGX: why the combination is in
Australias national interest
6 December 2010
Report by Access Economics Pty Limited for
ASX Limited
Commercial-in-Confidence
ASX-SGX: why the combination is in Australias national interest
Access Economics Pty Limited

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Declaration
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shares directly in ASX Limited.
Contents
Executive Summary.................................................................................................................... i
1
Introduction .................................................................................................................... 1
1.1
The proposal ..................................................................................................................... 1
1.2
The national interest tests................................................................................................. 2
1.3
Approach to the analysis ................................................................................................... 3
1.4
Contents of this report ...................................................................................................... 4
Australia as a Regional Financial Services Hub ................................................................. 6

2.1
2.2
Reduced Cost of Capital ................................................................................................ 11

3.1
Reliance on foreign capital .............................................................................................. 11
3.2
Significance of ASX-SGX................................................................................................... 17
Opportunities for Diversification ................................................................................... 22

4.1
4.2
Unrealised potential.......................................................................................................... 6
Significance of ASX-SGX..................................................................................................... 8
Comparing ASX and SGX .................................................................................................. 22

Significance of ASX-SGX................................................................................................... 28
Regulatory Control ........................................................................................................ 30

5.1
Impact of ASX-SGX .......................................................................................................... 30
5.2
Regulation and financial services in Australia and Singapore ............................................ 31
Illustrative Examples of New Services and Opportunities ............................................... 36

6.1
Benefits for the Australian funds management industry .................................................. 36
6.2
6.3
New products and services.............................................................................................. 37

Passport listing and secondary market quotation ............................................................ 38
6.4
6.5
Improving efficiency for the market and its participants .................................................. 39

Improved distribution of existing products and services .................................................. 40
The Counterfactual ....................................................................................................... 42
Conclusions ................................................................................................................... 48
References .............................................................................................................................. 49
Appendix A : Ten economic reasons why the ASX-SGX merger proposal should be approved .. 52
Appendix B : Reliance on foreign capital.................................................................................. 65
Appendix C : Recent examples of exchange mergers ............................................................... 69
Charts
Chart 2.1 : Overview of key financial centres ............................................................................. 9
Chart 3.1 : Australias current account deficit since Federation (% of GDP) .............................. 12
Chart 3.2 : Australias net foreign liabilities (% of GDP) ............................................................ 14
Chart 3.3 : Australian exports versus stock of foreign direct investment .................................. 16
Chart 4.1 : Market concentration of the largest 5% of companies by market capitalisation ..... 23
Chart 4.2 : Domestic market capitalisation by size segment .................................................... 24
Chart 4.3 : Number of domestic companies by size segment ................................................... 25
Chart 4.4 : ASX and SGX sectoral representation (proportion of market capitalisation) ............ 26
Chart 4.5 : ASX and SGX have complementary strengths ......................................................... 28
Chart 7.1 : Proportion of turnover in ASX-listed securities outside of the Central Limit Order
Book ...................................................................................................................... 43
Chart 7.2 : ASX, NZX and LSE market share (% of global market capitalisation) ........................ 44
Chart 7.3 : ASX, NZX and LSE market capitalisation ($US billions)............................................. 45
Chart 7.4 : ASX, NZX and LSE number of listed companies ....................................................... 46
Chart B.1 : Gross investment (% of GDP, previous decade) ...................................................... 66
Chart B.2 : Australian engineering construction work (% of GDP) ............................................ 66
Chart B.3 : Large and persistent current account deficits (1960-2006) ..................................... 67
Tables
Table 3.1 : Foreign investment in Australia by country/region (stock, $ billions) ...................... 17
Table 4.1 : Major international exchanges ............................................................................... 23
Table 4.2 : Value of share trading of selected stock exchanges, 2009 ...................................... 25
Table 4.3 : Total value of listed bond trading 2009 ($US million) ............................................. 27
Table 4.4 : Derivative products traded on ASX and SGX during 2009........................................ 27
Table 5.1 : World Economic Forum Financial Development Ranking 2010 ............................... 32
Table 5.2 : World Economic Forum Global Competitiveness Report Ranking 2009-10 .............. 32
Table 5.3 : World Bank Ease of Doing Business Rankings 2010 ............................................... 32
Table 5.4 : IMD World Competitiveness Yearbook 2010 .......................................................... 33
Table A.1 : Foreign investment in Australia by country/region (stock, $ billions) ...................... 55
Table A.2 : Australian overseas investment by country/region (stock, $ billions) ..................... 57
Table B.1 : Episodes of deficit reversals ................................................................................... 68
Figures
Figure 1.1 : Assessing the national interest................................................................................ 3
Figure 2.1 : Exports and imports of financial services ................................................................ 6
Figure A.1 : Australian financial services have weak international links.................................... 53
Glossary
ADR
American Depository Receipt
APEC
Asia-Pacific Economic Cooperation
ASEAN
Association of South-East Asian Nations
ASIC
Australian Securities and Investments Commission
ASX
ASX Limited
CA
Corporations Act
CLOB
Central Limit Order Book
ETFs
Exchange-traded funds
FATA
Foreign Acquisitions and Takeovers Act
FDI
Foreign direct investment
FIRB
Foreign Investment Review Board
FSDF
Financial Sector Development Fund
FUM
Funds under management
GDP
Gross domestic product
GFC
Global Financial Crisis
ICT
Information and communications technology
IMF
International Monetary Fund
LSE
London Stock Exchange
MAS
Monetary Authority of Singapore
NZX
New Zealand Stock Exchange
OECD
Organisation of Economic Cooperation and Development
RBA
Reserve Bank of Australia
REITs
Real estate investment trusts
SAFTA
Singapore-Australia Free Trade Agreement
SGX
Singapore Exchange Limited
SMEs
Small and medium-size enterprises
WFE
World Federation of Exchanges
Executive Summary
ASX Limited (ASX) has engaged Access Economics to examine the national interest implications
of the proposed merger between ASX and Singapore Exchange Limited (SGX). The merger
would create a new exchange group ASX-SGX Limited.
The merged group would become the fifth largest securities exchange in the world by market
capitalisation (approximately US$12.3 billion), the second largest listings venue in Asia, and the
largest provider of exchange-traded funds (ETFs), derivative products and real estate
investment trusts (REITs) in Asia.
Analysing the national interest case for approving the formation of ASX-SGX must begin by
recognising that the Australian assets of the new exchange group the licences to operate the
various exchange functions in Australia do not exist apart from the will of the Australian
Parliament.
Exchange groups cannot operate in Australia without valid licences, and they remain subject to
government and regulatory agency oversight and Ministerial direction no matter who owns
them.
Since the Australian Parliament exists to promote and protect Australias national interest, the
fact that the licensed Australian businesses of ASX-SGX only exist if the merged entity abides
by the conditions of its Australian licences guarantees that the Australian Government
continues to have ultimate sanction over the activities of ASX-SGX in Australia.
Beyond this, the questions of national interest most relevant to the ASX-SGX proposal are
economic in nature. The core question, as recognised by the Treasurer, is whether Australias
economic prosperity is promoted or adversely affected by the formation of ASX-SGX. This
report assesses the national interest implications of ASX-SGX under four headings.
1.
Australia as a regional financial services hub
Policymakers have long sought ways of establishing Australia as a regional financial services
hub. While regulations and international trade agreements have gone some way towards
increasing Australias presence in world markets, further integration with financial markets in
the Asia-Pacific would be a tangible and significant step towards promoting Australia as an
Asia-Pacific financial services hub.
John Brogden (2010) in his recent article in The Australian entitled Funds Passport is Australian
financial players key to Asia identifies the inefficiencies currently evident in cross-border
regulations particularly in reference to the financial services sector which denies our
investment products access to our own region *Asia+ and vice versa. The key barrier to
Australias financial services entering Asian markets is the relative inability of an Australian
fund manager to obtain a financial services license in most Asian countries. To counter this
significant competitive drawback, Brogden supports the introduction of the proposed Asian
Region Funds Passport.
Australia has many attractive qualities as a market for financial services a skilled and mobile
workforce, political stability, and a sound legal and regulatory framework, plus one of the
worlds largest pools of funds under management, a strong banking system and world-class
exchange infrastructure but these have not yet translated into significant cross-border
activity. Australias low level of exports and imports of financial services is just one indicator
among many that demonstrate an overly domestic focus. Our ambitions to become a regional
financial services hub require stronger connections beyond Australias shores, most especially
into Asia.
ASX-SGX will help to build a conduit into Asian financial markets to improve
financial flows between Australia and Asia, and connect Australias funds
management industry to fast-growing pools of Asian savings.
While Australia does hold a latent comparative advantage in financial services and geographic
proximity to a relatively untapped Asian market, our financial markets still tend to suffer from
low brand recognition offshore and geographic remoteness from most major centres. Without
some physical presence closer to the Asian mainland, Australia will compete with other Asian
financial centres for market access, the most prominent of which are Singapore and Hong
Kong.
ASX-SGX has huge potential to offer Australian businesses easy access to deep, liquid and
diverse sources of capital. ASX and SGX have already revealed their intentions to develop a
range of new non-A$ products and services, a move that would prove difficult if the exchanges
remained separately owned. Cross-listing, cross-membership and mutual offset arrangements
between the two exchanges will enable ASX listings to obtain enhanced profile in Asia and
better exposure to Asia-based investors.
ASX-SGX will raise the profile of Australias financial markets within Asia and
beyond.
2.
Reduced cost of capital
Australias standard of living owes much to our ability to attract and effectively use foreign
savings. Access to overseas capital has helped foster higher rates of economic growth,
develop new industries and infrastructure, and strengthen trade and economic links with the
rest of the world. Indeed, a reliance on foreign capital has been a prominent long-term
feature of Australias economic development given the limited size of our own capital markets
and the dominance of capital-intensive industries, especially mining.
Key characteristics of Australias economic circumstances include:
a reliance on foreign funding that is likely to increase, and to be increasingly affected by

developments in China and India major importers of Australian resources; and
domination of foreign capital inflow by short-term bank debt, as Australias domestic

banks are the major source of debt capital for Australian corporates and individuals.
The availability and pricing of equity capital is facilitated by securities exchanges. Given that
issuers and market participants will gravitate over time to the exchange with the most capital
and the most cost-effective and speedy settlement and registration, Australia needs to be on
the right side of those trends.
ii
Conceptually, the greater the size, liquidity, and reach of an exchange, the more cheaply it can
assemble capital from investors, and the better it can match the risk and reward preferences
of investors and companies. While the precise impacts of cross-border exchange mergers are
still unknown, a recent study by Nielsson (2009), which investigated the impact on market
liquidity of forming the Euronext exchange, noted that the main motivation for studying
liquidity is that it ultimately affects the cost of capital.
ASX-SGX has the potential to:
increase access to foreign capital; and

lower the cost of capital through increased scale, liquidity and diversification.
Given the dependence of Australias economic prosperity on continuing access to foreign

capital, any proposal that increases access to and reduces the cost of foreign capital to
Australia must be in the national interest.
ASX-SGX is a natural fit for encouraging Asian capital to invest in Australias
economic potential.
3.
Opportunities for diversification

ASX and SGX are sufficiently different yet sufficiently similar to offer scope for
diversification across regions, markets and sectors to Australian savers and
investors.
ASX-SGX will create opportunities for Australian savers to diversify their asset holdings more
easily across Asian investments; and for Australian issuers to broaden their sources of capital
to include the rapidly growing pool of Asian savings. As Brogden (2010) notes:
Asias population is 4.2 billion (60% of the worlds population) and is expected to grow
by 17% by 2050.
Many Asian countries have established pension schemes to help fund the ageing of their
populations.
Asia will generate much of the worlds wealth over coming years. Consensus forecasts
indicate that China and India will grow at double the rate of the rest of the world in the
five years to 2015.
However, at this stage, Asia has just 13% of the worlds funds under management (or
about $10 trillion based on 2007 figures for global funds under management (IFSL
2009)).
Both Australia and Singapore are internationally regarded as safe and strong financial centres.
Key complementary features of ASX and SGX include:
Comparable vertically integrated business profiles (i.e. offering trading, clearing and
settlement services) plus strong legal rights and investor protection mechanisms.
ASX is dominated by financial stocks, especially banks, and listed mining companies.
SGX, on the other hand, is dominated by industrial and materials companies,
iii
information and communications technology (ICT) stocks, real estate investment trusts
(REITs) and financial stocks.
Bond trading is far more established on SGX than ASX, with the value of bond trading on
SGX more than 15 times that on ASX in 2009 (WFE 2009).
ASX has a wider array of derivative products available to market participants compared
to SGX. However, SGX offers a suite of regional index futures contracts covering the
Chinese, Japanese and Indian markets, whereas ASX lists only one domestic stock index
futures contract (based on the S&P/ASX 200 index).
The complementary nature of the ASX-SGX transaction is evident in the chart below, which
compares the relative strengths of the two exchange groups. Clearly the exchanges are almost
perfectly matched in terms of their sectoral profiles. The merged group will have a more
balanced profile than either ASX or SGX separately, with flow-on implications for market risk.
Range of derivative products (number, 2009)
Bond trading (by value, 2009)
Energy and Utilities (by market cap)
Basic Resources (by market cap)
Financials (ex real estate) (by market cap)
Technology & Telecom (by market cap)
Real Estate (by market cap)
Travel & Leisure (by market cap)
Auto, Industrial Goods, Food and Personal Goods

(by market cap)
ASX
SGX
0%
20%
40%
60%
80%
100%
Source: WFE, Bloomberg.
Overall, broader diversification benefits are offered to Australian savers and

investors as ASX-SGX builds a conduit between the two complementary
exchanges and opens opportunities for participants in both markets to broaden
their horizons. This will diminish home country bias in both markets, potentially
lowering the cost of capital as savers and investors diversify their holdings across
the two markets.
iv
4.
Regulatory control
The Australian operations of ASX-SGX will continue to be regulated by ASIC and
the RBA with Ministerial oversight, and an Australian board with an Australian
chair will continue to oversee Australian operations. There is no loss of regulatory
authority or oversight of exchange operations in Australia implied by the merger
of ASX and SGX just as there has been no loss of regulatory oversight by
domestic regulators in the many other cross-border exchange consolidations.
In addition, there is no reason to be concerned about Singapores regulatory environment.

Independent international institutions (such as the World Bank, the IMF and the World
Economic Forum), which assess a broad sweep of institutional features bearing on financial
systems, rate both countries highly. Singapore and Australia are well matched with regard to
regulatory standards and investor protection.
The counterfactual
ASX should be allowed to respond to new competitors entering its markets.
In March 2010, the Australian Government announced its support for competition between
exchanges for trading in ASX-listed products in Australia. These developments have opened
the door for the foreign-owned operator, Chi-X, to enter the Australian exchange market.
Policy makers expect that competition in trading of ASX-listed stocks will lower transaction
costs and improve product and service innovation for users.
ASX will face increased domestic and international competition in any case even if ASX-SGX
does not proceed. ASIC is preparing Australias equity market regulatory framework to
encourage greater competition. Disallowing ASX-SGX would rule out a rational strategic
response on ASXs part to its changing market environment, changes facilitated by the
Australian regulatory authorities, which have oversight of ASXs compliance with its own
licence obligations.
Furthermore, the current regulatory framework does not prohibit foreign ownership of ASX
and proposes no foreign ownership limitations on new market operators that will compete
against ASX. In contrast to the controlled way in which the ASX-SGX merger is currently
proposed, the ownership of ASX could transition to foreign investors over time and in a less
strategic fashion.
Finally, if ASX-SGX were disallowed, this could add to perceptions, especially in Asia, that
Australia is not welcoming of foreign investment and/or is overly protectionist.
Conclusions
This report finds that the proposed formation of ASX-SGX is not contrary to
Australias national interest and, moreover, is consistent with Australias national
interest since: (i) ASX-SGX will improve the economic welfare of Australians; and
(ii) the ASX will continue to operate in Australia and be regulated by Australian
authorities.
Moreover, SGX stands out as the most logical merger partner for ASX given that
(i) the bulk of future capital flows into Australian investment projects will come
from Asian savings (and investors); (ii) ASX and SGX are complementary, meaning
that there is not one dominant business in the proposed merged group; and that
(iii) ASX and SGX have similar business models, common technology, and
complementary sectoral representation.
Access Economics
vi
Introduction
ASX Limited (ASX) has engaged Access Economics to examine the national interest implications
of the proposed merger between ASX and Singapore Exchange Limited (SGX). The merger
would create a new exchange group ASX-SGX Limited.
A securities exchange is quite different from a mining company or an agricultural business.
Their prime assets the mineral deposit being mined or the land being farmed are
geographically fixed and exist naturally, quite independent of the will of government. The key
business franchise of an exchange group, on the other hand, is made up of its licences to
operate trading, clearing and settlement facilities. Those facilities are provided by technology
platforms that operate within a domestic regulatory framework. The Australian regulatory
framework is set by Australian law and overseen by government and its responsible regulatory
agencies.
In this sense, securities exchanges are a means to an end rather than an end in themselves.
They are of value to a community because of the function they perform. Unlike mineral
deposits or fertile agricultural land, which are unique assets and limited in supply, exchange
licences can be replicated or changed by governments and their regulatory agencies. A
government can decide to have more or fewer licensed exchanges.
Analysing the national interest case for approving the proposed formation of ASX-SGX must
begin with the recognition that the assets in question the licences to operate the various
exchange functions do not exist apart from the will of the Australian Parliament. The right to
continue to operate these functions exists only at the behest of government and its regulatory
agencies.
them. Allowing a foreign entity, in this case SGX, to acquire the shares of ASX does not
distance the combined entity, ASX-SGX, from the authority of the Australian Parliament in
relation to the operation of the combined entitys Australian businesses.
Since the Australian Parliament exists to promote and protect Australias national interest, the
fact that the licensed Australian businesses of ASX-SGX only exist if the merged entity abides
by the conditions of its Australian licences guarantees that the Australian Government
continues to have ultimate sanction over the activities of ASX-SGX in Australia.
1.1 The proposal

