STORIES BY :- EVELYN FERNANDEZ & LIM AI LEEN

Cover Story:  Whither goes the money brokers?

         Eight money brokers and 10 banking groups. If the banking sector under goes another round of consolidation, the 10 anchor banks will be reduced further. The ideal number being bandied around is five. Where would that leave money brokers?
Add to this equation the prospect of e-broking. Already, an enterprising company called Klex Technology is believed to have set up an electronics broking system for the capital markets and money market products. Sources say Klex Technology is waiting for approval from the authorities to launch the system. There is little doubt about it - the money broking business is getting a little crowded and tougher as the domestic financial landscape changes and moves forward. A shake-up, it appears, may be inevitable.
Bank Negara's Financial Sector Master Plan (FSMP) outlined major developments for domestic financial institutions, but was silent on the money brokers' role in the whole scheme of things.
Is there a continuing role for money brokers? Predictably, money brokers say yes.
"We own the liquidity pool. Take the money brokers away and the liquidity will dry up significantly. There will be no price transparency and we will go back 30 years," argues James Khoo, executive director at Amanah Butler Malaysia.
"Who will hustle the buyers and sellers?" asks Aminnurllah Mustapah, chief operating officer at Harlow's Malaysia.
Shaharudin Othman, executive director of Harlow's, is already forging a path to enlarge the role of brokers. He believes that money brokers can evolve into inter-dealer brokers, offering more value-added services for the varied clientele and increased number of financial products. These services include research and information dissemination.
Bank Negara has come out on the brokers' side, as far as liquidity is concerned.
In a written reply to The Edge, the central bank said: "Money brokers can be expected to continue to have a role as the financial system becomes more developed. They still have an important role in providing efficient pricing in the market and are able to create a liquidity pool."
       However, money broking clients are divided on the issue.
Some bankers are murmuring that they can bypass brokers by trading directly between themselves on an electronic platform.
An observer comments that money broking will be a sunset industry once Bank Negara and the Securities Commission (SC) sort out the dual regulation of capital market and money market traders. His view is that universal brokers may have the upper hand once they are allowed to trade securities in both the capital and money markets.
Other clients say they still prefer to use the services of a money broker.
Michael Lim, senior general manager of treasury at RHB Bank Bhd, thinks there is room for electronic trading, but that brokers can't be eliminated all together. He says: "The human touch is necessary, because we trade on market information as well, and not just on the price. The feel for the market and its pulse is not there on the electronic platform."
He agrees that money brokers are one channel of liquidity, which is crucial for a bank with huge positions.

Cover Story: How it all started

Discount houses in Malaysia were first set up in 1963 and primarily served as a channel for Bank Negara to implement and conduct its monetary policies. Tasked with the role of mobilising short-term funds, discount houses allowed the central bank to influence interest rates.
By 1985, there were seven discount houses in the country and it has remained at that level since. Three are bank-owned while the remaining four are either individually or institutionally owned.
Malaysian discount houses were modelled after those in the UK. However, discount houses in the UK were phased out in the late 1990s, as the Bank of England reformed its open market operations and broadened the range of financial players within the money market.
Discount houses in Singapore were also phased out when they were unable to play a role in developing and maintaining a liquid market for government securities.
Locally, however, discount houses were allowed to evolve. Their range of services were expanded and by the mid-1990s discount houses in Malaysia diversified into the private debt securities market.
They were also allowed to move up the interest rate curve of the years to hold longer tenured government and corporate debt instruments.
Assets held by discount houses account for about 2.0 per cent or RM24 billion of the total assets (RM1.4 trillion) held by the entire financial system, Bank Negara says in its 2002 Annual Report.
Discount houses today play a pivotal role in deepening the debt securities market. In essence, their participation in the debt market make up the bulk of a discount house's earnings stream.
At a collective group, discount houses today have about RM11.5 billion in PDS holdings compared to RM2.6 billion held in 1994.
While some quarters consider them a weak link within the financial system because of their small capital base, discount house proponents dispel the myth. Since 1994, total shareholders funds of discount houses have grown in leaps and bounds from RM288 million to about RM2.0 billion now.

Cover Story: What are money brokers?

           Unlike the stockbroker, what a money broker does is little known, even among those who work within the financial markets. Money brokers have been compared to real estate agents, money changers and least glamorous of all, money lenders. And the shifting financial services landscape may require them to evolve further to compete and survive.
So what do money brokers actually do?
They are deal makers between financial institutions seeking to borrow or lend short-term funds. The funds are denominated in domestic currency (money market) or foreign currency (foreign exchange or forex market). Money brokers' clients range from the traditional financial institutions like banks, merchant banks and discount houses, to relative newcomers like insurance companies and universal brokers.
The instruments traded between the institutions are over-the-counter (OTC) financial products, which means that each contract is tailored to the specific requirements of the party.
The products can be broadly categorised as:

• Forex instruments like dollar deposits and forex swaps;

• Money market instruments such as BAs (bankers' acceptances) and NCDs (negotiable certificates of deposit);

• Fixed income instruments like government bonds and unlisted private debt securities.

