The CLOB Saga 1 comments

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Having read the various postings in Shareinvestor.com for some time, it is surprising that an event which happened about eight years ago still evokes so much emotion among veteran investors in the stock market. Pan Electric and the Asian financial crisis nowadays seem like distant memories, yet the CLOB saga strikes a raw nerve among those who had their money in these stocks (including some of my relatives) when the Malaysia government froze CLOB accounts in 1998.

The move was a direct result of the Asian currency crisis, when foreign speculators shorted the currencies of highly leveraged Asian countries, with Southeast Asia being particularly hard hit. Dr Mahathir, then Malaysia's PM, came up with the idea of imposing capital controls (a move for which he was lauded later for its effectiveness) to curb speculation (if money could not be moved out, any gains foreigners made from speculating would essentially be frozen, hence the markets would stabilise).

Of course, this also meant the CLOB market facilitating buying of Malaysian shares on the Singapore market would be affected. CLOB, or Central Limit Order Book (don't ask me why it is so named... reminds me of Central Limit Theorem in statistics) was set up in Singapore to trade Malaysian companies over-the-counter in Singapore after the Malaysian and Singaporean exchanges separated in 1990. Over the years it had developed into the main avenue for veteran Singaporean investors to invest in Malaysian equities.

The amount of money in CLOB shares at the time of the suspension in trading in September 1998 gives a clue to the anguish that is still felt by many investors today. There were about 172,000 Clob investors on the books - as many as 95 percent of them Singaporeans - and the total shares had a value of approximately US$4.47 billion. That works out to about US$25,000 per CLOB investor (remember that the US$ was king then) .... an indication that these CLOB share buyers were not small fry. And yet they got killed by events beyond their control. Under the arrangements following the CLOB market suspension, all shares in CLOB accounts were to be eventually transferred to accounts in the Malaysian Central Depository for eventual trading on the Kuala Lumpur Stock Exchange (KLSE). However, the Malaysian government feared a massive share overhang in the KLSE (given the enormous amounts of money tied up) if liquidation was made possible en-bloc and hence things dragged on as the SES (the predecessor of SGX) and the KLSE worked to facilitate the share migration.

There would be no clear resolution to the issue until early 2000, and between 1998 and then there was an ugly war of words between the Malaysian and Singaporean market authorities which served only to exacerbate the unfortunate situation. Bank Negara's (Malaysia's central bank) chief claimed that during the Asian crisis, CLOB shares were being borrowed to be short-sold on the Malaysian market, hence hinting at the reason why the CLOB market was suspended. It was further suggested that the Singapore authorities had done nothing to deter such damaging actions to the Malaysian market. The war of words then shifted over to the legitimacy of the CLOB market, with KLSE noting that the CLOB market was created "unilaterally" by SES to facilitate to generate revenue for the SES, was "never endorsed by the Malaysian authorities", and was effectively an "an unauthorised market for Malaysian shares" and that there were inherent risks to those who invested in CLOB shares. SES, of course, had never made public to its investors of such a risk. On its part, the latter declared that "trading of Malaysian securities on Clob was not authorised by Malaysian authorities because it required no such authorisation", and that it was essentially a win-win game as Singaporean money provided liquidity and support to Malaysian stocks. Of course, it was win-win so long as things were going fine.... it took a major dislocation like a regional financial crisis to unleash the inner demons.

Finally in early 2000 the two exchanges worked out a scheme of arrangement for letting CLOB investors trade out of their misery, where investors were offered two options, both of which involved releasing of CLOB shares on a staggered basis over >10 months, reflecting the KLSE's abovementioned concerns of a share glut should all be released at one go. The faster scheme involved payment (something like 2% upfront) of higher administrative fees to a Malaysian company, Effective Capital, which was linked to Malaysia's then-Finance Minister Daim Zainuddin, an indication of how business operates in Malaysia. CLOB investors were strongly urged by the Malaysian side to opt for the Effective Capital scheme. Although there were calls for this to be referred to the WTO given the rather unfair scheme of arrangement and rather threatening tones adopted by the Malaysian authorities to CLOB investors to accept the proposed schemes, it appears that ultimately the CLOB investors had been worn down sufficiently by the two-year impasse to succumb and sell off at huge losses. For a US$4.5B CLOB position (believe it was measured at 2000 market prices based on KLSE), Effective Capital offered US$1.5B to "take over the risk" of holding the long position. One knows that given its government links, it would have no problem disposing of this entire line eventually in the KLSE.

Out of this whole saga arose SIAS, Small Investor's Association of Singapore, which represented the bulk of CLOB investors in liaising with the various authorities. It also gave rise to the easily understood-ed term "CLOB-bered". Most of all, it gave rise to a fear of Malaysian stocks, not just by Singaporeans but by most foreign investors, who saw the perils of putting their money in a market that could easily change tack when under pressure. There are plans by the SGX to restore trading links with Bursa Malaysia soon. Perhaps that might go some way to restore investor interest in this market.

References:
(1) Time Asia article Jan 2000: Clobbered
(2) Asiaweek article May 1999: Still CLOBered In Singapore
(3) Business Times May 1999: Clob was never illegal or unrecognised: SES
(4) Article Feb 1999: CLOB solutions: Lessons of Immorality
(5) KLSE announcement Sep 1998: KLSE ANNOUNCES TRANSFER OF CLOB ACCOUNTS
(6) KLSE announcement May 1999: CENTRAL LIMIT ORDER BOOK (INTERNATIONAL)(CLOB)
(7) KLSE announcement Sep 1998: KLSE ANNOUNCES TRANSFER OF CLOB ACCOUNTS
(8) Asia Times article Sep 2000: Investment in Malaysia
(9) Agence France press article Aug 1999: Malaysia cental banker blasts Singapore over CLOB
(10) Associated Press article Feb 2000: Renewed war of words may delay Clob resolution