On 25 October 2010, ASX and SGX announced that they entered into a merger
implementation agreement to combine to enable customers globally to capitalise on listing,
trading, clearing and settlement opportunities created through the expanded platforms,
leveraging on the importance of Asia Pacific as the driver of global growth.1
Currently, both ASX and SGX are publicly-listed companies. Under ASX-SGX, ASX shareholders
will be paid $22 in cash and 3.473 new SGX shares for each existing ASX share. ASX-SGX is
ASX Media Release, 25 October 2010. http://www.asx.com.au/about/pdf/20101025_asx_sgx_media_release.pdf
structured in this way to compensate ASX shareholders for SGXs higher price-to-earnings ratio
and to generate earnings per share accretion for SGX whilst paying a large premium. The deal
values ASX at $482 per share, which represents a premium of 37.3% relative to the closing
price of ASX shares on 22 October 2010, or $8.4 billion in total.
Subject to regulatory approval, the merged group would have an international board
comprising fifteen directors from five countries, including four directors from Australia who
would be drawn from the current ASX parent board and include the chairman of the ASX
Compliance subsidiary board. Regulation of the relevant exchanges would be shared between
Australian and Singaporean authorities, with the Australian Securities and Investments
Commission (ASIC) and the Reserve Bank of Australia (RBA) regulating the Australian
operations and the Monetary Authority of Singapore (MAS) overseeing the Singaporean
operations of ASX-SGX Limited.
ASX-SGX Limited would be the holding company for the combined group and
would itself be listed on both ASX and SGX. The combined group would continue
to operate exchanges in Australia and Singapore, employ approximately 1,100
people and be regulated by their respective local authorities.
Centres of excellence would be created to leverage existing skill sets in both locations. ASX will
maintain its regional office presence (in addition to the Sydney head office), with the Perth
office to be expanded given its geographic and time zone centrality to the new exchange
group.
The merged group would become the fifth largest in the world by market capitalisation
(approximately US$12.3 billion), the second largest listing venue in Asia, and the largest
provider of exchange-traded funds (ETFs), derivative products and real estate investment
trusts (REITs) in Asia.
1.2 The national interest tests

ASX-SGX must pass two national interest tests.
The Foreign Acquisitions and Takeovers Act 1975 (FATA) empowers the Treasurer to
prohibit the foreign acquisition of shares in an Australian company if the result would be
contrary to Australias national interest.
Division 1 of Part 7.4 of the Corporations Act 2001 (CA) requires a regulation to be made
to enable any company (whether foreign-owned or not) to acquire more than 15% of
the shares in ASX Limited as Australian cash equities market licensee. It separately
requires the Minister to be satisfied that an acquisition resulting in a company having
15% or more voting power in the ASX Group futures market licensee, and clearing and
settlement facilities licensees, and their holding companies, is in the national interest
before the Minister may approve such an acquisition.
What constitutes Australias national interest is not defined in either Act but it clearly
encompasses matters such as defence, national security and foreign relations. While these
issues might seem largely peripheral to ASX-SGX, they have been raised in public debate.
2
Based on SGXs last traded price of S$9.54 prior to announcement of the proposal and the prevailing exchange
rate at announcement of S$1 = A$0.787.
The questions of national interest most relevant to this proposal are economic in nature. The
core question is whether Australias economic prosperity is promoted or adversely affected by
ASX-SGX.
The national interest test under FATA is that the Treasurer is empowered to block ASX-SGX if it
is found to be contrary to the national interest. On the other hand, the CA test in relation to
the acquisition of more than 15% of voting power in the futures market licensee, and clearing
and settlement facilities licensees and their holding companies, is an affirmative test: the
Minister must find that the proposed acquisition of shares in ASX by SGX, giving rise to this
downstream voting power in other licensees and their holding companies, is in the national
interest before the Minister may approve the acquisition.
In each case, the Treasurer (who in this case is the Minister) may impose conditions on his
approval. (There is no specified test for the Minister in determining whether to introduce the
regulation to allow the acquisition by SGX and its subsidiaries of voting power of more than
15% in ASX Limited.)
1.3 Approach to the analysis

This report assesses the national interest implications of ASX-SGX under four headings (see
Figure 1.1):
the implications for Australias standing as a regional financial services hub in Asia;
the impact on the cost of capital for Australian companies;
the impact on Australians ability to diversify their savings; and
the implications for regulatory control of exchange trading, and clearing and settlement
facilities in Australia.
Figure 1.1: Assessing the national interest
Regional
Financial Centre
Reduced Cost of
Capital
Diversification
of Savings
Regulatory
Control
New Products
& Services
Diversification
of Earnings
Enhanced
Distribution
Reduced Costs
of Operating
The first three headings in red (from left to right) relate to the CA requirement that ASX-SGX
be consistent with Australias national interest. Our view is that ASX-SGX should be considered
consistent with the national interest if it can be shown to promote the economic prosperity of
the people of Australia. The first three of our headings explore specific aspects of ASX-SGX
which have the potential to improve the economic welfare of Australians.
A finding that ASX-SGX is not contrary to Australias national interest (the FATA test) requires
the Treasurer to conclude that the economic prosperity of Australians would not be adversely
affected by the proposal. Our fourth heading addresses this issue directly.
ASIC and the RBA are the two regulators responsible for supervising Australias exchange
trading, and clearing and settlement facilities. They are both charged in broad terms with
securing Australias economic prosperity.
Importantly, ASIC (2010) has recently released its analysis of changing conditions in equity
markets in which it anticipates heightened competition in exchange markets. ASIC
acknowledges the benefits for Australia of reduced operating costs flowing from increased
competition in exchange markets while seeking to uphold the integrity and soundness of
Australias financial system.
So long as the authority and effectiveness of Australias regulatory agencies are maintained at
their current levels, ASX-SGX will not adversely affect Australias national interest. Our fourth
heading therefore addresses the question of whether ASX-SGX might in some way adversely
affect the regulatory control exercised by ASIC and the RBA.
A crucial aspect of our assessment is the counterfactual. Deciding whether ASX-SGX is in the
national interest or not also entails forming a view about what might occur if ASX-SGX were
not approved. Not only might the potential benefits of ASX-SGX fail to materialise in this event
but regression from the status quo might also occur. Assessing the potential benefits or costs
of ASX-SGX cannot assume that the status quo would simply continue if ASX-SGX were not to
proceed.
Figure 1.1 also shows how key elements of the commercial case for ASX-SGX articulate with
the national interest assessment. The commercial case for merging the two exchanges is built
on four pillars:
enhancing the potential to introduce new products and services across the merged
exchange groups;
a combined group which has a more diversified earnings base and access to broader
capital and investor groups;
enhancing the distribution of existing products and services; and

costs savings in operating the two groups as one, deriving benefits from scale, common
systems and a single corporate office.
This report does not address the commercial case for ASX-SGX except as it relates to the
national interest assessment. Importantly, neither the FATA nor the CA requires the Treasurer
to affirm that ASX-SGX is a sound commercial proposition in itself. This is a matter for the
shareholders of ASX and SGX to determine.
1.4 Contents of this report

Chapters 2 to 4 present reasons why ASX-SGX should be considered consistent with Australias
national interest:
Chapter 2 discusses Australias potential as a financial services hub in Asia;
Chapter 3 discusses Australias reliance on foreign capital and how ASX-SGX might
improve access to and lower the cost of capital to Australian borrowers/investors; and
Chapter 4 discusses the potential benefits from further diversifying Australian savings.
Chapter 5 discusses the implications for regulatory control of exchange trading, and clearing
and settlement facilities in Australia. If there is no impact on the authority and effectiveness of
Australias regulatory agencies, ASX-SGX cannot be judged contrary to the national interest,
since this would imply that Australias financial regulators are incapable of securing the
national interest through their regulation of the Australian operations of ASX-SGX.
Chapter 6 presents a number of illustrative examples of how the combination of ASX and SGX
might work. The examples identify areas of cooperative opportunity that would benefit a
diverse range of stakeholder groups. They are not exhaustive and, in all areas, are subject to
regulatory approvals in both Australia and Singapore.
Chapter 7 examines the counterfactual case. ASX-SGX is a commercial response to competitive
pressures in the market for listings, exchange trading, and clearing and settlement services. If
this response is disallowed by the Australian authorities, the competitive pressures do not
disappear. Assessing the national interest implications of allowing ASX-SGX to proceed
involves comparing this outcome to the alternative of not allowing ASX-SGX to proceed.
Chapter 8 summarises the report and offers conclusions.
Australia as a Regional Financial Services Hub
Policymakers have long sought ways of establishing Australia as a regional financial services
hub. Further connectivity with financial markets in the Asia-Pacific would clearly advance this
objective. ASX-SGX is one initiative that could be a catalyst for further connectivity, and
advance Australias aim of becoming a meaningful part of a regional financial services hub.
2.1 Unrealised potential

Australia has many attractive qualities as a market for financial services, including a skilled and
mobile workforce, political stability, and a sound legal and regulatory framework.
Furthermore, Australian financial markets already exhibit several of the key attributes required
of an attractive financial services hub, including:
good governance and regulation of property rights;
an English-speaking workforce in a world where English dominates as the language of

global finance.
a deep and increasingly mature pool of superannuation savings with a well-developed

funds management sector; and
Figure 2.1: Exports and imports of financial services

60%
% financial services
gross value added
50%
40%
Financial services exports
Financial services imports

30%
Source: Johnson Report (2009)

20%
10%
0%
United Kingdom
Singapore
Hong Kong
Canada
United States
France
AUSTRALIA
Japan
New Zealand
Yet despite also having one of the worlds largest pools of funds under management, a strong
banking system and world-class exchange infrastructure, Australias financial services qualities
have failed to translate into significant cross-border activity. Australias low level of exports
and imports of financial services demonstrates an overly domestic focus (see Figure 2.1). Our
ambitions to become a regional financial services hub require stronger connections beyond
Australias shores, most especially into Asia.
The Johnson Report (2009), published by the Australian Financial Centre Forum, addresses the
strengths and weaknesses of Australias bid to become a more prominent financial centre. The
report makes various policy recommendations aimed at promoting Australias chances, and
notes that a deepening regional engagement is an essential first step. Indeed, the report
picked Singapore as the best place to start.
The report emphasises that further integration with Asia-Pacific financial markets would be in
the national interest as it contributes to the concept of an Asia-Pacific Community, and can
contribute to Australias broader national economic and security objectives in the region.3
Broadly speaking, a successful financial centre offers easy access to deep, liquid and diverse
pools of capital. It also offers access to sophisticated infrastructure that facilitates hedging and
risk transfer activity. A higher level of cross-border financial activity is one way to strengthen
these characteristics. While Australias financial markets are well-developed, sizeable and
sophisticated, the level of managed funds sourced from offshore is relatively low.
The Johnson Report (2009) notes that, for instance, the proportion of Australias funds under
management (FUM) sourced from outside Australia is between 3.5% and 11%, compared with
31% for the UK, 64% for Hong Kong and 80% for Singapore. This relative paucity of funds
sourced from offshore reflects the overly domestic focus of the Australian financial services
sector.
The Asia-Pacific region is the obvious target for Australias efforts to boost imports and exports
of financial services. The Johnson Report (2009) notes that:
many Asian countries have high national saving ratios and are looking for opportunities
to invest overseas, whereas Australia has a low national saving ratio and plenty of scope
for investment;
many countries in the Asia-Pacific are looking to develop their private capital markets
and Australia can contribute by becoming more broadly engaged in the region; and
a number of the regions multilateral bodies, including the Association of South-East

Asian Nations (ASEAN), ASEAN+3, the East Asia Summit and the Asia-Pacific Economic
Cooperation (APEC), have the development of Asian financial markets as a policy
objective.
While Australias geographic location in the Asia-Pacific region is a potential advantage, the
Johnson Report (2009) notes that not being on the Asian continent diminishes our profile in
Asian financial markets. Australian financial markets tend to suffer from low brand recognition
offshore and geographic remoteness. Without some physical presence closer to the Asian
mainland, Australia will compete with other Asian financial centres for market access, the most
prominent of which are Singapore and Hong Kong.
The low brand recognition of Australian financial services outside Australia impedes our
development as a financial centre. Geographic distance from the main financial centres in the
UK, Europe and North America explains the difficulty of establishing offshore brand
3
Johnson Report (2009), p.112.
recognition in these traditional centres. In the Asia-Pacific region, however, the tyranny of
distance is reduced somewhat by compatible time zones and shorter travel times. The
potential prize is also larger as Asian saving ratios and rates of economic growth easily outstrip
those in the developed world.
The Johnson Report (2009) also cites regulatory and policy barriers as factors limiting crossborder transactions and fund raising. Australian-based fund managers seeking to offer their
products in the Asian region face constraints on market access, including regulations that
restrict the sale of funds management products to retail customers.
John Brogden (2010) in his 18 November article entitled Funds Passport is Australian financial
players key to Asia published in The Australian identifies the inefficiencies currently evident in
cross-border regulations particularly in reference to the financial services sector which
denies our investment products access to our own region [Asia] and vice versa. The key
barrier to Australias financial services entering Asian markets is the relative inability of an
Australian fund manager to obtain a financial services license in most Asian countries. To
counter this significant competitive drawback, Brogden supports the introduction of the
proposed Asian Region Funds Passport.
Raising Australias profile in Asian financial markets is an important step in developing our
ambitions to become a regional financial services hub. Stronger links with Asia will promote
Australian exports and imports of financial services to levels more consistent with our standing
as a sophisticated financial services marketplace.
Chapter 6, Section 6.1, further highlights the benefits of ASX-SGX for the Australian funds
management industry.
2.2 Significance of ASX-SGX

Australias latent comparative advantage in financial services and geographic proximity to a
relatively untapped Asian market underpin our potential as a regional financial services hub.
Raising the profile of Australias financial services sector in Asia is essential to closer
engagement with the region. ASX-SGX offers the potential to serve as a catalyst for this closer
engagement to occur.
Chart 2.1 lists Sydney as an established national financial services centre offering a full range of
services but with moderate international connections. Singapore, on the other hand, is
described as an aspiring regional hub offering a similar range of financial services to Sydney
but with much stronger international connections. Strengthening links between the Australian
and Singaporean financial services centres, as ASX-SGX would do, would immediately improve
the international connectedness of Australias financial services sector and align us with a
recognised emerging regional hub.
ASX-SGX will maintain separately administered exchanges in both Singapore and Australia
and act as a conduit of activity between the two centres. Cross-listing, cross-membership
and mutual offset arrangements between the two exchanges (see Section 6.2) will form the
basis of the conduit. ASX listings will obtain immediate profile in Asia through cross-listing on
the SGX and Asian investors will gain easier access to Australian stocks.
The scope for developing new products and services will improve with the combination of the
two exchanges under the ownership of one group. Innovation in products and services is the
hallmark of a financial services centre. The enhanced scope for developing cross-currency
derivative products and expanded pan-Asia indices is an achievable short-term benefit of ASXSGX (see Section 6.2). From Australias perspective, ASX will receive increased visibility within
the global investment community, raising interest in and enhancing the relevance of Australian
financial services more generally.
Chart 2.1: Overview of key financial centres
Source: Citi, Oliver Wyman in UK international financial services the future, 2009.
Furthermore, an enhanced profile for Australia within Asia and beyond will improve the
chances of attracting financial services professionals to, in particular, Sydney, Melbourne and
Perth. In other words, the proposal will enhance Australias financial centre employment
credentials. Financial services are intensive in human capital, which, unlike fixed plant or
mineral resources, can re-locate quickly.
Given the appeal of Australian cities such as Sydney, Melbourne and Perth as places to live and
the importance of amenity and liveability to financial services professionals, being able to live
and work in Australia while remaining connected into Asian and global financial markets is an
appealing prospect. In this respect, far from exporting high-value jobs to Asia, ASX-SGX helps
to build links, which facilitate highly skilled professionals moving to Australia to build careers
focussed on Asia.4
Brand recognition counts for a great deal in financial services. According to Deborah Ralston
(2010), director of the Australian Centre for Financial Studies, ASX-SGX would demonstrate a
genuine integration of Australian and Asian financial markets, and potentially reposition
Australia. The merger would be a game changer in relation to Asian attitudes towards
Australias commitment to the region.
Appearances count but nowhere more so than in Asia. For Australia to have any
chance of becoming a regional financial services hub, we must first demonstrate
commitment to the region and a genuine willingness to engage.
ASX-SGX aligns two of the regions strongest exchange groups to form the fifth largest
exchange group in the world by market capitalisation. Such a transaction places the merged
exchange group squarely on the international financial services map as a significant and
relevant global player based in the Asia-Pacific region.
ASX-SGX will help Australia become a regional financial services hub by:
(i) building a conduit into Asian financial markets to improve financial flows from
Australia into Asia and vice versa; (ii) connecting Australias funds management
industry to fast-growing pools of Asian savings; and (iii) raising the profile of
Australian financial markets within Asia and beyond.
The ASX itself employs around 500 people. It is expected that only a few executive positions would transfer to
Singapore as a result of combining ASX with SGX, while a number of new executive positions would be created in
Australia. Other jobs are unlikely to be significantly affected by the formation of ASX-SGX.
10
Reduced Cost of Capital
Australias standard of living owes much to its ability to attract and effectively use foreign
investment. Access to overseas capital has fostered higher rates of economic growth,
developed new industries and infrastructure, and strengthened trade and investment links
with the rest of the world. Indeed, a reliance on foreign capital has been a prominent longterm feature of Australias economic development given the limited size of our own capital
markets and the dominance of capital-intensive industries, especially mining.
Australian workers use the nations stock of capital in order to create output (i.e. their own
skills are married with physical infrastructure such as mines, factories, office blocks, roads,
ports, and computers and other equipment).
In recent times, Australias labour productivity growth has become dependent on

capital deepening that is, the stock of capital per worker.
The other source of productivity growth comes from innovation in its many guises
(multi-factor productivity growth). The Grattan Institute has identified better access to
risk finance as a likely key component in improving Australias innovation effort and
lifting Australias productivity performance.5
Productivity growth as a result of either capital deepening or innovation improves the

effectiveness of workers, boosting their incomes as well as the profits of the businesses
which have invested.
Australias history of current account deficits and the likelihood that those will lift in order to
finance the surge of resource and infrastructure projects being approved makes access to
and the price of capital among the most important determinants of Australias national
investment and national economic prosperity.
ASX-SGX has the capacity not only to ensure but to bolster Australias economic prosperity by:
increasing access to foreign capital; and

lowering the cost of capital as a result of increased scale, liquidity and diversification.
This chapter first explains in more detail why Australias economic prosperity is so reliant on
foreign capital and then discusses how ASX-SGX is likely to improve access to and lower the
cost of capital.
3.1 Reliance on foreign capital

