"Developing Singapore as one of Asia's Premier Financial Centres - Building the Treasury, Capital Markets and Asset Management Industries"
Speech by the 2nd Minister For Finance, Mr Lim Hng Kiang, at the 25th Anniversary Dinner of the Singapore Financial Markets Association, Westin Plaza Hotel,13 Nov 1998
Mr Ronny Tan, Chairman SFMA;
Mr Heering Ligthart, President of ACI - The Financial Markets Association;
Ladies and Gentlemen
Overview of the Treasury Industry
I am pleased to join you this evening for your silver jubilee dinner. In the 25 years since the Forex Association was founded, Singapore's foreign exchange market has undergone tremendous growth and development. According to the latest BIS survey, the average daily volume of foreign exchange trading in Singapore, on a "net" basis, reached US$139 billion in April this year. This is a 32 % increase since April 1995. Singapore has not only maintained its ranking as the world's 4th largest foreign exchange centre, but has also significantly narrowed the gap with 3rd-placed Tokyo. In addition, the average daily trading volume of foreign exchange derivatives has grown by a remarkable 228 % over the same three-year period, as reported by the BIS survey. Clearly, banks in Singapore have made much headway in expanding their capabilities in options and derivatives to meet the needs of increasingly sophisticated global investors.
2 Along with the rise in trading volumes, the profitability of the treasury business in Singapore has also improved. The latest MAS survey of treasury activities shows that 1997 was an exceptional year. Total revenue leapt almost 70% over the previous year to a record S$4.6 billion, while total treasury profits doubled to S$3.1 billion. 1998 promises to be an equally good year for the industry. Increased market volatility in recent months may be a cause for some concern. But revenue for the first half of this year was already more than half of last year's. These are very commendable achievements which should provide a strong boost to Singapore's drive to be a premier global financial centre.
Further Opportunities for the Treasury Industry
3 While the treasury industry can be pleased with its stellar performance in 1997 and the first half of this year, there is no room for complacency. These are bracing times that we live in. The Asian financial crisis has left ravaged economies and crippled financial systems in its wake. Even the US has not been left unscathed, as shown by LTCM and other hedge fund failures. As a result, global risk-taking appetites have shrunk.
4 Notwithstanding these potential challenges, the treasury industry should turn adversity to advantage. For example, "credit risk" is now the watchword. So, with the inefficiencies in the credit markets and increasing disintermediation of credit risk, the global market for credit derivatives has grown by leaps and bounds in the past few years.
5 Most of these activities are currently centred in London and New York. Singapore can link in as the Asian hub for credit derivative products and trading by building on the thriving foreign exchange and other existing derivatives markets here. To achieve this objective, treasury professionals here should upgrade their skills to provide such products. Banks should give attention to upgrading through in-house programmes and the import of experts to catalyse this process. I am glad to note that the SFMA has taken the initiative to organise an intensive and practical course on financial derivatives analysis for its members.
6 Given the volatile nature of the credit and foreign exchange markets as well as the drive towards cost reduction and improved risk management, the trend is for companies to centralise their cross-border treasury and cash management operations. With about 5,000 MNCs operating here, Singapore is well positioned to be the regional centre for these corporate treasuries. The treasury industry should work closely with corporate treasurers in offering a wider range of services to facilitate sound treasury management and to provide technology infrastructures necessary for today's increasingly complex environment. In this way, both the treasury industry and the corporations will further develop relevant expertise.
7 The impending European Monetary Union also presents many opportunities for the treasury industry. In the longer term, the most important consequence of monetary union would be the development of deep and efficient Europe-wide corporate bond and commercial paper markets. Already, there has been a major increase in ECU-denominated issues, with issuance estimated to have risen by more than six times in the first nine months of this year, compared with the same period last year. The introduction of the Euro is also expected to speed the disintermediation of the banking system as corporations shift their borrowings from their relationship banks to the bond markets. The treasury industry must develop new expertise to meet the higher demand for Euro products from portfolio managers, corporations and official institutions in this region, either for investments or for raising funds.
Development of Capital Markets
8 MAS is pushing ahead with initiatives to develop the financial sector. Our debt market development initiatives have generated encouraging response. International Finance Corporation was the first supranational to issue Singapore dollar denominated bonds here last month. We understand that it is already considering the launch of two or three more Singapore dollar bond issues in the coming year. We have also encouraged government agencies to issue bonds as an alternative source of funding. HDB and JTC have announced plans to issue S$2 billion worth of bonds and a S$4-billion medium-term note programme respectively over the coming months to finance their projects. The LTA also plans to issue debt in the near future. To facilitate increased retail participation in the bond market, the CPF Board has approved the inclusion of bonds issued by statutory boards as an additional investment instrument under the CPF Investment Scheme.
