42nd ACI World Congress - Singapore 2001 Embracing Change in Global Treasury Markets
Opening Remarks by Mr Lim Hng Kiang,
Minister for Health and Second Minister for Finance,
on 24 May 2001 at 7.30pm, Welcome Cocktail Reception,
The Grand Ballroom, Ritz-Carlton Millenia Singapore Date: 24 May 2001
Mr Heering Lighthart, President, ACI
Mr Mervyn Fong, President, ACI - Singapore
Distinguished guests, ladies & gentlemen.
I am pleased to be here this evening to address you at the opening reception of the 42nd ACI World Congress. Singapore is proud to play host once again to this eminent gathering of treasury and financial markets professionals. I would like to take the opportunity to extend a warm welcome to all delegates.
Global Forces at Work
2 The theme for this year's gathering - "One Financial World" is very appropriate. The financial industry is a global industry. Technology and competition has also led to extensive consolidation in the industry. Technology is transforming the way financial activity is being conducted and is rapidly altering trading patterns in the US$1.5 trillion a day foreign exchange market.
Impact of Technology
3 More sophisticated instruments such as derivatives are increasingly being traded online. Today, e-trading is no longer confined to single dealer systems but has evolved to encompass multi-dealer systems which give direct electronic access to a wider range of participants, including corporate treasury departments, hedge funds, independent foreign exchange traders and even retail investors.
Financial Institutions Entering the Fray
4 The leading foreign exchange players have reacted swiftly and entered into alliances to set up multi-bank platforms such as Atriax and FXall. Motivated by a combination of the benefits of automation and the threat of losing market share, they are keen to seize the initiative and pool together. Competition is intense. The market buzz is "cannibalise or be cannibalised".
5 Many are convinced that online trading would quickly replace traditional voice trading. This is not surprising considering the rate at which these automated trading portals are proliferating. According to the US research company, Tower Group, as much as 75% of total global foreign exchange trading may be done electronically by 2002.
Advantages of E-Trading
6 The development of electronic trading will inevitably bring about a number of significant changes. Firstly, electronic trading will lower trading costs and increase market efficiency. Secondly, transparent pricing will further increase market competition and depress FX margins. Thirdly, clients of financial institutions will benefit from more competitive prices, increased liquidity and improved information flows.
7 The migration to e-trading also implies that treasury professionals too have to "re-invent" themselves and move up the value chain. They have to engage in more complex structured products that cut across fixed income, foreign exchange, equities and money markets rather than purely foreign exchange transactions.
8 The treasury industry, especially the traditional FX industry, has undergone tremendous consolidation, both across and within financial institutions. The numerous mergers amongst institutions have resulted in consolidation of their treasury operations. Many institutions are downsizing their trading teams in smaller centres and concentrating their trading and risk management in the major global centres.
9 The traditional FX market is increasingly divided into 2 segments: a group of global players who focus on achieving economies of scale; and a group of smaller, regional banks who will concentrate on niche areas. Institutions are focussing on structured and exotic products for higher margins. Major financial conglomerates will now enjoy the advantage of seeing mergers and acquisitions that affect the market and can use their balance sheets to pull off mega deals.
Towards Reducing Settlement Risks
10 The "One Financial World" theme extends beyond trading activity and platforms to global clearing and settlement initiatives, such as the Global Straight Through Processing Association (GSTPA). GSTPA was driven by investment managers and included brokers/dealers and global custodians. GSTPA seeks to accelerate the flow of cross-border trades information, reduce the number of failed cross-border trades and lower the risks and costs of cross-border trade settlements.
11 Another initiative that is currently being developed is the Continuous Linked Settlement (CLS) system to settle foreign exchange transactions on a Payment-vs-Payment (PvP for short) basis. Expected to go "live" in October this year, the CLS system seeks to create safer capital flows through the elimination of settlement or what is commonly known as Herstatt risk and promote better management of risk. Such developments are to be encouraged as they would eventually minimise risks in financial markets.
Re-Examining Singapore's Role
12 Singapore has also been affected by the global slowdown in foreign exchange activity and consolidation in the industry. However, our initiatives to develop the financial industry has generated new opportunities for the local treasury industry. Financial institutions in Singapore have reacted to market demand by moving up the value chain of products and introducing a wider range of structured products such as credit derivatives, asset-backed securities and other asset-liability management instruments.
Singapore's Action Plan
13 Singapore will seek to grow the customer base for the treasury industry by attracting more multi-national corporations and other corporates to establish their regional treasury centres here, and encouraging fund managers in Singapore to conduct currency overlay activities. We will upgrade the professionals in the entire value chain of the treasury industry in Singapore. This includes the structurers, researchers, traders, risk management and clearing/settlement professionals. We will reinforce our strengths and further increase the effectiveness of our operating environment.
14 The financial industry is facing unprecedented changes. How to meet the challenge of these changes would keep you engaged over the next couple of days. I wish you a successful and fruitful conference.
15 Thank you.