While reliance on foreign capital has been a prominent long-term feature of Australias
economic development, our dependence on foreign capital has increased largely because of a
major boom in mining investment. Domestic savings are insufficient to finance investment on
the scale required, especially when the need for additional infrastructure is taken into account.
Hence, foreign capital will be required in substantial amounts to finance Australias national
investment.
Grattan Institute (2010).
11
Foreign capital, especially in the form of foreign equity, should be encouraged because:
1.
Australias current account deficit is high and rising.
2.
Australia is over-exposed to short-term foreign borrowing, and equity capital has

important advantages over debt capital.
3.
Australia benefits from foreign direct investment (FDI) and Asia, an increasingly
important source of FDI internationally, is under-represented as a source of FDI into
Australia.
These points are considered in the following sections.
3.1.1
The vulnerability associated with our current account deficits
Australia has been investing more than it has been able to muster from domestic savings since
it was colonised. National statistics collected since Federation show the dominance of current
account deficits (Chart 3.1).
Chart 3.1: Australias current account deficit since Federation (% of GDP)
2
-2
Century average
-4
Past three decades average

-6
1900s
1910s
1920s
1930s
1940s
1950s
1960s
1970s
1980s
1990s
2000s
Source: ABS Cat. No. 5302.0, 5206.0, the Reserve Bank, Federal Treasury.
It is not unusual for young nations to run current account deficits, because the opportunities to
invest often outstrip a developing nations ability to finance those opportunities. Somewhat
surprisingly, investment opportunities in Australia have grown over time. Over the last three
decades, Australias current account deficit lifted further as a share of the economy.
The lift in mining investment in recent years has already seen gross investment in Australia
outstrip that of many of our peers. In addition, the increased investment required to pursue
the increased opportunities now available to Australia, as a result of the current resources
12
boom, is likely to mean an even higher average current account deficit is in prospect. This will
involve an even greater reliance on foreign funding, particularly wholesale funding.
More detailed discussion of risks associated with current account deficits is provided in
Appendix B.
It is worth highlighting that any slowdown in the economies of China and India would create
additional risks for Australia. A slowdown in China and India would likely reduce our export
earnings more than it would reduce our import costs. These two effects would combine to
raise an already elevated current account deficit.
In turn, a higher current account deficit could be associated with unwillingness by foreigners to
lend to Australia during what could be a difficult period. Volatility affecting China and India is
likely to shape foreigners perceptions of Australia because Australia is a major supplier to
these two economies.
Australias reliance on foreign funding is likely to increase and be increasingly
subject to events affecting China and India.
3.1.2
Exposure to short-term foreign borrowing
Around 40% of Australias foreign liabilities (comprising debt and equity) is accounted for by
foreign borrowings by domestic banks. In 1990, the ratio was only 20%.
Australian banks share of foreign debt is higher than in previous times, as is their share of
financing of the current account deficit. Consequently, the ability of Australian banks to
borrow abroad is important for financing investment in Australia.
Australian banks borrowing abroad has a relatively short maturity it is impatient capital.
The ABS reports that 44% of the foreign debt liabilities of Australian depository institutions
have a maturity of less than 12 months (ABS Cat. 5302.0, Table 1). By contrast, direct equity
stakes by foreigners in Australian firms is patient capital.
The Global Financial Crisis (GFC) raised awareness of and concern about the danger of financial
sector instability in the face of external shocks and how impatient capital can seize up when
it is most needed. At the peak of the GFC, Australian banks were forced to pay more than 200
basis points over the swap rate for wholesale funds. The breakdown of interbank markets
forced the Australian Government to guarantee wholesale funding for Australian banks.
Official concerns about the risk to financial system stability from high and increasing levels of
market concentration in Australian financial markets are likely to persist. As Dr Ken Henry has
pointed out, during the crisis the major banks:
increased their market share of most financial products;

increased their net interest margins; and
increased their share of owner-occupied housing loan approvals (rising from around 60%
ahead of the crisis to around 82% in early 2010).
13
Australias rising reliance on foreign funding is dominated by short-term banking

debt and our domestic banks are the major source of debt capital for Australian
corporates and individuals.
Australian banks reliance on short-term and offshore funding sources carries risks.
The recent GFC highlighted Australias vulnerability to a meltdown in global capital markets,
when debt financing seized up almost overnight.
The rise of securitisation markets underwrote greater access by Australian lenders (and,
indirectly, Australian families) to cheap financing during much of the past decade. These
markets seized up during the GFC and are only recovering slowly.
Basel III will make bank-issued bills and bonds less attractive. The proposed Net Stable
Funding Ratio is intended to promote longer-term structural funding of banks balance
sheets, off-balance sheet exposures and capital markets activities. This means that
Australian banks will need to find alternatives to short-term sources of funding. The
higher capital requirements proposed under Basel III will also increase banks demands
for equity capital, at least over time.
In contrast, Australias net reliance on foreign equity capital (at $92 billion in mid-2010) is oneseventh of our reliance on foreign debt (at $673 billion), whereas three decades ago these two
components were of equal size (see Chart 3.2). There are important risks in our growing
reliance on foreign debt. Patient direct equity involves a greater sharing of risks and rewards
than debt financing, and it is less vulnerable to capital flight at times of turmoil. Hence, any
shift towards direct equity financing over debt financing would reduce the potential volatility
of future capital flows.
Chart 3.2: Australias net foreign liabilities (% of GDP)
60%
Net foreign equity
Net foreign debt
50%
40%
30%
20%
10%
0%
1980-81
1984-85
1988-89
1992-93
1996-97
2000-01
2004-05
2008-09
Source: ABS 5302.0, 5206.0
14
It is therefore particularly important to Australias future prosperity that

Australian companies have access to foreign-sourced equity at the best possible
price.
The availability and pricing of equity capital is facilitated by securities exchanges. The greater
the size, liquidity, and reach of an exchange:
the more cheaply it is able to assemble capital from investors; and

the better the exchange can match the risk and reward preferences of investors and
companies.
Accordingly, the increased size, liquidity, reach and accessibility to a wide range of investors of
ASX-SGXs markets will have important advantages in helping Australians achieve greater
economic prosperity.
3.1.3
Benefits of foreign direct investment funds
Access to overseas capital over the past century has helped Australia foster higher rates of
economic growth, develop new industries and infrastructure, and strengthen trade and
economic linkages with the rest of the world. Ensuring Australia continues to be an attractive
international investment location is of critical importance to our national interest and future
prosperity.
In 2007, Australia received around 1.8% of global portfolio investment. It also received about
2.8% of world foreign direct investment in 2008, the ninth largest recipient of this form of
investment. Both those shares are higher than Australias share of world GDP (1.7% in 2008).
The UK and the US are Australias largest sources of foreign investment, at around a quarter
each of total foreign investment in this nation. Yet the longer-term growth of capital flows
into Australia (which have already increased significantly over the last decade) are unlikely to
come from the US and UK, particularly given the stress that both countries are under to correct
their fiscal imbalances.
Rather, the growth opportunities of the future are likely to be those that connect the fastgrowing capital pools of Asia with good underlying economic growth and world-leading
saving rates with investment opportunities opening up in Australia.
ASX-SGX is a natural fit for encouraging Asian capital to invest in Australian
potential.
Increases in foreign investment flows reflect greater global integration. As countries such as
Australia have become more trade-intensive, cross-border investments have also grown.
Notably, this is part of the broader tendency for firms to drive efficiencies by undertaking
activities on a more global basis.
Australia is one of many locations that vie for a limited supply of foreign capital. In the wake of
the global financial crisis, foreign capital is more limited and more costly. Nonetheless,
Australia should aim to improve its attractiveness to foreign capital, especially from regions
which appear to be under-exposed to the benefits Australia offers, because the economic pay-
15
off for us (and for them) will be greater. However, should active policy interventions or illjudged pronouncements discourage overseas investors, the economic consequences are likely
to be negative.
Chart 3.3: Australian exports versus stock of foreign direct investment
Source: ABS Cat. Nos. 5368.0, 5352.0.
The relationship between Australias export trade and foreign investment can be seen in Chart
3.3 above. Some broader structural differences are noticeable in the investment-to-export
trade intensity of Australias more traditional providers of foreign capital and key Asian
markets. The chart maps out a simple relationship Australian exports to a nation and
investment in Australia from that nation tend to be linked. However, those linkages are
stronger for our old trading partners than for newer partners.
Other things equal, it makes sense for Australia to welcome foreign investment from Asia,
giving the latter a stake in Australia commensurate with the stake our export earnings have in
the health of those economies. Again, ASX-SGX is a natural fit for a greater alignment of such
trade and investment linkages.
The choice of Singapore as a partner makes particular sense because the investment links
between Singapore and ASEAN investors and Australian opportunities are not growing as we
might have expected.
As indicated in Table 3.1, overseas investors had invested nearly $2 trillion dollars in Australian
assets (as at 2009) including debt and equity holdings in Australian firms.
16
Over the past decade, the slower-growing OECD economies have nearly doubled the
dollar-value of their investments in the Australian economy.6
At the same time, the investment stake in Australia held by the faster growing ASEAN 7
economies (including Singapore) has remained virtually stagnant (0.1% average annual
growth over a decade).
Table 3.1: Foreign investment in Australia by country/region (stock, $ billions)
Singapore
ASEAN ex-Singapore
OECD
Total all countries
2001
39.9
7.2
600.1
856.7
2005
19.7
17.5
853.8
1,240.3
2009
40.2
11.5
1,361.5
1,897.7
Trend growth
% pa
2001 to 2009
0.1%
5.9%
10.8%
10.5%
Source: ABS cat 5352.0
We might have expected growth in ASEAN investment in Australia to outstrip that of the OECD
economies because:
the ASEAN economies have been growing strongly over the past decade; and
there are benefits to ASEAN investors in diversifying their portfolios by lifting their
investment in Australian firms.
In addition to the investment opportunities provided by the mining boom mentioned earlier,
opportunities for Australian firms to connect up with future growth in Asian savings will
accelerate since the IMF forecasts that Asian net savings will double between 2010 and 2015. 8

Australian companies such as Toll Holdings, Leighton Holdings, BHP Billiton, ANZ
and Macquarie Bank that already have a physical presence in Asia will find it
easier to raise capital in the region by listing on ASX-SGX via the proposed
passport arrangements.
Given the reliance of Australias economic prosperity on continuing access to foreign capital,
any proposal that increases access to and reduces the cost of foreign capital must be in the
national interest. The following sections illustrate the potential impacts of ASX-SGX on foreign
capital. This includes how ASX-SGX can increase liquidity and how increased scale, liquidity
and diversification can lead to a reduced cost of capital. The impact of ASX-SGX on the cost of
capital is also discussed in Section 4.2 below.
These estimates refer to stock estimates as at 30 June of each year. They do not refer to investment flows.
ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam. ASEAN members do not overlap with OECD members.
8
That is, savings less investment. The IMF projects Asian net saving will rise from 0.7% of OECD economic activity in
2010 to 1.5% in 2015.
17
3.2.1
Increased liquidity
As illustrated in Chapter 4, the combined group provides Australian companies with more
access to foreign capital than the ASX alone.
Australian companies would benefit from gaining access to a larger investor base in
Singapore (and Asia more broadly).
Australian market participants and intermediaries would benefit from a broader

customer base, new products and services, improved post-trade margining and
settlement efficiencies, as well as extended trading hours.
Australian investors would benefit from a greater range of stocks as well as new
products and lower trading costs.
Trading costs are likely to fall due to technology efficiencies and deeper liquidity.
In addition to access to the Singapore market, ASX-SGX will also increase visibility of the
merged group among the global investment community.
ASX-SGX would be Asias first exchange which straddles international boundaries. While
such arrangements have become commonplace in Europe and the USA, ASX-SGX will be
at the forefront in creating an international exchange group in the Asia-Pacific.
ASX-SGX will have a greater ability to attract international listings, which has the
potential to further increase liquidity.
SGX already has off-shore hubs in New York, London, Chicago, Tokyo and Hong Kong,
which provide global connectivity and an opportunity to grow international foreign
exchange flows through Singapore.
Given that issuers and market participants will gravitate over time to the exchange with the
most capital and the most cost-effective and speedy settlement and registration, Australia
needs to be on the right side of those trends. The greater the size, liquidity, and reach of an
exchange, the more cheaply it can assemble capital from investors, and the better it can match
the risk and reward preferences of investors and companies. The evidence suggests that large
global investment and hedge funds want access to deep, liquid markets.
Deborah Ralston (2010) claims that ASX-SGX is projected to generate a significant lift in
profitability, increased liquidity, and opportunities in the market. The proposal is also likely to
increase employment opportunities through a deeper and more complex capital market.
Although empirical analysis of securities exchange mergers is still in its infancy, one study
substantiates the argument that a merger increases liquidity:
Padilla and Pagano (2005) analysed the effects of harmonisation of clearing systems in
the Euronext exchanges and found that liquidity among the largest 100 stocks rose
substantially.
The combination of ASX and SGX will bring more large firms from ASX to SGX than vice versa
and more firms with foreign sales from SGX to ASX. ASX-SGX can therefore be expected to
benefit from enhanced liquidity from both sources if the Euronext experience is a reliable
guide.
18
3.2.2
Reduced cost of capital

A recent study by Nielsson (2009), which investigated the impact on market
liquidity of the formation of Euronext, noted that the main motivation for
studying liquidity is that it ultimately affects the cost of capital.
ASX-SGX will improve the connection between Australian investment opportunities and
foreign investors, especially Asian investors with rapidly rising savings.
The improved connection will manifest itself in higher foreign levels of patient capital
ownership of Australian firms.
This quantitative adjustment will be accompanied by a price adjustment namely, a cost

of capital that is lower than otherwise. (The quantitative adjustment and the price
adjustment are corollaries of one another, i.e., one would not occur without the other.)
The improved connection will enable Australian business-owners to more easily access
capital on terms that are more attractive than otherwise.
As the cost of capital decreases, businesses are more likely to invest in new mines, factories,
office blocks, roads, computers and other equipment. That boosts the productivity of
Australian workers, and hence the income that they (and the nation as a whole) will earn in
the future. Even a small change in the cost of capital can have a big impact on business
investment over time, which is why the cost of equity finance raising money through
securities exchanges is important.
IMPACT OF REDUCED COST OF CAPITAL
A reduction in Australias risk premium relative to other countries increases
foreign investment inflows into Australia (as shown in BCA (2010)). This increase
in foreign capital inflow has significant impacts. Most directly, an increase in
foreign investment inflow adds to a countrys capital stock, increasing its
productive capability and therefore output as measured by GDP.
In addition, there are two key flowon effects relating to employment. First, an
increase in foreign investment adds to domestic demand, through greater activity
in the construction sector. The construction sector is a major employer, and
hence increased demand for construction services has secondround impacts
through the economy in terms of increased employment and consumption.
Second, capital is a factor of production that combines with labour in the
production process. Any increase in foreign investment inflow adds to the stock
of capital and will also increase the demand for labour, increasing both
employment and real wages. For instance, a 10% increase in foreign investment
leads to higher real GDP of around 1.04% and increased employment of 0.32% at
2020. This equates to an increase in GDP at 2020 of around $14.3 billion in real
terms and an employment impact of 34,400 full-time jobs.
19
New sources of capital may well shake up existing competitive arrangements, including
the major role played by Australian banks.
Lower capital costs and access to more capital may be particularly important for smaller
companies, which have fewer options to attract foreign capital than large companies do.
The SGX has a greater representation of small and mid-cap firms relative to the ASX.
Two potential reasons are that (i) Asian investors are more comfortable gaining
exposure to smaller firms and (ii) it is easier for smaller companies to list on the SGX.
ASX-SGX may well open up a channel of financing and investor interest in smaller
Australian firms which have evidently been less successful in attracting the
interest of Australian investors.
Reduced cost of capital as a result of increased scale and diversification

