Date: 13 Aug 1998

MEPS: IMPROVING THE HARDWARE OF THE FINANCIAL SECTOR

1   I am pleased to officiate the launch of the MAS Electronic Payment System. With this switch to MEPS, Singapore joins the developed financial markets that have implemented real time gross settlement systems. MEPS is a significant technological improvement to our payments infrastructure, which will further enhance our financial system, in several ways.

2   First, MEPS reduces systemic risk. Since payments are settled on a gross basis in real time through the day, receiving banks are assured of good funds that they can use without being exposed to the risk of the paying banks defaulting. This minimises the risk of systemic failure resulting from a payment default by a single bank. MEPS also uses state-of-the-art security features such as smart card technology, digital signatures, and public key cryptography to ensure the authenticity, confidentiality, and integrity of payment instructions.

3   Second, MEPS allows banks to manage their payments and liquidity positions more efficiently. Banks can prioritise their payment queues and keep track of their payments and account positions in real time. By conforming to SWIFT message standards and providing an interface with banks' own payments systems, MEPS also allows for the "straight-through processing" of banks' payments.

4   Third, MEPS opens up the possibility for Singapore to participate in a seamless cross-border electronic payments and settlements network, linking us up with other financial centres. Currently, MEPS only provides real time gross settlement for Singapore Dollar interbank payments and delivery-versus-payment settlement for Singapore Government Securities transactions. Over time we can extend its coverage to provide real time delivery-versus-payment settlement for all Singapore Dollar denominated securities transactions. And, if we link MEPS with RTGS systems in other countries, we can move towards a global payment-versus-payment system for foreign exchange transactions. This will help reduce settlement risk in the global system, and enhance Singapore's standing as an international financial centre.

5   By making our payments infrastructure more resilient and efficient, MEPS significantly improves the hardware of our financial sector. MAS is also undertaking a broader review of the IT infrastructure for the financial sector. We have engaged Arthur D Little to take stock of the IT capabilities of financial institutions in Singapore and study how we can exploit IT further to enhance our competitiveness. This study will dovetail with the strategic review of the financial sector by McKinsey & Co.

6   As important as hardware upgrades, if not more important, are improvements to the software of the financial sector. The Government will provide, through its regulations and incentives, the soft infrastructure to enable private sector participants to interact and innovate, to exchange information, strike deals and prosper.

THE POLICY TO DISCOURAGE THE INTERNATIONALISATION OF THE SINGAPORE DOLLAR: IMPROVING THE SOFTWARE

7   One element of this framework of regulations is MAS' policy on the international use of the Singapore Dollar. MAS has a long-standing policy not to encourage the internationalisation of the Singapore Dollar, i.e. the use of the Singapore Dollar outside Singapore for activities unrelated to Singapore's real economy. This is implemented through the Notice to Banks MAS 621, which spells out the specific do's and don'ts which banks have to follow.

8   For some time, bankers and fund managers have told MAS that the restrictions under MAS 621 hinder our development as a financial centre. MAS' comprehensive review of the financial sector also highlighted the relevance of this issue to the development of capital markets in Singapore, particularly the bond market.

9   MAS therefore undertook a systematic study of the non-internationalisation policy, and MAS 621. The aim was to reassess the validity of the policy, and the scope for fine-tuning or relaxing the restrictions, without jeopardising our monetary policy framework.

10   The study has been completed. We have concluded that the basic policy remains sound: that is, we should not encourage the internationalisation of the Singapore Dollar. First, the policy makes it harder to mount a speculative attack on the Singapore Dollar. The restrictions hinder speculators who need to borrow Singapore Dollars in order to short the currency. Second, the policy has impeded the development of an offshore market in Singapore Dollars, beyond MAS oversight and influence. Third, the non-internationalisation policy has an important deterrent effect, signalling MAS' determination not to tolerate speculation in the Singapore Dollar.

11   No restriction can render the Singapore Dollar, or any other currency, completely impervious to speculative attacks. That is impossible in today's global financial markets, with free capital movements and complex derivative products. Our best defence against speculative attacks is Singapore's sound economic fundamentals and a credible exchange rate policy. So long as the Singapore Dollar exchange rate stays in line with changing economic conditions, it will be unattractive for would-be speculators to bet on a major appreciation or depreciation of the Singapore Dollar. Nonetheless, MAS 621 has been a valuable and effective deterrent.

