New Strategies to Boost the Singapore Government Securities (SGS) Market

Singapore, 2 May 2000... The Monetary Authority of Singapore (MAS) today announced new initiatives to further boost the growth of the Singapore Government Securities (SGS) market. Speaking at the FIA Asian Financial Markets 2000 Conference held in Singapore this morning, Second Minister for Finance Mr Lim Hng Kiang revealed that MAS will adopt a three-pronged strategy to strengthen the market-making mechanism and improve price transparency in the SGS market.

2   MAS' initiatives to boost the SGS market are :

1. Boosting the repo market

   Recognising the critical role the repo market plays in generating secondary trading activities, MAS will implement the following measures to boost the liquidity of the SGS repo market :

   1. Allow SGS held under reverse-repos by a bank to qualify as minimum liquid assets (MLA) regardless of the tenure and type of counterparty. The amount of SGS held under reverse-repos that can count as MLA will continue to be subject to a maximum of 5% of the bank's liabilities base;
      
   2. Allow offshore banks to engage in SGS repo transactions with non-bank customers as part of their capital market activities;
      
   3. Introduce an SGS repo facility that will be available to primary dealers. For a start, MAS will launch the facility for a fixed pool of benchmark SGS bonds. The benchmark bonds will be auctioned off to the primary dealers via a daily repo auction, with tenure limited to overnight repos. The repo facility will provide another avenue to primary dealers to cover short positions in benchmark issues arising from their market making activities, and make it more attractive for financial institutions to be SGS primary dealers.
      
2. Building larger benchmark issue sizes

   MAS will embark on a focused SGS issuance programme to raise the average benchmark sizes from the current typical sizes of about S$1.5 billion to at least S$2.0 to S$2.5 billion, subject to assessment of market conditions. This is to create larger and more liquid benchmark issues to facilitate secondary trading, and substantially increase total SGS free float from the current S$12.0 billion.

3. Improving price transparency

   MAS will cease performing the role of an SGS broker for primary dealers. This is to allow for the bulk of the SGS trading to be transacted through commercial brokers or through direct dealings between primary dealers, thereby making the price discovery process more transparent and efficient. Bid-ask spreads in the broking market can be expected to narrow with greater participation by primary dealers and secondary market participants.

3   Beyond the above initiatives to grow the SGS market, MAS will continue to look at other areas to broaden and deepen debt market activities in Singapore. This includes the development of asset-backed securitisation in Singapore, and in particular the promotion of mortgage-backed securities and the setting up of a mortgage corporation.

4   Turning to technology developments, Mr Lim acknowledged that rapid advances in electronic-bond technologies will offer tremendous leverage for Asian debt markets to augment their pace of development. Said Mr Lim, "The rapid advances in electronic-bond technologies have led to a proliferation of e-bond trading systems in US and Europe. Asian bond markets, whilst still in relatively nascent stages of development, would not be immune to the e-revolution. Proprietary bond distribution and trading systems in US and Europe will soon find their way to Asia, and it is important for Asian market participants to anticipate these developments."

5   To capitalise on this e-revolution to deepen and strengthen Singapore's debt trading and origination business, Mr Lim revealed that MAS is looking into how to facilitate the introduction of e-bond trading in Singapore . To ensure the development of a sound market infrastructure for e-bond activities, MAS will look into establishing an appropriate regulatory regime for the setting up of cyber bond exchanges here. MAS is also encouraging financial institutions and other dot.com entities to establish e-bond technology and cyber bond trading systems in Singapore.

6   Mr Lim said, "The new initiatives I have shared with you today reflect our efforts to constantly look at ways to boost the growth of Asian financial markets and the Singapore financial sector. We will continue to engage the industry and look at ways to further enhance our capital markets against the backdrop of the improving economic prospects in Asia."

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Appendix 1

List of SGS Primary Dealers

1. DBS Bank
   
2. Overseas Union Bank Limited
   
3. Oversea-Chinese Banking Corporation Limited
   
4. United Overseas Bank Limited
   
5. Keppel TatLee Bank
   
6. Citibank NA
   
7. Bank of America
   
8. Standard Chartered Bank
   
9. The HongKong and Shanghai Banking Corporation Limited
   

Appendix 2

Description of an SGS Repo Transaction

An SGS repo transaction is illustrated above. In a repo transaction, one party (Party B above) borrows cash for a period while delivering SGS to the other party as collateral for the cash loan. This transaction is reversed at maturity. In a reverse repo, one party (Party A above) borrows securities from another party for a period while delivering cash to the other party. This is also reversed at maturity.

Repos are attractive because they offer a way to obtain cheaper cash loans (usually at rates better than that for unsecured cash loans) by using SGS as collateral. Reverse repos are important to the SGS market because it enables investors to borrow specific SGS issues to cover their short positions in these issues.