There are two ways in which the increased scale of the combined group can reduce the cost of
capital:
through reduced risk (in the sense that the cost of capital is a function of reduced
sovereign risk and the rate of return on the market portfolio); and
through reduced transaction costs.
Whether ASX-SGX actually reduces the cost of capital through reduced risk depends on
Australias and Singapores sovereign risk rating and the diversification effect. Given that both
Australia and Singapore have a AAA sovereign risk rating9, sovereign risk is unlikely to be
affected by ASX-SGX; so cost savings are unlikely to stem from that part of the cost equation.
However, a larger and more diversified number of stocks traded by ASX-SGX may have an
impact on the rate of return on the market portfolio and the combined equity risk premium
assuming there is segmentation between the markets and clientele effects exist in each
national market. As discussed in Chapter 4, ASX and SGX complement each other in relation to
their industry composition and instrument offerings. This diversification has the potential to
reduce the equity risk premium and thus the cost of capital (see Section 4.2).
The greater the size, liquidity, and reach of a securities exchange, the more cheaply it is able to
assemble capital from investors, and the better the exchange can match the risk and reward
preferences of investors and companies.
The largest component of transaction costs for market participants and investors is the bid-ask
spread. As liquidity increases this spread typically decreases. Consequently, the increased
liquidity resulting from the proposed merger will reduce transaction costs. Transaction costs
may be further reduced through improved technology, as the combined, larger entity will be
better placed to maintain investment in new, more efficient technology. This investment will
be spread over a larger business, more market participants and greater trading volumes,
further reducing average costs for market participants.
Section 6.4 further highlights how ASX-SGX improves efficiency for the market and its
participants.
www.standardandpoors.com
20
The cost of equity capital is built up from the risk-free rate of return plus the
equity risk premium and the bid-ask spread. The combination of ASX and SGX is
unlikely to affect the combined risk-free rate of return but is very likely to lower
the equity risk premium through diversification across formerly segmented
markets, and lower the bid-ask spread through economies of scale in transactions.
21
Opportunities for Diversification
ASX and SGX are different enough yet sufficiently similar to offer scope for diversification
across regions, markets and sectors to Australian savers and investors.
This chapter summarises relevant characteristics of ASX and SGX and identifies ways in which
ASX-SGX will create opportunities for Australian savers to diversify their asset holdings more
easily across Asian investments; and for Australian issuers of capital to broaden their sources
of capital to include the rapidly growing pool of Asian savings.
4.1 Comparing ASX and SGX

4.1.1
History
The Australian Stock Exchange was formed in 1987 from the merger of six former State-based
stock exchanges. In 2006 the then Australian Stock Exchange Limited merged with SFE
Corporation Limited (holding company for the Sydney Futures Exchange), was re-branded as
the Australian Securities Exchange, and the listed company renamed as ASX Limited.
On 1 August 2010 responsibility for the supervision of domestic licensed financial markets and
for participants on those markets (including the relationship between participants and their
clients) was transferred from ASX to ASIC. The Australian Government announced the changes
to the supervision of Australias securities markets as the first step towards facilitating greater
competition between market operators.
The Singapore Exchange Limited was established in 1999, following a merger of the Stock
Exchange of Singapore with the Singapore International Monetary Exchange.
Both ASX and SGX are relatively young when compared with larger securities exchanges in the
USA and Europe and are smaller on various dimensions, including market size, concentration
and liquidity.
4.1.2
Equity markets
The Australian financial system has many positive attributes and is internationally regarded as
safe and strong. SGX stands out as the nearest equivalent exchange in the Asia-Pacific region
and the most compatible partner for ASX. ASX and SGX are not only compatible in terms of
equity market profiles, but both exchanges also offer strong legal rights, and investor
protection mechanisms.
Equity market size

Neither ASX nor SGX is ranked among the top 10 global exchanges by market capitalisation of
the entities listed on their exchanges. On 30 December 2009 the listed market capitalisation of
ASX was US$1,262 billion and SGX was US$481 billion. Had the two exchanges been combined
at that date, the equity markets of ASX-SGX would have ranked eighth with a listed market
capitalisation of US$1,743 billion, placing the combined group between Hong Kong Exchanges
and TMX (which runs the Toronto Stock Exchange) (see Table 4.1).
22
Table 4.1: Major international exchanges

2009 market
2009 share
capitalisation* turnover value
(US$ billion)
(US$ billion)
Exchange (location)
1
NYSE Euronext (US)
2
3
4
5
6
2009 listed
companies
(Number)
11,838
17,785
2,327
Tokyo Stock Exchange Group (Japan)

NASDAQ OMX (US)
NYSE Euronext (France)
London Stock Exchange (UK)
Shanghai Stock Exchange (China)
3,306
3,239
2,869
2,796
2,705
3,991
28,951
1,982
3,391
5,062
2,335
2,852
1,160
2,792
870
7
8
Hong Kong Exchanges (Hong Kong)

TMX Group (Canada)
2,305
1,677
1,502
1,240
1,319
3,700
9
10
BME Spanish Exchanges (Spain)

BM&FBOVESPA (Brazil)
1,435
1,337
1,511
626
3,472
386
ASX Group (Aust)

Singapore Exchange (Sing)
1,262
481
932
245
1,966
773
Source: World Federation of Exchanges (WFE) website.

*
Aggregate market capitalisation of companies listed on the relevant exchange at 30 December 2009.
Chart 4.1: Market concentration of the largest 5% of companies by market capitalisation
100
No. of companies in top 5% - 2009

Australia = 98 Singapore = 39
90
80
70
60
50
40
30
20
10
0
1996
2000
2004
Australia
2008
2009
Singapore
Source: WFE website.
23
Equity market concentration

ASX is one of the most concentrated exchanges in the world, second only to the UKs London
Stock Exchange in terms of the proportion of aggregate market capitalisation residing in a
small number of listed companies.
Chart 4.1 shows that in 2008 the largest 5% of companies by market capitalisation accounted
for 85% of the aggregate capitalisation of all companies listed on the exchange. In 2009 the
proportion had fallen only slightly to 80%. The largest six companies in Australia alone
comprise around 35% of total market value.
SGX, by comparison, is a far less concentrated exchange. In 2009 the largest 5% of companies
traded on SGX (39 companies) accounted for only 45% of the market capitalisation of all
companies traded on the exchange.
When compared by size segment, ASX and SGX have similar profiles, as shown in Chart 4.2 and
Chart 4.3.
Chart 4.2: Domestic market capitalisation by size segment
%
90
80
70
60
50
40
30
20
10
0
Large cap
Mid cap
Australia
Small cap
Singapore
Micro cap
Source: WFE (2010).

Capitalisation classifications used by the WFE: large cap > $US 1.3 billion,; $US 1.3 billion mid
cap > $US 200 million; $US 200 million small cap $US 65 million; and micro cap < $US65
million (2009 definition).
24
Chart 4.3: Number of domestic companies by size segment

Australia
Large cap
Mid cap
Small cap
Singapore
Micro cap
Large cap
Mid cap
Small cap
Micro cap
Source: WFE (2010).

Capitalisation classifications used by the WFE: large cap > $US 1.3 billion,; $US 1.3 billion mid cap > $US 200
million; $US 200 million small cap $US 65 million; and micro cap < $US65 million (2009 definition).
Market liquidity
Trading activity on SGX is small by comparison with exchanges elsewhere in the world. This is
despite a relatively high level of offshore participation, as shown in Table 4.2. In 2009 SGX
accounted for just 0.3% of global equities trade while ASX accounted for 1.15%.
Both are quite small compared with NASDAQ OMX, which accounts for 35.82% (including its
European exchanges) of global equities trade. Had they been combined in 2009, ASX-SGX
would have ranked close to rival exchange, Hong Kong Exchanges, with a combined share of
1.45% of global equities trade (see Table 4.2).
Table 4.2: Value of share trading of selected stock exchanges, 2009
Value of trade on main board
Foreign trade
US$m
% of world trade
NASDAQ
28,951,949
35.82
8.98
NYSE
Shanghai
17,784,586
5,061,643
22.00
10.83
6.26
4.94
4.20
0
0.03
30.91
2.71
18.23
1.86
1.15
0.18
4.54
0.30
n/a10
Tokyo
London
Deutsche Brse
3,990,909
3,391,103
2,186,433
Hong Kong
Australia
Singapore
1,501,638
931,555
245,425
10
% of total market trade
This information was not available in the original data source.
25
Value of trade on main board

Thailand
Indonesia
Malaysia
New Zealand
India
WFE Total
Foreign trade
US$m
% of world trade
126,097
94,351
86,033
0.16
0.12
0
0
0.11
0.02
n/a
1.64
22.81
n/a
14,901
n/a
80,827,344
% of total market trade
Source: WFE website.
Sectoral representation
ASX is dominated by financial stocks (especially banks) and materials (mainly listed mining
companies) (see Chart 4.4 Panel a).
SGX, on the other hand, has a broad sectoral spread with significant representation from
manufacturing, services, transport and communications and property-related stocks, although
financial stocks are also a significant presence (see Chart 4.4 Panel b).
Chart 4.4: ASX and SGX sectoral representation (proportion of market capitalisation)
Australia Panel a
%
35
Singapore Panel b
% 25
30
20
25
15
20
10
15
10
Source: ASX website and http://www.australian-economy.com/index.html; SGX website.
4.1.3
Debt markets
Table 4.3 shows the worlds top 10 exchanges by total value of on-exchange bond trading.
Neither ASX nor SGX ranks among the top 10, with SGX ranked 22nd and Australia ranked 32nd.
Nevertheless, bond trading is far more established on SGX than ASX, with the value of bond
trading on SGX more than 15 times that on ASX in 2009 (see Table 4.3).
26
Table 4.3: Total value of listed bond trading 2009 ($US million)
Exchange
Total value of bond trading
Percentage of world trade
BME Spanish Exchanges

London SE
8,180,998
6,943,331
36.25
30.77
NASDAQ OMX Nordic Exchange

Johannesburg SE
2,257,282
1,612,156
10.00
7.14
Colombia SE
Korea Exchange
Istanbul SE
949,031
401,773
401,042
4.21
1.78
1.78
Borsa Italiana
Tel Aviv SE
303,447
245,622
1.34
1.09
7,833
498
0.05
0.002
22,568,673
SGX
ASX
WFE total
Source: WFE (2009). The table reflects that fact that in most jurisdictions much more of the bond trading is done
over-the-counter rather than on-exchange.
4.1.4
Derivatives
Derivatives trading is more established on ASX than SGX. ASX has a wider array of derivative
products available to market participants compared to SGX (see Table 4.4). However, SGX
offers a suite of regional index futures contracts covering the Chinese, Japanese and Indian
markets, whereas ASX lists only one domestic stock index futures contract.
Table 4.4: Derivative products traded on ASX and SGX during 2009
ASX
SGX
Stock index options
Stock index options
Stock index futures

Short-term interest rate options
Stock index futures

Short-term interest rate options
Short-term interest rate futures
Short-term interest rate futures
Single stock options

ETF options
Long-term interest rate options
Dividend index options

Dividend index futures
Long-term interest rate futures

Commodity options
Commodity futures
Contracts for difference
Warrants
Source: ASX and SGX websites.
27

Opportunities for diversification flowing from ASX-SGX begin with the combined group itself.
Shareholders of ASX-SGX Limited will benefit from combining income streams across the
complementary products and services of the two groups. Even before considering wider
benefits, the opportunity presented by ASX-SGX to existing shareholders of ASX to raise their
risk-adjusted returns through diversification must be acknowledged. While shareholders can
do this today by buying shares in both groups, ASX-SGX will make this easier.
ASX-SGX represents the combination of complementary exchange businesses.
The complementary nature of the ASX-SGX transaction is evident in Chart 4.5, which compares
the relative strengths of the two exchange groups. Clearly, the exchanges are almost perfectly
matched in terms of their sectoral profiles. The combined group will have a more balanced
profile than either ASX or SGX separately, with flow-on implications for market risk (as
discussed in Section 3.2.2 above).
Chart 4.5: ASX and SGX have complementary strengths
Range of derivative products (number, 2009)
Bond trading (by value, 2009)
Energy and Utilities (by market cap)
Basic Resources (by market cap)
Financials (ex real estate) (by market cap)
Technology & Telecom (by market cap)
Real Estate (by market cap)
Travel & Leisure (by market cap)
Auto, Industrial Goods, Food and Personal Goods

(by market cap)
ASX
SGX
0%
20%
40%
60%
80%
100%
Source: WFE, Bloomberg.
Broader diversification benefits are offered to Australian savers and investors as ASX-SGX
builds a conduit between the two exchange groups and opens opportunities for participants in
both markets to broaden their horizons. Section 6.5 details plans for ASX-SGX to facilitate
cross-listing and cross-membership of the merged group. This will allow Australian firms to list
and trade on both ASX and SGX simultaneously through proposed passport listing
arrangements (as discussed in Section 6.3). The existing Australian governance standards will
be maintained and are themselves subject to Australian regulatory oversight.
28
SMEs stand to benefit especially from passport listing given the stronger presence of SMEs on
SGX (see discussion in Section 3.2.2 above). SGX investors are more familiar with investing in
SMEs, which is partly due to the lower concentration of market capitalisation on SGX
compared to ASX. Passport listing on SGX opens a conduit directly into the pool of Asian
savings for Australian SMEs looking to raise capital. The same is true for Australian investors,
including superannuation funds, keen to diversify their investments beyond the large cap
sector listed on the more highly concentrated ASX.
Given SGXs greater depth of trading in debt instruments, ASX-SGX also potentially improves
Australias chances of developing a corporate bond market. This has long been a challenge for
Australia and has become more important since the GFC as bank capital has become scarcer
and more expensive. This could be especially beneficial to Australias small and mid-cap firms
that are otherwise reliant on bank finance. This is also true of Australias farming communities
and agricultural businesses. To the extent that ASX-SGX promotes Asian investment into
Australian farming, rural communities benefit directly.
Section 6.5 indicates how ASX-SGX will facilitate cross-currency capital raising and derivatives
trading through mutual offset arrangements. Diversification across currencies and through
derivatives trading will become easier and the pool of traders larger, both of which serve to
lower risk through diversification and ultimately lower the cost of capital (as discussed in
Chapter 3). Better integration with Asia via Singapore will provide a stronger Asian platform
for Australian issues.
ASX-SGX will deliver the largest equity derivatives and commodities trading
business in Asia.
Given the home country bias common in financial markets and the different sectoral
weightings on the two exchanges, bringing them together through a merger potentially lowers
the market risk premium on the combined exchange compared with either of its constituent
exchanges. Anything that lowers barriers to capital flowing across national borders potentially
lowers the cost of capital in both locations.
If there are diversification benefits as well, which lower the equity premium on the combined
exchange, ASX-SGX clearly holds out the prospect of cheaper and more easily accessible equity
capital for Australian borrowers. ASX-SGX tackles home country bias at source by turning
Australian stocks into locally listed Singapore assets and vice versa. Lower home country bias
means better diversification across regions, currencies, sectors and markets, and ultimately a
lower cost of capital and higher risk-adjusted returns to investors.
ASX-SGX will make it easier for Australian investors to invest into Asia while also
widening the scope for capital-raising in Asia by Australian companies. Asian
investors will find Australian investment opportunities easier to access,
diversifying the opportunities for Asian savers beyond their domestic markets.
ASX-SGX will diminish home country bias in both markets, potentially lowering
the cost of capital as savers and investors diversify their holdings more fully across
the two markets.
29
Regulatory Control
ASX, its markets and the facilities it operates will continue to be subject to Australian law, the
oversight of the Australian regulatory agencies, ASIC and the RBA, and Ministerial nondisallowance of any listing or operating rules changes.
The regulatory frameworks of both Australia and Singapore have clear objectives, focussing on
market quality and integrity, investor protection, and economic efficiency.
This chapter first explains why there are no regulatory concerns in relation to ASX-SGX, and
then compares the regulatory standards in the two countries and their respective approaches
to financial services.
5.1 Impact of ASX-SGX

5.1.1
Regulation
ASX will continue to be based in Australia and be subject to Australian law and regulatory
oversight. Hence, whether ASX is 0% or 100% owned by Australians has no bearing on how
Australian capital markets are regulated. No privileged status was granted to ASX when the
Government gave in-principle support to fragment markets and open them up to competition.
The regulatory role of Australian governments and government bodies in relation to ASX plays
no direct part in the governance, operations or investment decisions of ASX.
Foreign companies owning assets and operating businesses in Australia have to operate under
Australian law, even if those companies are partly owned by foreign governments. Under ASXSGX, listing and operating rules for the ASX will continue to be subject to ASIC review and
Australian Ministerial disallowance processes. ASX Compliance will be maintained with a
separate local board. The 21-member ASX Corporate Governance Council and its principles
and recommendations will be maintained in the Australian listing environment.
Likewise, SGX will continue to be incorporated in Singapore and subject to Singaporean law.
The Monetary Authority of Singapore (MAS) regulates and will continue to regulate SGX. The
Singapore Government does not own or control SGX. Shares in SGX are held by a subsidiary of
Temasek Holdings (Private) Limited (Temasek) as trustee for the benefit of the Financial Sector
Development Fund, a fund set up to help develop and enhance the talent pool and
infrastructure of Singapores financial services industry.
Temasek operates as an autonomous and professional investment house, guided by an
independent board and management that make investment and other company decisions on a
commercial basis. It plays no part in the governance, operations or investment decisions of
SGX and would take no part in the decisions of ASX-SGX. Singapore regulation ensures that the
shares in SGX which are held by Temaseks subsidiary cannot be voted. SGX governance
practices will still conform to the Securities & Futures Regulations 2005 and the Code of
Corporate Governance 2005, and the SGXs Regulatory Conflicts Committee, comprising solely
independent directors, will be maintained.
30
5.1.2
Taxation
ASX-SGX will continue to pay tax on profit generated in Australia.
The profits earned by the ASX Limited business structure will be subject to Australian company
tax. Moreover:
The Australian Tax Office polices strict rules regarding the use of transfer pricing to shift
tax obligations from jurisdiction to jurisdiction.
On 8 September 2009, the Australia-Singapore double taxation agreement was

upgraded to allow the exchange of information provided between authorities to the
OECD standard.
If successful, ASX-SGX will retain more trading and investment activity on an exchange
that will be part-owned by Australians and will itself pay tax on its Australian operations.
By contrast, a marginalised and isolated ASX risks losing business to other exchanges in
the region.
For the year to 30 June 2010, ASX declared $299.3 million in dividends, representing
approximately 90% of underlying profit after tax. These dividends were fully franked at 30%.
This provided ASX shareholders with $128 million of franking credits that were available to
reduce Australian tax that would otherwise be payable. This was approximately 93% of
Australian income tax expense for ASX in 2010 and essentially represents a partial refund of
corporate tax paid to shareholders.11
Dividends paid by ASX-SGX will be unfranked so there will be no effective refunding of
Australian corporate income tax paid by the merged entity. Australian shareholders in ASXSGX will be subject to Australian income tax on dividends received from ASX-SGX based on
their individual tax positions. Consequently, tax paid by Australian resident shareholders on
dividends received should increase.
5.2 Regulation and financial services in Australia and Singapore

