Published Date: 15 February 2001

"Challenges Ahead For The Singapore Debt Market"

Opening Address by Mr Koh Yong Guan, Managing Director, Monetary Authority of Singapore (MAS) at The DBS Singapore Dollar Bond Conference 2001

Date: 15 Feb 2001

Good morning, ladies and gentlemen,


I thank DBS for inviting me to this inaugural Singapore Dollar Bond Conference .

2   Since 1998, when MAS first began to actively develop the bond market, it has taken off in ways that have exceeded most people's expectations. Our bond market now offers more opportunities today to both issuers and investors than it has ever done in the past. Let me first give a quick review of how the bond markets in Asia, including Singapore, have developed over the past three years.


3   MAS had identified, as part of our financial sector review, the debt market as one area for further development in our financial sector. The Asian financial crisis of 1997/98 had exposed many structural weaknesses of the economies in the region. The crisis made it clear that countries needed to develop their capital markets to diversify funding sources and reduce their dependence on bank lending. Our decision to target the debt market as an area for development could not have been more timely.

4   As a result, we have seen significant growth in the bond markets in Asia over the past three years. Bond markets in countries such as Thailand and Korea have liberalized and grown to become much deeper and broader, allowing greater investor access. The growth in the bond markets has helped Asian countries reduce their reliance on short-term foreign capital inflows. It has also provided an additional source of funding for the large-scale financial sector recapitalisation and corporate restructuring that crisis-hit Asian economies have had to undertake and are still on-going.

5   This is a positive development. In time, Asian corporates would get back on their feet and embark on new growth strategies that will need financing. A vibrant Asian debt market would offer borrowers a viable alternative source of funds, and bond financing would provide companies with much needed long-term funding.


6   In Singapore, MAS has taken a significant number of policy initiatives in the last few years to facilitate the growth of the debt market taking account feedback from the market players. All of you would have been familiar with what we had done. More specifically, in order to develop a liquid and efficient government bond market, we had adopted a focused issuance programme aimed at building large and liquid benchmark issues. Average issue sizes of new SGS benchmarks now range between S$ 2 - 2.5 bn. In the latest 5-year auction, a new benchmark size of S$3.4 billion was established in response to market demand. To complement the issuance programme, MAS also carried out its first SGS repurchase programme in November last year. This aimed to re-channel liquidity from off-the-run issues into larger and liquid benchmark bonds.

7   The results have been encouraging. The SGS market has grown at an average rate of over 20% since 1998. Average daily turnover in 2000 has also risen 60% from 1999 to over S$800m.

8   The repo market has also taken off. Repo market volumes doubled in 2000, with the introduction of a repo facility for primary dealers, and with MAS using repos more actively as part of its money market operations. As the market deepens and becomes more liquid, we expect both the number of players and activity in the repo market to further increase. To bring our market in line with international standards, we are also encouraging the adoption of the widely used international repurchase agreement, the PSA - ISMA Master Repurchase Agreement, by market players here. This should facilitate the entry of more foreign players into the repo market. For our part, MAS has already adopted this agreement in relation to repo trades with our counterparties.


9   The corporate bond market has also fared well. With the liberalization of our S$ non-internationalisation policy and a liquid benchmark curve to price off corporate issues, activity in the corporate bond market has picked up. Statutory boards, GLCs, as well as foreign issuers have been able to tap the market. The market is now open to all foreign issuers, rated or unrated. There is also no minimum issue size requirements to tap the market.

10   Our recent Corporate Debt Market Survey 2000 has shown that the total amount of debt securities in 2000 increased by 161% over 1999, from S$19.3bn to S$50.4bn. Non-S$ issuance accounted for about 70% of the total issuance. Average issue sizes have also increased, which is a positive step towards development of greater liquidity and trading in the secondary market. Total amount of non-S$ issuance in 2000 has increased by 250% from S$10.3bn in 1999 to S$36.1bn in 2000. S$ issuance has also increased 55% from S$9.2 bn to S$14.3 bn.