12   MAS has therefore reaffirmed the basic thrust of the non-internationalisation policy. However, the actual Notice, MAS 621, has become outdated. It was last revised in 1992, but since then the economy and external environment have changed significantly. The Singapore economy has grown and matured further, as has the financial sector. We can therefore accept larger capital flows, provided they are proportional to the size and strength of the economy. Furthermore, some judicious relaxation of specific restrictions will foster the development of the capital markets, while minimising the incremental risks.

13   We have therefore decided to issue a new notice, MAS 757, to replace MAS 621. MAS has consulted widely in preparing the new Notice. We have sought the views of local and foreign banks, and other financial institutions who know how the market works and where the opportunities and risks are. It is not easy to achieve the right balance between flexibility and effectiveness, and to craft the requirements to suit actual market conditions, but we have tried.

14   As with many other changes we are making in the financial sector, the new Notice is incremental and evolutionary, rather than dramatic or spectacular. This is a matter of deliberate policy. Caution is especially necessary in a sensitive and vital policy area like internationalisation of the Singapore Dollar. We must not inadvertently create the misimpression that it is now open season for speculation in the Singapore Dollar, especially in the present external environment, where exchange rates of the Asian countries have far from stabilised.

15   The new Notice will contain clearer and more explicit provisions than MAS 621, to minimise the need for banks to consult MAS. We are also widening the limits for allowed transactions, and allowing some activities hitherto forbidden. These changes should create a more conducive business environment for financial institutions.

LENDING SINGAPORE DOLLARS FOR REGIONALISATION

16   One significant clarification is that the restrictions on Singapore Dollar credit facilities for use outside Singapore apply only to non-residents, and not to residents. In practice this is already MAS policy, as MAS has publicly stated several times. But, there is still a wide-spread perception to the contrary, because the text of MAS 621 still requires banks to consult MAS even on loans to residents for use outside Singapore. It was written before we launched the regionalisation drive, and has not been amended. The new Notice will make it clear that banks may extend Singapore Dollar financing to residents for overseas projects without prior consultation with MAS.

17   Many companies operating in the region are run and controlled by Singaporeans, but partly or even majority foreign owned. We will allow such companies to borrow Singapore Dollars for bona fide overseas projects, subject to the condition that they must convert the Singapore Dollar proceeds into foreign currency for use outside Singapore. The Notice will set out clear working guidelines on the amount of Singapore Dollar financing that is permitted. The criteria will include Singaporean management control, sponsorship by MTI or EDB, and the extent of Singaporean ownership in the project.

CAPITAL MARKETS

18   To become a world-class financial centre, Singapore needs to develop deep and broad capital markets. This will attract a broad range of international issuers, investors, and intermediaries. As our domestic economy is small, our capital markets can only grow by listing and trading more foreign equities and bonds. We need to promote the origination, listing, and trading of these foreign securities here.

19   The new Notice will therefore make it easier for foreign entities to list Singapore Dollar denominated shares and issue Singapore Dollar bonds, where the proceeds will be used outside Singapore.

20   Equities. Presently MAS allows foreign companies to list Singapore Dollar denominated shares on SES only if they have OHQ status and have at least 35% of their revenues, profits, or expenses attributable to Singapore. We will relax these conditions.

21   Foreign companies will now be allowed to list Singapore Dollar-denominated shares on SES, subject to consultation with MAS. As an initial working guideline, applications from companies with at least 20% of their revenues, profits, or expenses attributable to Singapore will be approved. Other applications will also be considered, but case-by-case based on their merits. This guideline is still conservative, but we plan to review it periodically, and, if appropriate, relax it further.

22   Bonds. Fixed-income securities are a promising area of potential growth for our financial industry. An active bond market will add breadth to our capital markets, and complement our efforts to develop our equities market. It will offer investors a wider range of liquid instruments to invest in. Bonds will also offer companies an attractive channel to raise capital, including longer-term funds, besides bank borrowing and equity financing. Bonds can be sold to a broad range of investors, thereby diversifying risks in the financial system over the long-term.

23   Bond markets are relatively under-developed in Asia, compared to equities markets. But Asian countries will need to raise large amounts of capital in the coming years. In the short term they need to recapitalise insolvent banks and companies. In the medium term, as their economies recover, they will again be building infrastructure projects, and companies will again need to tap capital markets.

24   Singapore therefore has an opportunity to promote the origination and trading of fixed-income securities, and to develop into a regional hub for the business. The Government will take steps to help seed a vibrant and liquid bond market, and encourage major international players in fixed income securities to site in Singapore.