Reputation
Both Singapore and Australia are reported as having strong financial services sectors as
evidenced by the World Economic Forums annual Financial Development Report.
Singapores and Australias respective strengths are complementary as illustrated in Table 5.1.
Singapore ranks particularly highly in relation to institutional environment, business
environment, financial stability and financial markets.
11
Australian shareholders include the dividends received plus the franking credits in their assessable income, with
the franking credit reducing the tax otherwise payable. Australian resident taxpayers would also be entitled to a
refund to the extent that franking credits received exceeded the tax otherwise payable. Non resident shareholders
do not receive a refund, with the franking credits offsetting any withholding tax otherwise payable to the extent
that the relevant dividend is franked.
31
Table 5.1: World Economic Forum Financial Development Ranking 2010

Pillar
Australia
Singapore
Institutional environment
Business environment
18
13
1
2
Financial stability
Banking financial services
9
7
4
13
Non-banking financial services

Financial markets
Financial access
8
6
1
11
2
13
Overall rank
Source: WEF (2010a). Ranking included 57 countries.
Similarly, the World Economic Forums Global Competitiveness Report 2009-10 shows that
both Singapore and Australia rank highly in relation to the regulation of securities exchanges
(Table 5.2).
Table 5.2: World Economic Forum Global Competitiveness Report Ranking 2009-10
Pillar
Australia
Singapore
Soundness of banks
Efficacy of corporate boards
Judicial independence
Regulation of securities exchanges
5
6
19
4
Effectiveness of anti-monopoly policy
Reliance on professional management
Source: WEF (2010b). Ranking included 139 countries.
The complementary strengths are reiterated in the World Bank Ease of Doing Business index,
which places Singapore as the best place to do business and ranks Australia as the tenth best
place. Singapore ranks very highly in most of the categories measured.
Table 5.3: World Bank Ease of Doing Business Rankings 2010
Pillar
Australia
Singapore
Starting a business
Dealing with construction permits

Registering property
63
35
2
15
Getting credit
Protecting investors
Paying taxes
6
59
48
6
2
4
Trading across borders

Enforcing contracts
29
16
1
13
Closing a business
12
Overall rank
10
Source: World Bank (2010). Ranking included 183 countries.
32
Finally, the IMD World Competitiveness Yearbook 2010 shows that both Singapore and
Australia rate highly in relation to ethical practices, risk factors in the financial system and
transparency of financial institutions (see Table 5.4).
Table 5.4: IMD World Competitiveness Yearbook 2010
Pillar
Australia
Singapore
Ethical practices
Risk factors in the financial system
Protectionism
Competition legislation
7
7
13
10
Financial institutions transparency
Investment risk
19
IMD (2010). Ranking included 58 countries.
Overall, both countries are well matched with regard to regulatory standards and investor
protections. The Johnson Report (2009) also concluded that Australia should court closer
financial system ties with Singapore as an immediate priority ... due primarily to the potential
economic benefits and its relatively more advanced regulatory regime which has similarities
with Australias.12
Financial system regulatory regimes

Both Australias and Singapores regulatory regimes are well regarded internationally.
However, there is a key difference in the institutional structure of the regulatory agencies:
Australias regulatory responsibilities are split among three regulatory agencies RBA,
APRA and ASIC. ASIC and the RBA regulate Australian capital markets, including ASX.
The Monetary Authority of Singapore (MAS) is an integrated regulator, responsible for

central banking, prudential regulation and securities regulation. It is also tasked with
developing Singapore as a financial services hub.
Both exchanges have regulatory responsibilities. However, SGXs responsibilities are broader
than ASXs following the transfer of certain supervisory responsibilities from ASX to ASIC in
August 2010:
SGX is responsible for issuer regulation, Catalist regulation, member supervision, market
surveillance, enforcement and risk management (managing the counterparty risk of the
exchange and clearing facilities); while
ASX is responsible for ensuring participants admitted to its market comply with its
operating rules; for monitoring and enforcing compliance of listed entities with the
listing rules; and overseeing the obligations on ASXs clearing and settlement facility
operators.
12
Johnson Report (2009), p. 150.
33
Importantly, any proposed changes to ASXs listing and operating rules are subject
to ASIC review and disallowance by the Minister responsible for the Corporations
Act. This oversight will continue post the formation of ASX-SGX.
Singapore-Australia Free Trade Agreement (SAFTA)

There are already strong ties between Australian and Singapore. Both countries are Englishspeaking and have a shared heritage of British common law. Trade and investment between
the two countries is sizeable. In 2009 Australian merchandise exports to Singapore were
$5.4 billion (Australias eight largest export market) and Australian imports from Singapore
reached $11.2 billion (Australias fourth largest source).
Services are a key part of Australian-Singaporean bilateral trade, with exports to Singapore
valued at $2.9 billion (Australias sixth largest export market) and imports at $3.5 billion
(Australias third largest source) in 2009.13 Investment ties are also substantial. In 2009
Australian investment in Singapore was close to $22 billion and Singapores investment stock
in Australia was $40 billion.14
Hence, it is not surprising that Singapore was only the second country after New Zealand
with which Australia entered into a free trade agreement. The Singapore-Australia Free Trade
Agreement (SAFTA) became operational in July 2003 and aims to strengthen trade and
investment links between the two countries. Singapore is also a party to the ASEAN-AustraliaNew Zealand Free Trade Agreement (AANZFTA), which became operative on 1 January 2010.
Key outcomes of SAFTA for Australia include:
a more certain and enhanced operating environment for financial services suppliers;
investors being protected against expropriation and/or being compensated for

expropriation or other loss.
transparency of investment restrictions in Singapores government-linked companies;

and
Singapore is committed to providing market access and national treatment across a range of
financial services, including banking, insurance, and capital markets. In addition, financial
services suppliers may transfer to or process information in Australia, including via electronic
means.
While access to the Singapore financial services sector has improved through its commitments
under the General Agreement on Trade and Services (GATS) and under SAFTA, some
restrictions remain and apply to the establishment and operation of foreign banks, wholesale
banks, offshore banks, merchant banks, finance companies, and Funds Management
Companies (FMCs). For example, foreign banks may only operate as branch offices of
Singapore-incorporated companies, and finance companies and insurance brokers may only
operate as Singapore-incorporated companies.15
13
http://www.dfat.gov.au/geo/singapore/singapore_country_brief.html
14
ABS Cat. 5352.0.
15
http://www.dfat.gov.au/fta/safta/ch4_safta_guide.html
34
Foreign investment restrictions in Singapore

Restrictions on foreign investment in Singapore are low. The only formal restrictions on
foreign investment are found in broadcasting, the domestic news media, retail banking, legal
and other professional services, multi-level marketing and property ownership (MAS approval
is required to acquire 5% of SGX and move through 12% and 20% thresholds). In addition,
under Singapore law, corporate Articles of Incorporation may include shareholding limits that
restrict ownership by foreign persons. Some, but not many, companies include such
shareholding restrictions.
Foreign investors are not required to enter into joint ventures or cede management control to
local interests, and local and foreign investors are subject to the same basic laws. Apart from
regulatory requirements in some sectors (financial and telecom services), the Singapore
Government examines investment proposals only to determine eligibility for various incentive
regimes.16
The Singapore Government offers a wide range of tax and non-tax incentives to companies and
individuals choosing to invest in Singapore (such as tax holidays, concessional tax rates, etc).
The Monetary Authority of Singapore (MAS) also offers concessionary tax incentives for
financial institutions looking to set up operations in Singapore. Singapore places no
restrictions on reinvestment or repatriation of earnings or capital.
Under SAFTA, Australian investors and investments are treated on the same basis as Singapore
businesses (national treatment), including in relation to the establishment, acquisition,
expansion, management, conduct, operation, liquidation, sale, transfer and expropriation of
investments.
SAFTA contains strong investor protection provisions in relation to expropriation and the right
to receive fair market value for property in the event of expropriation. Australian investors
have the right to challenge any measures introduced by the Singapore Government which
violate SAFTA investment rules. SAFTA also offers greater transparency in relation to
investment restrictions on Singapores government-linked companies.
16
http://www.dfat.gov.au/fta/safta/ch6_safta_guide.html
35
Illustrative Examples of New Services and Opportunities
This chapter presents a number of illustrative examples of how the combination of ASX and
SGX might work. The examples identify areas of cooperative opportunity that would benefit a
diverse range of stakeholder groups. They are not exhaustive and, in all areas, are subject to
regulatory approvals in both Australia and Singapore.
6.1 Benefits for the Australian funds management industry

As noted in the Johnson Report (2010), growing the funds management industry in Australia
and increasing the level of international funds under management by Australian managers will
assist in achieving the goal of positioning Australia as a financial services hub. ASX-SGX intends
to utilise the shared expertise of both groups to develop new products and services that will
potentially deliver a range of benefits for the Australian funds management industry and
investors.
Example 1: Exchange Traded Funds (ETFs)

The Australian ETF sector is less developed than in other markets. For the year to 30
September 2010, trading in ETFs represented just 0.5% of the value of securities traded on the
ASX. This is low in comparison with other large global markets over the same period, e.g.
NASDAQ (3.0%), Hong Kong (4.8%), New York Stock Exchange (7.4%) and London (8.2%).
Furthermore, as at September 2010, SGX had 76 ETFs compared to just 33 for ASX, only 5 of
which related to assets other than equities. By utilising SGXs existing expertise in the ETF
sector, ASX-SGX can establish a meaningful ETF sector on ASX over a range of international and
domestic asset classes including equities, commodities and market sectors.
ETFs provide a simple and low cost alternative for investors to gain diversification benefits via
a single security. Cost advantages for investors could include lower transaction costs, lower
spreads due to the use of market makers and lower management expenses relative to an index
fund manager. ETFs are also likely to generate incremental liquidity on the ASX from
additional investment funds flowing into new equity products as well as market makers buying
and selling portfolios of underlying assets to provide liquidity in ETF products. The
development of a larger local ETF sector will also provide domestic investors with simple
access to new investment classes such as commodities and international shares.
Example 2: ASX/SGX indices

ASX-SGX intends to develop indices with constituents from both markets, e.g. a top 50 ASXSGX index or an ASX-SGX property sector index. Based on current market values, a top 50 ASXSGX index would comprise 35 ASX-listed shares and 15 SGX-listed shares and would have a
notional capitalisation in excess of A$1 trillion. In combination with passport listings (see
Section 6.3), the creation of new indices would improve the ability of domestic fund managers
to raise funds across both markets to be benchmarked against these indices. This has direct
benefits for the Australian funds management industry by increasing funds under
management, including potentially being more attractive for overseas funds to be managed
from Australia. This would also provide increased choice of investments and diversification
benefits for Australian fund managers.
36
6.2 New products and services

One marker of a regional financial services hub is the development of new products and
services, especially in multiple currencies. ASX-SGX intends to develop a range of new non-A$
products and services aimed at market users based in Australia, the Asia-Pacific and around
the world. Historically, this level of product development and integration has not been
effective between markets that are separately owned.
Example 3: New Asian fixed income derivatives and mutual offset arrangements
ASX-SGX will develop new fixed income derivative products aimed at Asian traders and
investors that leverage ASX expertise in developing interest rate derivatives markets in
Australia and SGXs distribution gateway to Asian derivative traders. These products will be
offered on ASX and SGX, as well as being made available through mutual offset arrangements,
allowing the resulting positions to be held at either exchange for clearing.
The Johnson Report (2009) identified the existence of a liquid currency and interest rate
derivatives market as an important reason why Australia has attracted a large component of
bond issuance from non-resident issuers. The development of a similar market for such risk
management products in Asian currencies will assist in establishing an additional source of
debt capital for Australian issuers who wish to raise debt denominated in Asian currencies.
Case Study 1
An Asian bank wishes to hedge fluctuations in the overnight Japanese TIBOR cash rate and
better manage their daily cash exposures. The Australian-based ASX-SGX derivatives team
develops a new 30 Day Overnight TIBOR futures contract that is listed on both ASX and SGX.
Market users can choose to clear their new 30 Day Overnight TIBOR futures contract positions
either in Australia or Singapore. This product is complementary to the JGB and Euroyen
futures currently traded in Singapore.
Example 4: Pan-Asian equity options

ASX-SGX will develop new pan-Asian equity options covering major Asian markets, such as
Japan, Hong Kong, Korea and Taiwan aimed at Asian traders and investors that leverage ASX
expertise in developing equity options markets in Australia. These products will be accessible
to an active equity options investor base in Australia, as well as SGXs international and Asian
derivatives trading community, to hedge exposures to the underlying equities and generate
additional derivatives trading opportunities.
Case Study 2
An international institutional investor would like to hedge positions in Asian equities and/or is
seeking exposure to a broader range of Asian derivatives. In the current environment, the
investor would only be able to trade in selected Asian index futures contracts and equity
options available across various Asian exchanges on a limited and fragmented basis. The
investor would need to establish trading and clearing relationships with participant firms in
each market separately and maintain margins and margin calls in multiple currencies across
multiple clearing houses. With the listing of pan-Asian equity options on SGX, the institutional
37
investor can efficiently access a wide range of these contracts through a single platform and
gain capital efficiency through margin offsets against other Asian derivatives traded on SGX.
Example 5: Pan-Asian indices, index products and derivatives

ASX-SGX will develop new indices that include securities listed on both exchanges, augmenting
key sector strengths of the listings businesses in resources, property and financials. These
indices will provide investment benchmarks that can be developed into ETFs, structured
warrants and certificates, and futures and options by the ASX-SGX derivatives team.
International funds managers and Australian superannuation funds can easily access AsiaPacific investments and hedge their exposure, thereby providing additional liquidity and
capital to issuers listed on both exchanges.
Case Study 3
An Australia-based property investor wishes to invest in high-yielding property securities that
provide additional exposure to growth in the Asia-Pacific region. By having a benchmark index
comprising REITs listed on ASX and SGX encompassing Australian, Singaporean, Chinese,
Japanese, Indian and South-East Asian REIT investments, the investor is able to invest and track
performance across a wider selection of instruments. In addition, a passive investor who seeks
diversification could have readily accessible REIT ETFs listed by an issuer on ASX or SGX.
Investors will also be able to hedge such investments with futures and options provided on the
derivative platforms of ASX and SGX, and also use structured products created by issuers to
facilitate investments and risk management.
6.3 Passport listing and secondary market quotation

Subject to ASIC and MAS approval, ASX and SGX will recognise each others listing rules as
broadly equivalent to one another. In fact, they are already broadly similar. Local governance
standards will remain and continue to be overseen by local authorities. As a result, companies
on one exchange are considered as equivalent to being listed on the other. This allows an
issuer to raise capital at either exchange easily and cheaply. In addition, each exchange
provides a secondary market for passport-listed securities, enabling investors to trade, clear
and settle transactions in those securities in their own market.
Case Study 4
An SGX-listed company in China wishes to raise capital and broaden its investor base. The ASXSGX passport listing arrangements enable the company to raise capital in Australia at reduced
cost and effort, and faster time to market. The passport listing arrangements also allow the
company to gain access to Australian investors, including Australias large base of
superannuation funds (who are able to hold the SGX-listed companys securities denominated
in Australian dollars within the ASX CHESS settlement/sub registry infrastructure). It also
enables the SGX-listed company to more easily participate in M&A and other corporate finance
activity in Australia as a secondary market is now available in Australia, and the company is
now able to raise capital in Australian dollars.
38
Case Study 5
An ASX-listed resources company in Australia wishes to raise capital in US dollars. The ASXSGX passport listing arrangements enable the company to raise US$ through the existing multicurrency capital raising infrastructure in Singapore with little more time and effort than is now
involved in seeking a domestic offering or without having to list on another exchange that
facilitates US$ capital raising (e.g. NYSE or NASDAQ). Investors and traders can trade, clear
and settle the US$ securities in Australian companies in either Australia or Singapore (instead
of in the US). The company will also gain visibility and access to capital with an expanded base
of investors, including Asian investors, in a region which is becoming an increasingly important
consumer of commodities.
Case Study 6
An Australian bank wishes to raise debt to service its A$ funding requirements. Through a
listing of the debt securities on ASX, the ASX-SGX passport listing arrangements mean that the
debt securities can also be made available to investors in Singapore. ASX-SGX provides
secondary trading in those securities at both ASX and SGX to enable investors to gain access to
the securities through their existing trading and clearing relationships. Investors can choose to
hold the securities they own at either ASX or SGX.
6.4 Improving efficiency for the market and its participants