9 The growth of Singapore's financial sector requires close Government and private sector partnership. I commend the SFMA for its efforts in this area. Some members of the SFMA have taken the initiative to form a pro-tem Debt Market Working Group. This Working Group has played an important role in identifying issues and opportunities in the development of the debt market here. Its members have been most generous in volunteering their time to serve on this committee. An industry group should now be established to facilitate continued feedback and development of the industry.
10 In the equity markets, our plans to demutualise our exchanges, merge them into a single integrated exchange, open access and free commission rates will significantly boost Singapore's efforts to become a premier equity centre in the Asian time zone. The new exchange will be more robust and flexible, and be in a stronger position to develop a range of products that will position Singapore as a leading Asian centre for the trading of both cash equities and derivatives.
11 SIMEX already trades successful Japanese and Taiwan equity index futures contracts. It recently launched a Singapore index futures contract and a Thai stock index futures product. It plans to relaunch its Hong Kong index futures contract, after making improvements to the old contract. All this reflects its determination to provide investors with a comprehensive range of Asian offerings on the most competitive terms.
12 SIMEX's achievements as an international derivatives exchange have been underpinned by its framework of sound regulations, vigorously enforced. SIMEX aims to preserve market integrity and protect customers' interests at all times. Its system of prudential regulation and financial safeguards is well recognised in the futures industry as being of the highest international standards, and certainly among the most stringent in Asia.
13 Singapore has traditionally been known as a financial centre where rules are stringently, and sometimes too rigidly, enforced. Over the last year, Singa-pore has been trying to change its reputation, and its methods, but has made plain its intention to maintain its high prudential standards.
14 I am therefore puzzled that SIMEX's plans to relaunch its Hong Kong index futures contract should have triggered concerns in Hong Kong over the danger of lax regulatory standards in Singa-pore. The trading of the Hong Kong Index Futures on SIMEX will add depth and liquidity to the market for the contract. Competition between exchanges in Hong Kong and Singapore can only benefit both. It will sharpen the performance of both, and enable them to provide better service to investors and traders, whether they do business in Singa-pore or Hong Kong.
15 The Hong Kong Futures Exchange and SIMEX, both internationally-minded exchanges, have acknow-ledged this. The South China Morning Post of 11 Nov quoted HKFE CEO Randy Gilmore saying that the HKFE will meet the challenge from SIMEX head on and win it; that it will have to take a more aggressive marketing stance for new products as well as existing products; that the HKFE shared SIMEX's "predatory" aspirations; that "the folks in Singapore have the same objective as every other exchange in the world, which is to grow the market as big as they can."
16 This is a sound basis for healthy market competition. I am sure SIMEX is looking forward to the challenge. There is no reason for such friendly rivalry to affect the traditional warm ties between the two economies.
Placement of S$10 Billion of MAS Funds to Further Develop the Asset Management Industry
17 The MAS has set out a bold and realisable vision for the asset management industry. Our aim is to make Singapore a premier asset management centre in Asia, managing both the Asian mandates of global clients as well as the global mandates of Asian clients.
18 To help develop the asset management industry, it was announced in February that GIC would place out S$25 billion to fund managers over the next three years. Indeed, between January and September this year, GIC has granted mandates worth S$6.5 billion to external fund managers. This evening, I am pleased to inform the industry that MAS itself also intends to place out funds for private sector fund managers to manage. As a start, MAS will farm out S$10 billion over the next three years to qualifying fund managers of good proven track-record and who show commitment to developing the asset management industry in Singapore. We will measure their commitment by the amount of additional funds they bring to manage here as well as their plans to build up their locally-based fund management expertise. Together with the GIC funds, this $10-billion contribution from MAS will help to ensure a steady flow of funds to be managed by the private sector. These funds will act as seed money to encourage existing fund management companies to continue to grow in their operations as well as attract other fund management companies to set up offices in Singapore. This increase in the critical mass of investors here will mean more business for the various financial services that Singapore offers.
19 Ladies and gentlemen, despite the challenges facing the financial sector, the Government is pushing ahead with various initiatives to further develop the industry.
20 Apart from these initiatives, we recognise that intellectual capital is a critical component in developing the financial sector. The Government's policy of attracting good foreign talent that can encourage cross-fertilisation of ideas and generate high-level skill transfer also applies to the financial sector. This will underline Singapore's international appeal as a place to do cross-border business. DPM Lee announced the establishment of a Financial Sector Development Fund at the SES 25th Anniversary dinner last week. MAS will look at how a part of this fund could be used to support industry training and acquisition of new capabilities.
21 The measures which the Government has put in place will need the private sector's support in order to drive the industry's future growth. Close Government and private-sector partnership is critical. This partnership is clearly demonstrated in the development of Singapore's treasury industry.
22 Looking ahead, I am confident that our pro-business approach and our efforts to adopt the best practices in market supervision will enable us to achieve our vision of making Singapore Asia's premier financial centre.
23 I wish you an enjoyable evening. Thank you.