25   First, MAS is issuing longer term Singapore Government Securities, to extend the yield curve off which other debt issues can be priced. It has just successfully auctioned 10-year SGS bonds in July, and will continue to auction 10-year bonds regularly, to complement the shorter tenor issues.

26   Second, MAS will issue more SGS, to build up the liquidity and depth of the SGS market, beyond the amounts which banks are required to hold as part of their minimum liquid assets. How much MAS will issue will depend on what the market can absorb. MAS will announce a regular calendar of issues through the year, so that the market will know what to expect.

27   Third, statutory boards will issue more bonds to fund infrastructure projects. JTC and PUB have issued bonds in the past, but their borrowing needs are growing and they will be more active in future bond issues.

28   HDB has not tapped the bond markets till now. But HDB will similarly be issuing bonds for its construction and redevelopment programmes once the necessary legislative changes have been made. These bonds will replace development loans which the Government presently extends to HDB at market rates of interest. HDB is also examining the feasibility of securitising its mortgages for issue as high-grade bonds.

29   Preparations are being made for the LTA to restructure its financing mode so that it can tap the bond markets for financing, to be repaid from a suitable future stream of revenues, instead of depending on upfront Government grants. This will not affect the commuting and driving public, as the Government's policies of charging for road usage and subsidising the capital costs of rail projects will remain unchanged.

30   As the HDB and LTA have very substantial projects to finance in the future, their bonds issues will contribute significantly to the diversity and range of fixed income securities available in the market. Such issues will not be done simply to create a debt market. They will also benefit the statutory boards themselves, by enabling them to achieve a more efficient financing structure which matches their development expenditure needs.

31   Fourth, to broaden and deepen the bond market, MAS will allow foreign entities to issue Singapore Dollar denominated bonds, even where the proceeds are to be used outside Singapore. The new Notice spells out the detailed rules for this. I will highlight three of the more important ones.

32   First, MAS will allow, upon consultation, foreign companies and supranational institutions of good standing to issue Singapore Dollar denominated bonds. Approval will be on condition that Singapore Dollar proceeds are converted or swapped into foreign currency for use outside Singapore. This safeguard will limit the development of an offshore market in Singapore Dollars.

33   Second, to promote the development of the market in Singapore Government Securities (SGS), we will now allow non-residents to engage in Singapore Dollar repurchase agreements (repos) in SGS.

34   We can afford to be less strict for repos than other forms of borrowing, because repos pose less risk to our ability to manage the exchange rate. A non-resident borrowing Singapore Dollars through a repo must first obtain the equivalent amount in SGS, which is a Singapore Dollar denominated asset. Repos will therefore not lead to an uncontrolled expansion of Singapore Dollar credit to non-residents, which the non-residents may then use to sell the currency short.

35   For funds managed in Singapore, banks may, without consultation, transact Singapore Dollar repos of up to S$20 million with non-bank non-residents. Repos of more than S$20 million may also be allowed, but banks will need to consult MAS. As a safeguard, we will require ex post reporting of all repo business done with non-residents.

36   Third, to support the development of a mortgage-backed securitisation market in Singapore, we will allow banks to transact Singapore Dollar currency swaps and interest rate swaps with Singapore-incorporated Special Purpose Vehicles, as long as the proceeds are for the express purpose of securitising mortgages of financial institutions in Singapore.

CONCLUSION

37   MAS will issue today the new Notice MAS 757, setting out the revised implementation of MAS' policy on the internationalisation of the Singapore Dollar.

38   We do not plan to change our policy on the non-internationalisation of the Singapore Dollar in the foreseeable future. As a small and open economy, we cannot afford to have our currency subject to manipulation or speculation. Even if the attacks ultimately fail because of our sound fundamentals, they may still do us considerable harm.

39   But so long as the stability of the exchange rate is not compromised, the actual implementation of the non-internationalisation policy will continue to evolve as we gain experience with the new rules, and as our financial sector and capital markets grow and develop. The provisions in the new MAS 757 are therefore not final or permanent. MAS will review them after one year, in the light of practical experience.

40   In contrast to these changes to the soft infrastructure of the financial sector, we can afford to be bolder in upgrading the hardware of our financial sector. Up to date technology and systems will enhance Singapore's competitiveness as an international financial centre. MEPS will make our payments infrastructure more efficient and robust, and facilitate our integration into the global financial system. It is my pleasure, therefore, to officially launch the MAS Electronics Payment System.