ASX-SGX intends to harmonise rules (subject to ASIC, RBA and MAS approval), systems and
processes across the ASX and SGX exchange groups. This improves operational efficiency for
market users by removing anomalies between the exchanges rules and synchronises
technology and processes that are employed for essentially the same function (e.g. the
technical protocols for connecting to trading platforms, the processes for calculating and
calling margins).
Given the complementary nature of trading and clearing platforms already operated by ASX
and SGX (e.g. leading NASDAQ OMX technology: Genium and Secur), ASX-SGX will develop
identical technical interfaces to both ASX and SGX markets and harmonise technology
upgrade/replacement cycles.
Utilising identical interfaces, risk and default management methodologies, aligning upgrade
cycles and providing margin offsets and settlement efficiencies through fungibility of securities
and derivatives products traded on ASX and SGX enables market participants to benefit from
access to existing and new products and services at lower cost than is currently the case. In
addition, international capital flows and additional liquidity can be attracted to both ASX and
SGX following improved operational and capital efficiency.
Case Study 7
An international investment bank is currently a trading participant on both ASX and SGX. The
bank has an ongoing operational overhead in remaining in compliance with the rules of each
exchange and in ensuring their front and back office systems are contemporary with the
technology of the exchanges. Utilising identical interfaces and aligning upgrade cycles enables
the investment bank to benefit from access to existing and new products and services at lower
cost than is currently the case. In addition, international capital flows and additional liquidity
39
can be brought to both ASX and SGX through common hubs (in Chicago, London, Hong Kong
and Tokyo) thereby reducing connectivity costs to access both marketplaces with the resulting
benefit of improving market efficiency and increasing capital flows to Australia and Singapore.
Case Study 8
An international investment bank is a clearing participant on both ASX and SGX. The bank has
an ongoing capital cost and operational overhead in remaining in compliance with the rules of
each exchanges clearing house and in ensuring their risk management systems are
contemporary with the systems, risk management, and default management processes of the
exchanges. Utilising identical interfaces, risk and default management methodologies, aligning
upgrade cycles and providing margin offsets and settlement efficiencies through fungibility of
securities and derivatives products traded on ASX and SGX (outlined in earlier case studies)
enables the investment bank to benefit from access to existing and new products and services
at lower cost than is currently the case.
6.5 Improved distribution of existing products and services

ASX-SGX intends to improve the distribution of existing products and services to users based in
each exchange groups existing markets. This will reduce the cost of capital and more easily
facilitate the foreign exchange needs of ASX issuers; establish Australia as a venue for foreign
currency capital raising; provide diversification opportunities for Australian superannuation
funds in non-A$ products; provide new funds management and investment banking
opportunities to the Australian financial services industry; increase the product offering
available to Australian investors and traders more generally; and lower the costs of trading
through improved liquidity and capital efficiency via the offsetting of risk exposures across
multiple products.
Example 6: Cross-listing and mutual offset arrangements

ASX-SGX will list selected futures contracts (with modifications to suit the local market e.g.,
currency, contract size) and provide incentives to arbitrageurs and market makers from the
home exchange to provide liquidity in the new contracts. Additionally, ASX-SGX will establish
a mutual offset arrangement, allowing the resulting positions to be held at either exchange for
clearing.
Case Study 9
An international proprietary trader based in Singapore who trades index futures contracts is
seeking new trading opportunities in the Asia-Pacific region. In the current environment, in
order to trade the ASX SPI 200 futures contract, the trader would need to open a trading
account with an ASX participant, establish a clearing relationship with an ASX participant, and
maintain margins and margin calls in A$.
With the cross-listing of a US$ denominated SPI 200 contract and liquidity provided by ASX
market users, the international trader can access the contract on SGX at reduced cost through
its existing trading and clearing relationships, and gain capital efficiency through margin offsets
against other pan-Asian derivatives contracts that the international trader executed on SGX
such as the Nikkei 225, MSCI Taiwan, CNX Nifty and FTSE Xinhua China A50 index futures.
40
Additionally, Australian based liquidity providers trading the SGX-listed ASX SPI 200 contract
can transfer their positions to the ASX for clearing.
Case Study 10
An Australian investor is seeking exposure to a broader range of Asian index derivatives. In the
current environment, the investor would need to open a trading and clearing relationship with
an SGX participant and maintain margins and margin calls in multiple currencies (Sing$, US$,
Yen) in Singapore. With the cross-listing of A$ denominated index products such as Nikkei 225
(Japan), CNX Nifty (India), MSCI Taiwan and the FTSE Xinhua China A50, and liquidity provided
by SGX market users, the Australian investor can access these contracts on ASX at reduced cost
through its existing trading and clearing relationship. The Australian investor can also maintain
margins and margin calls in A$, and gain capital efficiency through margin offsets against other
Australian derivatives contracts traded on ASX. Additionally, Singapore based liquidity
providers trading the ASX-listed SGX index futures contracts can transfer their positions to the
SGX for clearing.
Example 7: Cross-membership
Subject to ASIC and MAS approval, ASX and SGX will recognise each others membership rules
and requirements as being broadly equivalent to one another. As a result, market participant
firms on one exchange can be admitted as market participant firms on the other in a
streamlined manner. This allows market participant firms to easily expand into new markets
and access new products and customers, while enabling ASX and SGX to grow their respective
distribution networks.
Case Study 11
A Singapore physical commodity distributor, who already uses SGX to trade and hedge risk on
energy, freight, metals and agriculture derivatives, wishes to access the ASX grain derivative
products. In the current environment, the trader would need to open a trading account with
an ASX participant, establish a clearing relationship with an ASX participant, and maintain
separate margins and margin calls. Under the cross-access arrangements, the commodity
trader can access the grain derivative products on ASX at reduced cost through its existing
trading and clearing relationships, and gain capital efficiency through margin offsets against
other derivatives contracts executed on SGX. Australian based users enjoy the benefits of
improved liquidity (reduced costs of trading), and trade and clear the product through ASX.
Case Study 12
An ASX market participant firm which currently maintains a presence only in Australia wishes
to offer their customers access to a broader set of products and services. Through the ASXSGX cross-access arrangements, the ASX participant can gain immediate admission as a SGX
member and offer their customers access to SGX-listed products and services at a reduced cost
by utilising existing ASX trading and clearing relationships in Australia.
It also creates the opportunity for the ASX market participant to extend its reach to a wider
base of Asian customers.
41
The Counterfactual
Determining whether the combination of ASX and SGX is in Australias national interest must
consider the counterfactual; in other words, what would happen if the merger were disallowed
by Australian authorities. The formation of ASX-SGX in part is a commercial response to
changing market conditions, anticipated and encouraged by Australian regulators (see ASIC
2010).
Within the limits imposed by Australian law, ASX should be allowed to respond to
new competitors entering its markets.
Historically, exchange markets developed as natural monopolies but globalisation and
technological developments have reduced many of the advantages of that model.
In March 2010, the Australian Government announced its support for competition between
exchange markets for trading in listed products in Australia. Policy makers expect that
competition in trading ASX-listed stocks will lower transaction costs and improve product and
service innovation for users. These developments have opened the door for foreign-owned
operators, including Chi-X, to enter the Australian exchange market.
All businesses, including ASX and SGX, that match buyers with sellers are under increasing
competitive pressure stemming from advances in computing and communications technology.
The world is seeing a rapid tie-up of exchanges amid a search for scale (and the associated cost
and service advantages that scale can offer), as outlined in Appendix C. In its recent overview
of Australias equity market structure, ASIC (2010) makes the point that cross-border exchange
consolidation is a global trend. Whether or not ASX-SGX proceeds, further consolidation of
exchanges can be expected to occur.
Developments in technology have also led to the emergence of new platforms, including dark
pools. These platforms provide alternative means of executing trades and today are offered
by a range of foreign-owned market participants, including:
UBS Price Improvement Network (PIN);

Citi Match;
Credit Suisse CrossFinder;
Goldman Sachs Sigma-X;
Morgan Stanley MS Pool;
Liquidnet; and
ITG POSIT Marketplace.
Anecdotally, at least two other institutional brokers are close to launching similar platforms.
At present, these venues operate as anonymous matching engines that find liquidity outside of
ASXs Central Limit Order Book (CLOB) and execute trades as special crossings. The fee
received by ASX for executing these trades is 0.05 basis points (i.e., a twentieth of one percent)
relative to 0.15 basis points for execution of trades via the CLOB (i.e., one-third of the usual
cost), with a cap that limits maximum trade execution fees to $75 per trade.
42
Partially as a result of the actions of these alternative platforms, approximately 14% of

turnover in ASX-listed securities in 2010 occurred outside of the CLOB (see Chart 7.1).
Chart 7.1: Proportion of turnover in ASX-listed securities
outside of the Central Limit Order Book
20%
15%
10%
19%
16%
14%
13%
Jan-10
Feb-10
5%
14%
13%
15%
12%
13%
14%
Sep-10
Oct-10
0%
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Off-market crossings (% of market turnover)
Aug-10
Source: ASX.
Heightened competition in ASXs markets is likely to accelerate with the granting of new
market licences and further technology developments. ASIC (2010) anticipates such
developments and is orienting its regulatory framework to support heightened competition in
the Australian market.
The experience of the London Stock Exchange (LSE) provides a case study for the impact of
competition on an incumbent exchange. Since the introduction of competition for trade
execution in the UK in 2007, alternative exchanges and trading venues have steadily increased
their market share. Today, less than 60% of the value of trading in LSE-listed shares occurs on
the LSE. 17
It is likely that these trends will continue, implying that a failure to act may see a
further deterioration over time in the relative scale and competitive position of
ASX. Any such developments would come at a cost to those that rely on the
infrastructure ASX provides.
Particularly in Asia the pressure might increase over time, as Asia is still catching up with this
international trend towards exchange consolidation. Given that the region does not follow the
same timelines as Western countries, the Asian exchange landscape might change very rapidly,
leaving the ASX little time to react.
ASX will face increased domestic and international competition in any case even if ASX-SGX
does not proceed which puts domestic revenue under threat and creates more business risk.
Disallowing ASX-SGX would rule out a rational strategic response on ASXs part to its changing
market environment, changes induced to a material extent by the Australian regulatory
authorities themselves.
17
BATS Europe market data.
43
THE NEW ZEALAND AND LONDON STOCK EXCHANGES EXPERIENCES

In the context of the national interest assessment, it is necessary to examine the
counterfactual or what may eventuate should ASX-SGX not go ahead. While it is
difficult to assess directly, the recent declined merger experiences of the NZX and
LSE provide some insight into the potential impact.
Both the NZX and LSE examples are relevant comparators for ASX, if for differing
reasons. From a global perspective, the New Zealand and Australian economies
share many geographical, demographic, economic and regulatory characteristics.
While the UK does not share the same economic environment cohesion, the LSE
has experienced the impact of new market entrants in particular, Chi-X.
In 2001, the NZX rejected a $20 million merger approach from the ASX.
Meanwhile, over the last decade, LSE has declined offers from Deutsche Brse
(1999 and 2000) and the US NASDAQ market operator (2006 and 2007).
Chart 7.2: ASX, NZX and LSE market share (% of global market capitalisation)
12%
10%
8%
6%
4%
2%
0%
1990
1992
1994
1996
ASX
1998
2000
NZX
2002
2004
2006
2008
LSE
Source: WFE.
The rationale for rejecting the mergers may well have appeared reasonable e.g.,
a merged exchange where the interests of the smaller country are subservient to
those of the larger country may not necessarily cater well for local problems and
costs.
However, these opportunities had the potential to significantly increase market
capitalisation and coverage, improve market liquidity, reduce costs and raise
international profile. In addition, the continued worldwide trend of stock
exchange mergers and the market entry of competitors such as Chi-X are only
increasing competitive pressures.
44
In terms of competitive positioning, New Zealand remains challenged on a global

scale (See Chart 7.2). Over the last 20 years, NZXs global market share has more
than halved and has been declining for the last five years. The LSE shows a similar
declining pattern. Indeed, less than 60% of the value of trading in LSE-listed
shares now occurs on the LSE.
An article in Global Investor Magazine (2000) that addressed the potential for the
ASX-NZX merger looked at reasons why New Zealand was not seen as a preferred
listing location by investment bankers. These included its geographical isolation,
lack of compulsory superannuation and small institutional funds.
However, the article also reported that the ASX was seen to be a preferred
exchange within the region because of its efforts to introduce co-listing and cotrading with a number of exchanges such as the Singapore stock exchange and
NASDAQ.
Chart 7.3: ASX, NZX and LSE market capitalisation ($US billions)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1990
1992
1994
1996
ASX
1998
2000
NZX
2002
2004
2006
2008
LSE
Source: WFE.
45
Chart 7.4: ASX, NZX and LSE number of listed companies

3,500
3,000
2,500
2,000
1,500
1,000
500
0
1990
1992
1994
1996
ASX
1998
2000
NZX
2002
2004
2006
2008
LSE
Source: WFE.
Market capitalisation (see Chart 7.3) and number of listed companies see (Chart
7.4) are two high level measures of exchange market performance. The high
number of confounding factors, the most prominent of which being the global
financial factors, make it difficult to attribute any trend to the declined mergers.
However, of note is the significant volatility shown in the market capitalisation
time series for NZX (difficult to observe given the scale of the y-axis) and LSE,
which may be attributed, at least in part, to relatively undiversified portfolios.
While the experiences of NZX and LSE are not necessarily indicative of ASX
performance should the ASX-SGX combination not proceed, the market-related
issues uncovered during and following the merger discussions are worth noting
within the Australian context.
Furthermore, the current regulatory framework does not prohibit foreign ownership of ASX.
Under the FATA, foreign investors (with no holder and associates having voting power over a
15% interest) could in theory acquire all of the shares in ASX Limited. The Treasurer could act
to compel foreign investors to divest shares where:
the Treasurer has determined that the foreign persons collectively are in a position to
determine the policy of ASX Limited;
the level of voting power of the foreigners and associates is at least 40%; and
the Treasurer has determined that he considers the foreign investors investment is
contrary to the national interest.
Hence, in contrast to the controlled way in which the ASX-SGX merger is currently proposed,
the ownership of ASX could transition to foreign investors over time.
46
Allowing and facilitating the introduction of new foreign-owned competitors while restricting
the ownership and response of an incumbent Australian company would appear to be
inconsistent with best practice economic policy. It would also be clearly contrary to the
interests of the Australian company and its shareholders.
Unless the incremental benefits from restricting the ownership and limiting the capacity of the
Australian company to respond commercially outweigh the detriment to the company and its
shareholders resulting from these restrictions, they are clearly contrary to Australias national
interest.
Competition in the domestic exchange sector will increase whether or not the proposed
transaction occurs from further developments in technology and a new entrant having been
granted in principle approval for a market licence from the Australian Government. The
benefits that will accrue to stakeholders from competition are therefore inevitable and there
are no incremental benefits that could arise from restricting the ownership of ASX.
Furthermore, if the proposed transaction is not permitted, the benefits outlined in Chapters 3
and 4 will be forgone, to the detriment of Australian investors, the Australian economy, and
ASX and its shareholders.
Finally, if ASX-SGX were disallowed, this could add to perceptions, especially in Asia, that
Australia is not welcoming of foreign investment and/or was overly protectionist.
There have been numerous previous cross-border exchange transactions (outlined in

Appendix C), each of which have required, and have received, multiple regulatory and
government approvals in jurisdictions including the USA, United Kingdom, Canada,
Dubai, France and the Netherlands. To the best of our knowledge, no previously
proposed cross-border exchange sector transaction has failed to proceed on the basis of
regulatory disallowance.
Disallowing ASX-SGX would send the wrong message to foreign investors
particularly as similar exchange combinations have been approved in many
jurisdictions around the world.
47
Conclusions
This report finds that the formation of ASX-SGX promotes Australias national interest since it is
highly likely to raise the economic welfare of Australians by:
improving Australias chances of becoming a financial services hub in Asia;

improving Australians ability to diversify their savings; and
lowering the cost of capital for Australian companies.
Furthermore, the report finds that the merger is not contrary to Australias national interest
since:
ASX will continue to operate in Australia and be regulated by Australian authorities.