11   Notably, the issuer base has diversified. In 1998, property companies were the dominant issuers in the SGD debt market. Now, there is a good mix of credits in the market, including statutory board / GLCs, foreign entities and financial institution issuers.

12   The range of products offered in our debt market has also widened. Issuers have increased in sophistication, and have begun to move beyond the plain vanilla straight bond issues when tapping the market. As our Corporate Debt Market survey shows, the volumes of asset backed securitization and derivative transactions such as CBOs/ CLOs have increased by 68% since 1999. Total volume amounted to S$4.2bn last year.


13   Many of the basic building blocks to establish the Singapore bond market are now in place. While the results have been encouraging thus far, MAS' work is by no means complete. We continue to face two main challenges: that of improving secondary market liquidity, as well as the task of enlarging the investor base in the debt market. Let me elaborate.


14   Liquidity in the SGS market has improved significantly, largely due to the commitment and market making efforts of our primary dealers. We are pleased that two new banks have decided to become primary dealers in the past year, and hope that more will come on board to further contribute to the development of the SGS market.

15   To further improve secondary market liquidity, especially in the corporate bond market, three immediate tasks loom ahead:- (1) foster a liquid swap market and cultivate a stable base of market makers; (2) to provide the market with a means to hedge their risk exposures; (3) to improve infrastructure conducive to market development.

(A) Fostering a Liquid Swap Market

16   Fostering a liquid swap market is one important aspect of developing secondary market liquidity in the wider bond market. An illiquid swap market impedes competitive pricing and structuring of bonds, hence constraining the development of the bond market. For an active swap market to develop, the number of participants, including market makers must increase. To allow this to happen, we have decided to liberalize in the following areas :-

  • First, in order to encourage a greater level of participation, we will further open the S$ swap market to offshore banks in Singapore that are keen to engage in swap transactions with non-banks. Currently, such banks are restricted in terms of purpose and value of the swap transactions. We will now lift these restrictions with effect from 1 March 2001.
  • Secondly, in 1999, we had announced that banks were no longer required to set aside reserves for S$ received from swaps with non-banks of more than 1 year in maturity. We have reviewed this and, in line with further liberalization, we would like to announce that banks no longer need to set aside reserves for S$ swap transactions with non-bank FI and corporates that are of less than 1 year maturity. This will take effect from 1 March 2001 as well. This will enable an efficient and level playing field for swap transactions between banks and non-banks such as the securities houses, insurance companies and other corporates. Where market conditions allow, banks will also find it easier to bring shorter-dated transactions to the market with this liberalization measure. We trust that banks will, at all times, adhere to the spirit of the regulatory reserve requirements, and not accept S$ deposits from non-bank customers via foreign exchange swaps.
  • Finally, we would like to further clarify that securities dealers licensed under the Securities Industry (SI) Act are allowed to engage in financial activities/transactions that are not incidental to their securities dealing business and where the underlying instruments are not securities. These would include activities such as swaps and credit derivatives etc. Securities dealers are only required to inform MAS if they engage in such activities/transactions. If these activities do not require licensing under our current law, MAS will monitor these activities in line with our risk-based supervisory approach. Where necessary, to meet prudential concerns, companies would be required to ensure that adequate capital and risk management systems are in place. However, for activities that require licences under our current regulations, securities dealers would have to apply for the required licence(s) in addition to the dealer's license that they hold, unless otherwise exempted. We hope that with this clarification, securities houses will be able to play a more active role in the development of the swap market in Singapore.

(B) Providing Players with Hedging Mechanism

17   We will also explore other measures to facilitate liquidity in the secondary market. This includes providing players with hedging mechanisms to manage their risk. To this end, we will work to further develop the futures market.