Money brokers earn a fixed commission for putting a lender and borrower together. More importantly, they match the parties' requirements of time, price and amount with each other. It is in this area that the brokers distinguish themselves - offering the institutions better price discovery and giving them greater cost savings than if they were to do the deals directly amongst themselves.
"We have become somewhat like an exchange," says Wan Kamaruzaman Wan Ahmad, chief executive of Affin Money Brokers Sdn Bhd. He believes that the money brokers' connectivity to the entire market enables them to be efficient - to give the fastest, best prices at low brokerage costs.
A treasury officer at a bank agrees. He says: "We have a choice of doing the deal directly with another bank or going through a money broker. But close to 90 per cent of money market trades go through a broker because they narrow the spreads and wait to hit the right price. And our identity is not revealed, so the other players can't read our quotes."
James Khoo, executive director of Amanah Butler Malaysia Sdn Bhd, summarises it: "We are a one-stop marketplace for every financial product that Malaysia allows us to do, and we are just one phone call away from all of it."
There are eight money brokers in the industry, all licensed under the Banking and Financial Institutions Act 1989 (Bafia). The money broking business in Malaysia started in 1973, and brokers were regulated directly by the Minister of Finance then. They are now regulated by Bank Negara. According to the central bank, no new money broking licence has been issued since 1984.

Cover Story: A profitable business

Shaharudin Othman, executive director of Harlow's Malaysia, has been in the money broking business for 25 years.
"When the market first started, 70 per cent of business was in the forex (foreign exchange) market. Money market activity was limited to closing off positions in overnight funds," he recalls.
In the 1980s, more money market instruments came on the scene. One industry veteran with 15 years' experience credits the growth of money market products to the discount houses. "They had the foresight to see that paper trading was the way to go. So instruments like BAs (bankers acceptances), NCDs (negotiable certificates of deposits) and bonds were introduced. Now the money market has turned out to be the biggest money earner in the shop," he says.
He is referring to the shrinking market in forex trading, and the expanding one in money market instruments.
In 1998, the government pegged the ringgit to the US dollar, in what was then seen as a draconian measure to stem the economic bleeding caused by the Asian financial crisis. The thin spreads meant that banks dealt directly with each other for US$-RM deals. As a result, brokerage income from forex trading suffered.
              Aminnurllah Mustapah, chief operating officer of Harlow's, estimates that forex trading made up about 50 per cent of their brokerage income pre-1998. This fell to 15 per cent between 1998 and 2000. It has now dwindled to around 8.0 per cent.
But the boom in fixed income, bonds in particular, and money market trades, has more than made up for reduced forex income.
          Wan Kamaruzaman attributes this growth to the series of interest rate cuts, both domestically and by the US Federal Reserve since 2001. "Our brokerage income rose by about 60 per cent, from RM5.39 million in 1998 to RM8.85 million in 2001. Our dollar deposits and swaps were a big contributor to income, due to the volatility", he says.
"Volumes thrive on volatility," says Shaharudin. He explains that there is heightened activity when there are divergent views in the money market.

Cover Story: Banking mergers: Chapter two
The chapter on the first and difficult round of Malaysian banking mergers will close on May 1, when RHB Bank and Utama Bank finally operate as a single entity. Yet even as the first chapter ends, the second one on the 10 anchor groups is being written, threatening to throw the financial landscape into disarray once again.