Hence the question for Australian policymakers focussed on the national interest
is not Should the ASX be allowed to merge with the SGX? but Who might be the
best merger partner for the ASX?
The SGX stands out as the most logical merger partner for ASX, given that the great bulk of
future capital flows into Australian investment projects will come from Asian savings (and
investors), while the use of English language and the heritage of British common law are key
shared benefits.
Similarly, the SGX is of broadly similar size to the ASX, meaning that there is not one
dominant business in the proposed merged group. The ASX and SGX groups also have similar
business models and common technology, and complement each other in terms of sector
representation, allowing the merged group to better meet the diversification aims of investors.
48
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51
Appendix A: Ten economic reasons why the ASX-SGX merger

proposal should be approved
The main report finds that the formation of ASX-SGX promotes Australias national interest
since it is highly likely to raise the economic welfare of Australians by:
improving Australias chances of becoming a financial services hub in Asia;

improving Australians ability to diversify their savings; and
lowering the cost of capital for Australian companies.
Furthermore, the main report finds that the merger is not contrary to Australias national
interest since:
ASX will continue to operate in Australia and be regulated by Australian authorities.
This appendix identifies ten economic reasons why the ASX-SGX merger proposal should be
approved.
Reason #1
ASX-SGX will help Australia become a regional financial services hub.
Reason #2
ASX-SGX will help Australian firms connect with Asian investors.
Reason #3
ASX-SGX will make it easier for Australian investors to invest into Asia.
Reason #4
Similar exchange combinations have been approved in many jurisdictions

around the world.
Reason #5
ASX must be allowed to respond to new competitors entering its markets.
Reason #6
ASX-SGX is a merger of complementary exchange businesses.
Reason #7
ASIC and the Reserve Bank will continue to regulate the Australian
operations of ASX-SGX.
Reason #8
There will be no loss of an Australian icon.
Reason #9
ASX-SGX will continue to pay tax on income generated in Australia.
Reason #10
Disallowing ASX-SGX would send the wrong message to foreign investors.
52
A.1
ASX-SGX will help Australia become a regional financial

services hub
A.1.1 The facts

Australia has so far developed only limited cross-border activities in financial services.
The recent Johnson Report found that Australia needs to forge closer links with Asia to
develop our potential as a regional financial services hub. The Report picked Singapore
as the best place to start (see Figure A.1).
A securities exchange of global scale and relevance is the lynchpin of any strategy for
Australia to become a financial services hub. ASX-SGX would be the 5th largest
exchange in the world by market capitalisation with a value of US$12.3 billion and would
be the second largest listings venue in Asia-Pacific with over 2,700 companies.
ASX-SGX would offer investors access to the worlds second largest cluster of resource
sector companies as well as the largest real estate investment trust and exchange
traded funds sectors in Asia-Pacific.
In its recent overview of Australias equity market structure, ASIC makes the point that
cross-border exchange consolidation is a global trend. So whether or not ASX-SGX
proceeds, further consolidation of exchanges can be expected to occur.
Without an Asian partner, the exchange operated by ASX could become marginalised as
its competitors in Asia grow and/or consolidate and others enter the Australian market.
Figure A.1: Australian financial services have weak international links
60%
% financial services
gross value added
50%
40%
Financial services exports
Financial services imports

30%
Source: Johnson Report (2009)

20%
10%
0%
United Kingdom
Singapore
Hong Kong
Canada
United States
France
AUSTRALIA
Japan
New Zealand
53
A.1.2 Discussion
The recent Johnson Report found that Australia needs to forge closer links with Asia to develop
our potential as a regional financial services hub. The Report picked Singapore as the best
place to start given the strong ties that already exist between Australia and Singapore,
including the Singapore-Australia Free Trade Agreement (SAFTA).
A securities exchange of global scale and relevance is the lynchpin of any strategy for Australia
to become a financial services hub. ASX-SGX would be the 5th largest exchange in the world
with an anticipated market capitalisation of US$12.3 billion.
Further consolidation of securities exchanges will occur in our region anyway, whether or not
this merger proceeds. Without an Asian partner, ASX could become marginalised as its
competitors in Asia grow and/or consolidate and other competitors such as Chi-X enter the
Australian market.
Australia is underperforming as a regional financial services hub despite well documented
advantages, including our skilled and mobile workforce, political stability, sound legal and
regulatory framework, and the Australian lifestyle.
Australia has developed only limited cross-border activities in financial services. Our imports
and exports of financial services (relative to the size of our financial sector) are low by
international standards (see Figure A.1).
By contrast, Singapores financial services exports are relatively higher (and Asias financial
services exports are growing relatively faster), so the ASX-SGX linkage would open
opportunities for Australians.
A.2
ASX-SGX will help Australian firms connect with Asian

investors
A.2.1 The facts

In 2009 overseas investors had invested nearly $2 trillion dollars in Australian assets
including debt and equity holdings in Australian firms.
Over the past decade, the slower growing OECD economies have nearly doubled the
dollar-value of their investments in the Australian economy.18
At the same time, the investment stake in Australia held by the faster growing ASEAN
economies (including Singapore) has remained virtually stagnant. 19
18
These estimates refer to stock estimates as at 30 June of each year. They do not refer to investment flows.
19
ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam.
54
Table A.1: Foreign investment in Australia by country/region (stock, $ billions)
Singapore
ASEAN ex-Singapore
OECD
Total all countries
2001
39.9
7.2
600.1
856.7
2005
19.7
17.5
853.8
1,240.3
2009
40.2
11.5
1,361.5
1,897.7
Trend growth
% pa
2001 to 2009
0.1%
5.9%
10.8%
10.5%
These facts are curious. We might have expected growth in ASEAN investment in Australia to
outstrip that of the OECD economies because:
the ASEAN economies have been growing strongly over the past decade (and have high
savings to invest); and
there are benefits to ASEAN investors in diversifying their portfolios by lifting their
investment in Australian firms.
Opportunities for Australian firms to connect with future growth in Asian savings will
accelerate, since the IMF forecasts that Asian net savings will double between 2010 and
2015.20
Australia needs substantial amounts of foreign capital to finance the boom in mining
investment. Australias national savings are not large enough to meet the need.
Our current account deficits already large are going to grow even bigger because of
the need to finance the surge of resource projects now being approved.
The easier it is for Asian savings to find their way into Australian investments the more
readily we can finance our national investment needs.
Not only would ASX-SGX better align investment flows with existing trade flows, Asias
rapid growth means it opens up the potential for increased trade opportunities as well.
ASX-SGX aligns with the proposal by the Johnson Report for an Asian Region Funds
Passport as a means of addressing the barriers presented to Australias financial services
entering the Asian market (and vice versa). As John Brogden has noted, by enabling
[Australian] fund managers to offer their products directly to citizens of Asian countries,
that is likely to bring the greatest export growth.21
ASX-SGX will improve the connection between Asian investors and Australian firms. The
deeper liquidity and investor pool of a combined ASX-SGX would mean that Australian firms
would have less need to list or raise capital elsewhere to fund their growth needs. Australia
has one of the best financial systems in the world. Only Singapore provides a comparable
exchange partner in our Asian neighbourhood.
Singapore offers very strong legal rights, investor protections and enforcement of
contracts.
20
That is, savings less investment. IMF projects Asian net saving will rise from 0.7% of OECD economic activity in
2010 to 1.5% in 2015.
21
John Brogden, Funds Passport is Australian financial players key to Asia, The Australian, 18 November 2010.
55
Singapore is internationally regarded as offering comparable anti-monopoly legislation,

transparency of financial institutions and, crucially, regulation of securities exchanges.
As shown by the number of exchange consolidations overseas, scale matters.
When combined, the ASX-SGX group would have the worlds second largest cluster of
resource stocks, the largest real estate investment trust sector and the largest number
of exchange-traded funds in the Asia-Pacific region.
Transaction costs are likely to fall as ASX-SGX will be better placed to compete with
Internet-based trading platforms and will be in a better position to provide
complementary platforms.
Global connectivity with off-shore hubs in New York, London, Chicago, Tokyo and Hong
Kong would be further enhanced.
A.2.2 Discussion
Australian firms with large levels of debt were particularly vulnerable during the Global
Financial Crisis (GFC). Compared to previous decades, Australian business is now much more
reliant on debt than equity. As equity is more patient than debt, an improved connection
from Asian equity providers to Australian firms will reduce the vulnerability of Australian firms
to a future GFC.
Both Asian savings and Australian investment opportunities will grow strongly in the years
ahead.
ASX-SGX provides an improved connection between Asian investors and Australian

investment opportunities. Asian investors will be able to invest in a range of new
Australian stocks in the knowledge that they are regulated by Australian authorities in
one of the worlds best financial systems. More broadly, Australia provides the best
partner for Singapore in the neighbourhood.
Australia has a securities exchange that is multi-asset class and vertically integrated,
providing listing, trading, clearing and settlement services.
ASX-SGX provides an opportunity to reduce the impact of transaction costs on securities

exchanges. If these are higher than they need to be (because players lack the requisite reach
and economies of scale), then they can act as an important behind the border barrier limiting
Australian trade, investment and job creation.
A.3
ASX-SGX will make it easier for Australian investors to

invest into Asia
A.3.1 The facts

In 2009 Australia had invested nearly $1.1 trillion dollars in overseas assets including debt
and equity holdings in overseas firms.
In the past decade, the growth of investment by Australians into ASEAN countries,
including Singapore, has not matched Australian investment into the established OECD
economies.
56
Table A.2: Australian overseas investment by country/region (stock, $ billions)
Singapore
ASEAN ex-Singapore
OECD
Total all countries
2001
10.4
7.9
407.6
516.1
2005
9.0
8.6
584.4
720.0
2009
21.7
14.0
897.7
1,130.4
Trend growth
% pa
2001 to 2009
9.6%
7.4%
10.4%
10.3%
Like Table A.2, these facts are curious. We might have expected growth in Australian overseas
investment in ASEAN countries to outstrip our investment into established OECD economies
since:
ASEAN economies have grown strongly over the last decade, especially relative to the
OECD; and
there are benefits to Australian investors of diversifying their investments beyond

Australia and the other established, developed economies.
A.3.2 Discussion
The opportunities for Australian investors to connect up with future growth in the Asian
region will accelerate, along with the growth prospects for Asia compared to the established
economies of the OECD.
There are benefits in trade and investment flows moving together and each has the potential
to boost the other.
ASX-SGX will strengthen the connection between Australian investors and Asian investment
opportunities. Australian investors will be able to invest in a range of new Asian stocks in the
knowledge that they are regulated by Singapores Monetary Authority of Singapore (MAS).
Over time, investors may also benefit from new products such as multi-currency and index
products and Asian interest rate derivatives. More broadly, Singapore provides the best
partner for such a merger in our neighbourhood ASX and SGX have similar business models,
offer complementary products and services, and have common technology, while Australia
and Singapore are predominantly English speaking, have aligned financial regulatory structures
and have common law legal systems.
A.4
Similar exchange combinations have been approved in

many jurisdictions around the world
A.4.1 The facts

There has been a global trend towards consolidation among exchanges in response to rising
competition, improved technology and the consequent pressure to reduce costs. The
consolidations have also sought to deepen liquidity and increase capital flows. These same
pressures have produced similar changes in other parts of financial systems worldwide. In
particular, electronic trading has made geographic and political boundaries increasingly
57
irrelevant, accelerating trends already underway amid a rise in dual listings and the use of
ADRs (American Depository Receipts are securities issued by a US bank in place of foreign
shares held in trust by that bank, thereby indirectly allowing foreign stocks to trade on US
exchanges).
Recent international stock exchange mergers include:
The formation in 2000 of Euronext, a pan-European stock exchange based in Amsterdam

and the result of a merger of the Amsterdam Stock Exchange, Brussels Stock Exchange,
Paris Bourse and, since 2002, the Portuguese Stock Exchange.
The formation in 2003 of OMX, a merger between OM AB (a Swedish futures exchange,

which operated the Stockholm Stock Exchange) and the Helsinki Stock Exchange. OMX
expanded over time to own and operate seven exchanges in Helsinki, Copenhagen,
Stockholm, Iceland, Tallinn, Riga and Vilnius.
The acquisition in 2006 of Euronext by NYSE, which created the worlds first global stock
market with more than 8,000 listings across the US and Europe, trading cash equities,
futures, options, fixed income and exchange-traded products. The merged company is
headquartered in New York, with European operations and its trading platform run out
of Paris. Euronext operates five exchanges in Europe: Amsterdam, Brussels, Lisbon,
Paris and London (the former London International Financial Futures and Options
Exchange).
The merger in 2007 between the London Stock Exchange (LSE) and the Borsa Italiana
(BI).
The 2008 acquisition of OMX by NASDAQ to form the NASDAQ OMX Group.
This trend has been reinforced by domestic mergers which include the:
Chicago Mutual Exchange (CME) acquisition of the Chicago Board of Trade (CBOT)
derivates exchange in 2006;
consolidation in 2002 of the Spanish Stock Exchange (BME) from four regional
exchanges;
merger of the ASX with SFE Corporation (operator of the Sydney Futures Exchange) in
July 2006. (The ASX itself was formed in 1987 by legislation of the Australian Parliament
which enabled the amalgamation of six independent exchanges that formerly operated
in the State capital cities.); and
merger of the Toronto and Montreal exchanges in 2007 to form the TMX Group.
Exchange consolidation has received the backing of a range of national regulators.
The creation of the NASDAQ OMX Group ultimately received the approval of exchange
regulators in ten nations: the UK, US, Dubai, Denmark, Sweden, Finland, Iceland, Estonia,
Lithuania and Latvia. Each of the national exchanges is operated as a separate legal
entity and continues to be subject to each jurisdictions regulation.22
The NYSE-Euronext merger was approved by regulators in six nations: the US, UK,
France, Belgium, Netherlands and Portugal.
The LSE-BI merger was approved by regulators in the UK and Italy.
22
http://www.nasdaqomxbaltic.com/en/exchange-information/about-us (Website accessed 12 November 2010.)
58
A.4.2 Discussion
The approval of the consolidation of the NASDAQ and OMX Groups by the regulators in ten
nations demonstrates that the benefits of merging exchanges outweigh concerns about
ownership or headquartering.
There are no known cases of regulators disallowing consolidations among securities exchanges
anywhere in the world.
A securities exchange is quite different from a mining company or an agricultural business.
Their prime assets the mineral deposit being mined or the land being farmed are
geographically fixed and exist naturally, quite independent of the will of government. The key
business franchise of an exchange group, on the other hand, is made up of its licences to
operate trading, clearing and settlement facilities. Those facilities are provided by technology
platforms that operate within a domestic regulatory framework. The Australian regulatory
framework is set by Australian law and overseen by government and its responsible regulatory
agencies.
In this sense, securities exchanges are a means to an end rather than an end in themselves.
They are of value to a community because of the function they perform. Unlike mineral
deposits or fertile agricultural land, which are unique assets and limited in supply, exchange
licences can be replicated or changed by governments and their regulatory agencies. A
government can decide to have more or fewer licensed exchanges.
There will be no change to the existing regulatory arrangements as a result of this merger.
Cross-border exchange consolidation has not yet happened in Asia. The formation of ASX-SGX
would put Australia and Singapore at the forefront of Asia-Pacific exchange consolidation.
A.5
ASX must be allowed to respond to new competitors

entering its markets
A.5.1 The facts

In April 2010 the Australian Government gave in-principle support for a market licence
application by foreign-owned Chi-X Australia.
Chi-X hopes to establish a low cost, low service platform for trading ASX-listed equities.
Chi-X claims that the daily turnover of the value of shares traded on Chi-X systems
around the globe significantly exceeds the daily turnover of the ASX. 23
Chi-X and potential further licensees can and will compete directly with the ASX for trade
execution.
Internationally, competition in trade execution has seen established exchanges lose market
share.
23
http://www.businessreviewaustralia.com/business-features/finance/new-kid-block-chi-x-has-arrived-australia
(Website accessed 10 November 2010.)
59
Since trade execution competition was introduced in the UK in 2007, over 40% of the
value of trading of LSE-listed shares has migrated to other platforms.24
In the US, less than 40% of the value of NYSE-listed stocks is now traded on the NYSE.25
Only about 30% of the value of NASDAQ-listed stocks is traded on the NASDAQ.26
A.5.2 Discussion
All businesses, including ASX and SGX, that match buyers with sellers are under increasing
competitive pressure stemming from advances in computing and communications technology.
The world is seeing a tie-up of exchanges amid a search for scale (and the associated
cost and service advantages that scale can offer).
ASIC has reported that equity markets globally are undergoing considerable change. As a
result, ASIC is developing a regulatory framework to support heightened competition in the
Australian market.
ASX does not have a legislated monopoly on the Australian exchange market.
If the new framework in Australia is to maximise opportunities for market efficiency and
innovation while minimising risks to investor confidence, as ASIC intends, then ASX as
the incumbent exchange should be allowed to respond to keep pace with change.
ASXs responses may include domestic fee reductions, new products and services, and
technology improvements (as has happened already), and regional exchange
combinations (as is proposed with ASX-SGX).
The Australian Government has given in-principle approval for alternative exchange
operators to set up in Australia and compete with ASX as evidenced by the imminent
arrival of foreign-owned Chi-X Australia.
ASX must adapt to new financial market developments regardless of whether or not
alternative exchange operators set up in Australia.
A.6
ASX-SGX is a merger of complementary exchange

businesses
A.6.1 The facts

Both ASX and SGX are multi-asset class, vertically integrated exchange groups, providing
a full range of exchange services.
They have common technology and similar sector representation among listed
companies, and each is based in countries grounded in the English language and
common law.
ASX shareholders will own more than 35% 27 of ASX-SGX and four directors on a board of
15 will be Australian resident directors from ASX. The remaining 11 positions will be
24
BATS.
25
NYSE statistics.
26
NASDAQ market share statistics.
60
filled by people from four different nations, including the Managing Director who is a
Swede.
ASX will continue to have its own board (and management team) to oversee operations
of ASX Limited and its licensed subsidiaries in Australia. ASX is incorporated in Australia
and subject to Australian law.
The Australian Parliament will determine whether any future change in ownership of
ASX Limited will be permitted.
A.6.2 Discussion
A securities exchange is a means to an end rather than an end in itself. Australian companies
and families will benefit and national prosperity will improve when critical mass and
economies of scale are achieved through the creation of ASX-SGX. Other benefits are likely
(such as, subject to consultation, 24 hour trading for the derivatives market and extended
trading hours for cash equities).
However, gaining those benefits requires that Australian shareholders accept a smaller share
of a larger enterprise with a brighter future, in place of a larger share of a smaller enterprise
with a less bright future.
Going forward, the amount of ownership and control Australians exert over ASX-SGX will be
determined by purchases of shares by Australian investors in the merged group. In this sense
Australians can have as much control of the group as they are prepared to pay for.
The Australian Parliament will continue to determine whether any future change in ownership
of ASX Limited will be permitted.
A.7
ASIC and the Reserve Bank will continue to regulate the