18   In September 1999, SIMEX (now SGX's Derivatives Trading division) launched a short-dated S$ interest rate futures contract. With the support of market makers in the recent months, this contract has traded fairly actively. Since then, industry participants have suggested that an SGS futures contract of a longer duration would be key to boosting liquidity in the secondary market. SGX has taken cognizance of this and is consulting industry players to examine the feasibility of launching such a contract. Thus far, feedback from market participants has been encouraging. Subject to market players' commitment to support the trading of the instrument, SGX may launch an SGS Bond Futures contract around mid-2001.

(C) Improve Market Infrastructure

19   The trend toward electronic trading of bonds gathered momentum in 2000. The Bond Market Association (BMA) reported that there are six times as many systems for institutional electronic bond trading as there were just three years ago. In Singapore, we have seen similar interest grow, and have witnessed a proliferation of e-bond platforms here. We need to keep in pace with financial innovation and ensure that we have the necessary market infrastructure to compete. E-bond trading would contribute to greater price transparency and liquidity of the market. We will continue to encourage the FIs and other internet companies to use Singapore as a base for its e-bond technology and business.


20   We recognise that having a deep and broad investor base is an important ingredient to the success of our bond market. To cultivate a wider investor base, we would (1) continue our efforts to grow the fund management industry in Singapore and raise the profile of the Singapore bond market amongst foreign investors and (2) cultivate an awareness of bonds as an alternative avenue of investments amongst our domestic investor base. We would also continue to ensure that our regulatory framework is conducive for the bond market to develop.

(A) Growing our Fund Management Industry

21   Concerted efforts have been made to attract foreign fund managers to Singapore in order to grow the investor base here. GIC and MAS have continued their respective exercises to outplace funds to external asset managers. To date, MAS has placed out S$8bn of the total S$10bn total funds earmarked for outplacement. The liberalization measures introduced by CPF are estimated to add around $35 billion to the investible pool of funds in Singapore. All these initiatives, aimed at developing the asset management industry, will also fuel the growth of our debt capital markets.

22   Fund managers are seeing the merits of managing fixed income investments from Singapore. Results from the Survey of the Asset Management Industry support this fact. As at end-1999, fixed income investments by fund managers in Singapore amounted to S$26.9bn, up from S$17.6bn as at the end of 1998. This upward trend in fixed income investments by fund managers in Singapore is likely to continue. More international fixed income specialist managers have also established investment operations in Singapore while incumbent fund managers have beefed up their operations here.

(B) Cultivating Awareness amongst the Wider Investor Base

23   In addition to fund managers, the banks and insurance companies who currently form the bulk of the investor base in the fixed income market in Singapore. There is still much potential amongst statutory boards, GLCs, the financial treasury centres of the MNCs based here and even the retail market, to play a more active role in the debt market. It is important to increase the awareness of bonds amongst both our institutional and retail investors as an alternative instrument of investment.

24   To foster the familiarity of bonds as an alternative investment instrument, the Singapore Investment Bankers Association (SIBA) will be organizing an inaugural Bond Investment Fair for the retail investors this year. We are encouraged that industry bodies are accelerating their efforts to promote the bond market to a wider range of investors, including the retail public.


25   We recognise the importance of a progressive regulatory framework to market development. In line with the rapid expansion of asset securitization and credit derivatives market in US and Europe, Singapore has also refined our regulatory framework to cater for such new developments in the capital markets arena. Guidelines addressing capital treatment for banks dealing in credit derivative products such as the credit default swap, the total return swap and the credit-linked note have been introduced. Guidelines for banks dealing in asset securitization transactions have also been introduced.

26   Going forward, we will be setting out the regulatory treatment of collateralised debt obligations (CDOs) and look to issue guidelines in the near future.

27   By keeping our regulatory framework up to date, we hope to clear the way for market participants to fully exploit opportunities available in the market.


28   The Singapore debt market has grown beyond the expectations of many since its inception in 1998. Nonetheless, there is still much work to be done. We will continue to liberalise the banking industry, adopt measures that will promote greater trading and liquidity in the secondary market, while cultivating a wider investor base for bonds. MAS will carry on working closely with the industry to foster conditions conducive to the development of the debt market.