Secondary players heading for a shake-up
Though the core banking groups have found their balance for now, the fact that there are rumblings of discontent among an oft forgotten segment of the financial industry - the secondary financial institutions - throws up more flux.
Over the last few years, working behind the scenes of headline core banking mergers, discount houses and money-brokers, a main part of the secondary financial market, have quietly been scrambling to find a space of their own within the industry.
But the lack of clear policy direction from the authorities has hindered progress for some of these players.
Some industry observers believe that discount houses and money brokers will eventually be phased out from the financial scene as the industry consolidates further.
Discount houses would merge to become part of a larger banking group while money brokers could easily be assimilated into the treasury department of a commercial bank, they say. But both these groups are reluctant to trade their position without a fight. Both argue that they will continue to have a role as independent players of the financial sector.
"Discount houses are so entrenched in the Malaysian financial system. As the market evolves and if we can continue to evolve, adapt and re-invent, we should be allowed to remain," Datuk Khatijah Ahmad, owner and founder of KAF Discounts, tells The Edge.
Likewise, those in the money broking business argue that independence from a banking group improves the efficiency levels of a money broker and extends their reach across various banks within the financial landscape. Independence is a necessary function for any money broker if it wants to service a cross section of local and foreign institutions.
"We are efficient, fast and are able to get the best price out of various market participants. Banks have been able to deal directly with each other all these years, but they still use us as we give greater cost savings," says Wan Kamaruzaman Wan Ahmad, chief executive officer of Affin Moneybrokers.
"Money brokers don't just provide a buy and sell service. They build relationships," adds James Khoo, executive director of Amanah Butler Malaysia.
KAF's Khatijah argues for survival of the fittest within the financial industry. "Let the market decide," she says.
In reality, however, discount houses and money brokers are being nudged into consolidation.
Underlying these rumblings of discontent and uncertainty are the two master plans - the FSMP and the Capital Market Master Plan (CPM). The FSMP, proposed by Bank Negara, the governing authority for discount houses and money brokers, is silent on the future of money brokers. It is also silent on the role of stand-alone discount houses.
In a written reply to The Edge, however, Bank Negara says "money brokers are expected to have a continued role in providing liquidity. Any consolidation between money brokers will therefore be market-driven".
Bank Negara did not respond to questions on discount houses.
In broad terms, the FSMP, which fashioned the investment bank and the Securities Commission's CMP, which created the universal broker has bewildered financial institutions. Industry players across the board are peeved by the incongruity between these plans. According to the CMP, stockbrokers who complete a three-plus-one merger (which means a broker will merge with three others) will qualify as a universal broker. This will allow them to carry out corporate finance and advisory work akin to that of a merchant bank.
Alternatively, the CMP allows brokers to become niche players if they merge with at least one other broker - but they remain brokers. On their own, the choices provided under the CMP seemed attractive.
The lure of a new income stream led to a rash of mergers among stockbrokers. Hundreds of millions of ringgit were spent to acquire universal broker status and the industry was reduced to 33 players last year from 65 players initially. There were six universal brokers at the close of last year.
Mergers within this sector have however come to a halt. Brokers were caught wrong-footed by the tenets of the FSMP.
Under the FSMP, merchant banks that merge with either a discount house or stockbroker will qualify as an investment bank. This will allow them to also undertake trading and brokerage activities apart from merely providing advisory services. Once again, the FMSP is silent on the position of stand-alone discount houses.
"Who knows what an investment bank really is?" asks an irate banker.
"The FSMP talks about it [investment banks], but it is only now in the process of drawing up the legislation for this beast," adds Khatijah.
In a nutshell, the concept of an investment bank remains up in the air.
In Bank Negara's 2002 Annual Report, the central bank says it will come up with a concept paper for the establishment of investment banks in the early part of this year. This will be followed by the amendments to the Banking and Financial Institutions Act, 1989 (Bafia) which will be tabled at Parliament this year to facilitate the creation of investment banks.
Not wanting to be caught at the wrong end of the stick like many other brokers, Khatijah is sticking to her guns and waiting patiently. "We must be patient. We want to see what the Investment Bank Act is going to look like before we move," she asserts.
Malaysian Industrial Development Finance (MIDF), a development financial institution with two discount houses to its name, Amanah Short Deposits and Malaysia Discounts was put in a spot after it sold its merchant bank during the first phase of consolidation.
Like the KAF Group, Mohd Sallehuddin Othman, MIDF's chief executive and director, says all MIDF can do now is wait for Bank Negara to define the parameters of an investment bank before it takes the next step.
If the authorities eventually allow for mergers between discount houses and stockbrokers to form investment banks, then both these groups could qualify for an investment banking licence.
Bank Negara hints that money brokers may have to be absorbed into major financial groups, in line with global developments. "We cannot be part of an investment bank, our business focus is different. But perhaps we can be owned indirectly through another subsidiary," says Amanah Butler's Khoo.
While the stand-alone money broking and discount houses wait around, bank-backed institutions are pushing ahead to streamline their various organisations internally. Affin Merchant Bank, for instance, is working on a merger with its Affin UOB Securities and Affin Discount.
CIMB and Maybank, meanwhile, are just waiting for the regulatory amendments to be made before they each integrate their merchant banks with their discount house and stockbroking units. For these groups, laying the groundwork now and getting ahead will to some extent put them ahead on the consolidation curve.
But for the other stand-alone financial institutions, the world certainly seems an uncertain place.