Australian operations of ASX-SGX
Both ASIC and the RBA, in their annual assessments of ASXs activities as a market and clearing
and settlement licensee, have emphasised the robustness and strong foundations of
Australias financial markets. The regulation of exchanges is of fundamental importance.
The Australian arm of ASX-SGX will continue to operate under Australian law and be
regulated by Australian authorities. It does not matter who controls the ASX-SGX Group
or from where its Australian operations will still be subject to existing ASIC, RBA and
Ministerial controls.
After all, ASIC, Treasury and the RBA are, and will remain, powerful arms of the
Australian Government, and have numerous levers to influence any matters of national
interest at any time in the future.
By contrast, ownership of exchanges is of secondary importance.
27
ASX is owned by shareholders and its securities are bought and sold daily. It has never
been owned by government.
Correct at time of 25 October 2010 ASX-SGX merger announcement.
61
ASX is a market operator it does not set the law or the control environment in which it
operates.
ASX did not expect (nor did it receive) any privileged status when the Government gave inprinciple support for alternative exchange operators to set up in Australia and compete with
ASX.
A.7.1 The facts

ASIC and the RBA regulate Australian capital markets, including ASX. Foreign companies
owning assets and operating businesses in Australia have to operate under Australian law,
even if those companies are partly owned by foreign governments.
Likewise, the Monetary Authority of Singapore (MAS), Singapores central bank, regulates SGX
activities conducted in Singapore.
SEL Holdings Pte Ltd holds a 23.5% stake in SGX (likely to be diluted to below 15% under the
ASX-SGX proposal28) as a nominee for the beneficiary of the shares, the Financial Sector
Development Fund (FSDF).
The FSDF is a fund administered by the MAS. The fund was set up to help develop and
enhance the talent pool and infrastructure of Singapores financial centre.
It runs programs such as the Financial Training Scheme to help defray costs for the
training of employees of financial institutions and of other companies in the finance
sector.
The FSDF also offers scholarships to candidates pursuing certain post-graduate

programs.
SEL is a special purpose entity ultimately owned by Temasek Holdings (Private) Limited.
Singapore regulation ensures that the shares held by SEL cannot be voted. Temasek is a taxpaying investment company, with a board and management that make investment and other
company decisions on a commercial basis, independently of its shareholder, the Singapore
Government. Temasek plays no part in the governance, operations, commercial or investment
decisions of SGX, and cannot vote on any proposals put to shareholders.
A.7.2 Discussion
Whether ASX is 0% or 100% owned by Australians has no bearing on how ASX is regulated.
In Australia and Singapore the regulation of exchanges is of fundamental importance. It is a
matter of national sovereignty. Ownership of exchanges is of secondary importance. That is
why the fact that ASX is privately owned has never been regarded as a problem in the past.
Nor has the fact that approximately 20% of ASXs issued capital is already owned by foreign
shareholders.
28
Correct at time of 25 October 2010 ASX-SGX merger announcement.
62
them. Allowing a foreign entity, in this case SGX, to acquire the shares of ASX does not
distance the combined entity, ASX-SGX, from the authority of the Australian Parliament in
relation to the operation of the combined entitys Australian businesses.
A.8
There will be no loss of an Australian icon
A.8.1 The facts

Icon status is unrelated to ownership.
Approximately 20% of ASXs issued capital is already owned by foreign shareholders.
A.8.2 Discussion
The ASX brand name will be preserved, in both the name of the new exchange Group ASXSGX Limited and for established products such as the ASX suite of indices. Moreover, ASX
Limited will remain a wholly-owned part of the new Group.
National icons are to be distinguished from national institutions. National institutions are
state-owned and play a far-reaching role in Australias public life. ASIC and the RBA, for
example, will always remain Australian-controlled.
International precedent demonstrates that exchange brand names are preserved despite
changes to ownership. Note the maintenance of OMX (in NASDAQ OMX Group) and Euronext
(in NYSE Euronext Group).
A.9
ASX-SGX will continue to pay tax on profit generated in

Australia
A.9.1 The facts

The profits earned by the ASX Limited business structure will be subject to Australian company
tax and shareholders in the merged entity (including Australians) will not qualify for franking
credits.
ASX shareholders are compensated for the loss of franking credits by the 37.3%
premium provided in the transaction for ASX shares.
Removing the availability of franking credits could increase Australian tax revenues by as
much as $128 million per year (based on financial year 2009-10 figures).
Beyond these first-round effects, ASX-SGX will pay tax in Australia according to the profits
generated by its Australian business.
The Australian Tax Office polices strict rules regarding the use of transfer pricing to shift
tax obligations from jurisdiction to jurisdiction.
On 8 September 2009 the Australia-Singapore double taxation agreement was upgraded

to allow the exchange of information provided between authorities to the OECD
standard.
63
A.9.2 Discussion
Removing the availability of franking credits benefits Australian taxpayers given that it derives
from an asset which was not theirs to sell in the first place (unlike the deals with Telstra,
Commonwealth Bank, Queensland Rail and the like).
ASX-SGX will retain more trading and investment activity on an exchange that will be partowned by Australians and will itself continue to pay tax on its Australian operations and profit.
A.10 Disallowing ASX-SGX would send the wrong message to

foreign investors
A.10.1 The facts
In terms of Australias Foreign Investment Review Board (FIRB) applications:
In 2007-08, $192 billion of applications were decided. Of these, $162.6 billion (or 85%)
were approved unconditionally.
In 2008-09, $181.4 billion of applications were decided. Of these, $135.9 billion (or 75%)
were approved unconditionally.
No more than 0.1% of applications (by value) were rejected in 2007-08 and 2008-09.
The remaining applications (15% in 2007-08 and 25% in 2008-09) were approved with
conditions.
Therefore, in the event that the proposal to form ASX-SGX was rejected, it would send a
strongly negative message to investors.
Internationally, cross-border transactions in the exchange sector have required approvals from
governments and regulatory bodies in a wide range of jurisdictions.
There are no known instances of transactions failing to complete due to approvals from
these bodies being withheld.
For example, the June 2006 acquisition of Euronext by NYSE gained necessary approvals
from US, French, Dutch, UK, Belgian and Portuguese authorities; and the September
2007 acquisition of OMX by Borsa Dubai/NASDAQ gained approvals from UK, US,
Scandinavian, Baltic and Dubai authorities.
If the ASX-SGX merger were blocked, it would put Australia out of step with exchange
consolidation occurring around the world.
A.10.2 Discussion
Australia promotes itself as an open economy and welcoming of foreign investment. We are a
significant importer of capital. If ASX-SGX did not proceed for reasons perceived as populist or
protectionist:
Australias international credibility as an advocate for trade liberalisation could be

undermined.
64
Appendix B: Reliance on foreign capital

The current account deficit is high and rising
Officials such as RBA Governor Glenn Stevens and Federal Treasury Secretary Ken Henry have
noted that Australia will likely run even larger current account deficits in future. That is
because the current resource boom suggests that an increase in investment opportunities (and
hence a matching increase in investment capital needed) is already underway in Australia.
For example, Ken Henry, talking of Australia in coming decades, noted that:
A common thread in the forces I have talked about is a higher level of investment,
lasting perhaps for some decades. That means that the Australian economy will be
importing capital and therefore running a substantial current account deficit
for many decades to come.29
Glenn Stevens, the Governor of the Reserve Bank of Australia, has argued that:
The emergence of China and India is a benefit to Australia, but we stand to have a
heightened exposure to anything going seriously wrong in those countries.30
He added that strong growth in China would generate a boom in investment in Australian
resources which would lead to our current account deficit becoming temporarily larger,
noting that the reliance of Australias financial system on wholesale funding from offshore was
a point of vulnerability.31 That vulnerability concern has also been echoed by Ken Henry:
It is clear, in retrospect, that Australias key vulnerability in financing its current
account deficit has been the roll-over risk associated with its financial
intermediaries borrowing in global short term money markets. Indeed, well before
the crisis hit, financial intermediaries heavy use of this borrowing had featured in
a number of Reserve Bank Financial Stability Reviews, and roll-over risk had been
highlighted in the International Monetary Funds 2006 Financial Sector
Assessment Program report on Australia.32
The lift in mining investment in recent years has already seen gross investment in Australia
outstrip that of many of our peers (see Chart B.1). In addition, the increased investment
required to pursue the increased opportunities now available to Australia is likely to mean an
even higher average current account deficit is in prospect, and hence greater reliance on
foreign funding, particularly wholesale funding.
29
The Shape of Things to Come: long run forces affecting the Australian economy in coming decades, speech to the
Queensland University of Technology Business Leaders Forum, 22 October 2009, at page 20.
30
The road to prosperity, Address to the 2009 Economic and Social Outlook Conference, 5 November 2009.
31
Ibid. Note that the reference to temporary doesnt mean short-lived it means not permanent.
32
The Shape of Things to Come: long run forces affecting the Australian economy in coming decade, at page 25.
65
Chart B.1: Gross investment (% of GDP, previous decade)

25
20
15
10
0
United
Kingdom
United States
Germany
France
Canada
Japan
Australia
OECD
Average
Source: IMF World Economic Outlook, OECD Economic Outlook, ABS Cat. No. 5206.0, Federal Treasury.
That points to even further increases in investment in coming years as seen in Chart B.2.
Chart B.2: Australian engineering construction work (% of GDP)
% of GDP
5.5%
5.0%
4.5%
4.0%
3.5%
Forecast
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1985
1989
1993
1997
2001
2005
2009
2013
Source: Australian Bureau of Statistics, Access Economics.
66
Potential risks
The flipside of sustaining a high and rising current account deficit is a mounting stock of net
foreign liabilities. If Australian savings are unchanged but investment lifts to chase that
improved profit potential, then a widening current account deficit will ensue.
However, current account imbalances can only last for as long as investors are satisfied with
the return they receive on their investment in a foreign country. Lenders may charge penalty
rates if doubts surface about a borrowers ability to make repayments (that is, the
sustainability of the current account deficit) or if more attractive alternative investments arise.
Chart B.3: Large and persistent current account deficits (1960-2006)
Share of GDP
0
-2
-4
Australia
New Zealand
United States
-6
-8
-10
-12
-14
0
10
15
20
25
30
Years
Source: IMF.
For a current account deficit to be sustainable, a countrys net foreign liabilities cannot keep
increasing relative to the size of the economy. In Australias case, net foreign liabilities have
risen from 17% of GDP in 1980 to 55% of GDP today. It is useful to compare our experience
with other countries. A survey of current account deficits over the past 40 years has been
undertaken by the International Monetary Fund (IMF).33 Of particular interest are the findings
relating to large and sustained reversals of such large and persistent imbalances.34 As Chart
B.3 above shows, Australias deficit has lasted longer than any other in the IMF survey.
The findings from the IMF study of current account deficit reversals in advanced economies
are summarised in Table B.1. The first row shows that, on average, a current account deficit
equivalent to 4.1% of GDP preceded a reversal of 5.7 percentage points of GDP (implying a
33
IMF, Exchange rates and the adjustment of external imbalances, World Economic Outlook (April 2007).
34
The IMF has defined a large and sustained reversal as a change in the current account balance of at least 2.5% of
GDP and at least 50% of the starting imbalance, sustained for at least 5 years. A large and persistent imbalance is
defined as a period where the current account imbalance exceeds 2% of GDP for at least 5 years.
67
switch to a surplus of 1.6% of GDP). The average reversal lasted for 4.6 years, during which
time annual GDP growth was 1.4 percentage points lower than in the equivalent period before
the correction. By the end of the reversal episode, the real exchange rate had depreciated by
12.2% in total.
Table B.1: Episodes of deficit reversals
All reversals
Preceded by
large and
persistent deficit
Number
Initial
current
account
(% of GDP)
Size of
adjustment
(% of GDP)
Duration
of
reversal
(years)
Change in
GDP
growth
(%)
Change
in real
exchange
rate (%)
42
-4.1
5.7
4.6
-1.4
-12.2
-6.9
7.4
5.0
-0.2
-10.2
Source: IMF.
The second row of numbers shows that, where preceded by large and persistent deficits, a
reversal could be expected to last for longer, with somewhat lesser consequences (albeit still
negative ones) for the economy and exchange rate. 35
The study also noted that deficit reversals tend to be preceded by peaks in the real exchange
rate and the (positive) output gap.
Or, in other words, other nations which have run persistent current account deficits have
tended to eventually run into trouble with sustaining that foreign financing, leading to sharp
depreciations and large recessions.
35
The IMF study does not try to explain the differences between the sample and sub-sample.
68
Appendix C: Recent examples of exchange mergers

Over the last decade, there have been significant changes to the way in which stock exchanges
operate:
the typical government or member-owned, national stock exchanges have largely been
replaced by for-profit, publicly listed exchanges;
stock exchanges increasingly operate at an international level;
there has been a worldwide trend towards consolidation among exchanges.
increasing fragmentation of liquidity between stock exchanges and alternative trading

venues; and
Securities markets across the globe have been the subject of mergers following changes to
financial markets and pressure to reduce costs and to respond to technological and
competitive developments. Electronic trading has made geographic and political boundaries
increasingly irrelevant, making consolidation both feasible and attractive.
Recent international exchange mergers include:
The formation in 2000 of Euronext, a pan-European stock exchange based in Amsterdam

and the result of a merger of the Amsterdam Stock Exchange, Brussels Stock Exchange,
Paris Bourse and, since 2002, the Portuguese Stock Exchange.
The formation in 2003 of OMX, a merger between OM AB (the Swedish futures and
stock exchange, which operated the Stockholm Stock Exchange) and the Helsinki Stock
Exchange. OMX expanded over time to own and operate seven exchanges in Helsinki,
Copenhagen, Stockholm, Iceland, Tallinn, Riga and Vilnius.
The acquisition in 2006 of Euronext by NYSE, which created the worlds first global stock
market with more than 8,000 listings across the US and Europe trading cash equities,
futures, options, fixed income and exchange-traded products. The merged group is
headquartered in New York, with European operations and its trading platform run out
of Paris. Euronext operates five exchanges in Europe: Amsterdam, Brussels, Lisbon,
London (LIFFE) and Paris.
The merger in 2007 between the London Stock Exchange (LSE) and Borsa Italiana.
The 2008 acquisition of OMX by NASDAQ to form the NASDAQ OMX Group.
This trend has been reinforced by domestic mergers which include:
The merger of the Sao Paulo Stock Exchange and the Brazilian Mercantile & Futures
Exchange to form BM&F Bovespa in 2008.
The acquisition of NYMEX, a leading US energy and futures market, by CME in 2008.
The acquisition by NASDAQ OMX of the Philadelphia Stock Exchange in 2007.
The acquisition of American Stock Exchange by NYSE Euronext in 2008.

The merger of the Toronto Stock Exchange and Montreal Exchange in 2007 to form the
TMX Group.
The Chicago Mutual Exchange (CME) acquisition of the Chicago Board of Trade (CBOT)
derivates exchange in 2006.
69
The consolidation in 2002 of the Spanish Stock Exchange (BME) from four regional
exchanges.
The merger of the ASX with SFE Corporation (operator of the Sydney Futures Exchange)
in July 2006. (The ASX itself was formed in 1987 by legislation of the Australian
Parliament which enabled the amalgamation of six independent stock exchanges that
formerly operated in the State capital cities.)
Ralston (2010) suggests that ASX-SGX might work in a similar fashion to consolidations such as
NASDAQ-OMX and NYSE-Euronext where each exchange holds an exchange licence granted by
the relevant regulatory authority and operates under its supervision, subject to national laws
and regulations, requirements by the national exchange authority and, in some cases, the
central bank and/or finance ministry.
70

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ASX-SGX: why the combination is in

Australias national interest

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ASX-SGX: why the combination is in Australias national interest

The proposal ..................................................................................................................... 1

The national interest tests................................................................................................. 2

Approach to the analysis ................................................................................................... 3

Contents of this report ...................................................................................................... 4

Australia as a Regional Financial Services Hub ................................................................. 6

Reduced Cost of Capital ................................................................................................ 11

Reliance on foreign capital .............................................................................................. 11

Opportunities for Diversification ................................................................................... 22

Comparing ASX and SGX .................................................................................................. 22

Regulatory Control ........................................................................................................ 30

Impact of ASX-SGX .......................................................................................................... 30

Regulation and financial services in Australia and Singapore ............................................ 31

Illustrative Examples of New Services and Opportunities ............................................... 36

Benefits for the Australian funds management industry .................................................. 36

New products and services.............................................................................................. 37

Improving efficiency for the market and its participants .................................................. 39

The Counterfactual ....................................................................................................... 42

ASX-SGX: why the combination is in Australias national interest

ASX-SGX: why the combination is in Australias national interest

American Depository Receipt

Asia-Pacific Economic Cooperation

Association of South-East Asian Nations

Australian Securities and Investments Commission

Central Limit Order Book

Foreign Acquisitions and Takeovers Act

Foreign direct investment

Foreign Investment Review Board

Financial Sector Development Fund

Funds under management

Gross domestic product

Global Financial Crisis

Information and communications technology

International Monetary Fund

London Stock Exchange

Monetary Authority of Singapore

New Zealand Stock Exchange

Organisation of Economic Cooperation and Development

Reserve Bank of Australia

Real estate investment trusts

Singapore-Australia Free Trade Agreement

Singapore Exchange Limited

Small and medium-size enterprises

World Federation of Exchanges

ASX-SGX: why the combination is in Australias national interest

Australia as a regional financial services hub

ASX-SGX: why the combination is in Australias national interest

Reduced cost of capital

a reliance on foreign funding that is likely to increase, and to be increasingly affected by

domination of foreign capital inflow by short-term bank debt, as Australias domestic

ASX-SGX: why the combination is in Australias national interest

increase access to foreign capital; and

Given the dependence of Australias economic prosperity on continuing access to foreign