Speech by Mr Koh Yong Guan, Managing Director, Monetary Authority of Singapore, at the Singapore Exchange

Date: 17 April 2002

Ladies and Gentlemen,

Introduction and Launch of STI ETF

1   May I first extend my congratulations to the Singapore Exchange ('SGX') and State Street Global Advisers, and the various Participating Dealers and Market Makers, on the official launch of the "streetTRACKS^SM STRAITS TIMES INDEX FUND" (the "STI ETF"). 

2   In the past 12 months, SGX has brought a number of significant new initiatives to the Singapore market.  These include the establishment of the SGX-ASX link for trading of stocks listed on SGX and the Australian Stock Exchange, an organised securities borrowing and lending facility, and the introduction of new products such as Single Stock Futures, Singapore Government Bond Futures, and the Amex' -listed exchange-traded funds.  This impressive list of innovations attests to SGX's progress in developing into a premier securities and futures exchange. 

3   Last year, SGX, in partnership with The American Stock Exchange, launched the trading of exchange-traded funds (ETFs) such as the SPDRs, Diamonds and iShares in Singapore.  This brought to the Singapore capital markets another innovative product to add to the diversity of cash, futures and derivatives products available at SGX.  Today, we welcome the introduction of an important addition to the ETF family at SGX, the STI ETF based on the Straits Times Index.  The STI is commonly regarded as the barometer of the Singapore stock market, closely followed by both professional and retail investors alike. Anyone who invests in equities in Singapore will potentially find interest in this new ETF.  The STI ETF will enhance SGX's status as the gateway for international investors to access exchange-traded Asian financial products.
 

4   While SGX has been innovating to create a world-class capital market infrastructure, MAS' work on the broader capital market reforms in Singapore has been proceeding apace.  The Securities and Futures Act  ['SFA'] and Financial Advisers Act ['FAA'] were enacted in October last year.  MAS has since consulted the industry on the Regulations and Guidelines that implement the Acts. 

I would like to inform you about two specific regulatory initiatives that MAS will implement in the Securities and Futures Regulations, which will be of particular interest to most people here.  They are the Risk-Based Capital Framework for SGX member companies and the new licence fee structure for intermediaries and representatives under the SFA.

Risk-Based Capital Framework

5. First, the risk-based capital (RBC) regulatory framework for securities dealers and futures brokers who are members of SGX.

6   At the launch of SGX in December 1999, Chairman MAS, DPM Lee Hsien Loong, announced our intention to introduce a risk-based capital framework.  This is in line with our shift to a risk-based supervisory approach.  The new RBC framework will replace the existing Adjusted Net Capital regime with a more dynamic, risk-focused method of determining capital requirements.

7   I am pleased to announce that MAS and SGX will shortly introduce the new RBC framework for SGX members.  The RBC framework is the result of a 2-year long collaboration between MAS and SGX, and extensive consultation with stockbrokers and futures brokers.  Both SGX and its members have been very supportive of the endeavour, contributing invaluable inputs and feedback to the crafting of the new framework.   

8   The RBC framework will be a single, harmonised structure for SGX members, both stockbrokers and futures brokers.  Under the framework, an SGX member needs to meet two capital requirements: a common minimum dollar requirement depending on whether you are a clearing or non-clearing member; and a risk-based financial resources requirement, depending on the specific risks that you assume.

9   The common minimum capital requirement will be much lower than the existing paid-up capital requirement.  Currently, stockbrokers (SGX ST members) and futures brokers (SGX DT members) are subject to minimum capital requirements of $15 million and $5 million, respectively.  This difference will be removed.  Members will be differentiated by their clearing status under the new RBC regime.  A clearing member will maintain a minimum capital of $5 million, while a non-clearing member, $1 million.  This holds irrespective of whether the member is trading stocks or futures.  Companies that are dual clearing members will maintain a higher minimum capital of $8 million.  This differentiation reflects the inherently higher risks in clearing operations and, consequently, the greater need for financial resilience for clearing members.     
 
10   The second requirement, a financial resources requirement, requires SGX members to hold specific capital for specific risks assumed by the members.  Risks that will attract capital are counterparty risk, position risk, large exposure risk, underwriting risk and operational risk.  The capital efficiency of individual SGX members will be enhanced, as their regulatory capital requirements will be more directly related to the risks arising from their business activities.  The greater alignment of financial resources to firms' business risks also better serves our regulatory objectives. 

11   Quantitative testing undertaken by MAS and SGX, using data provided by SGX members, shows that the aggregate capital requirement for SGX stockbroking members will come down significantly under the new framework.  This reduction is estimated to be about 20% of their existing aggregate shareholders' funds.  The more risk-sensitive nature of the RBC framework may also lower the amount of excess capital that members need to keep as a buffer in catering to growth in their existing businesses or the assumption of new risks.  This enhanced efficiency is achieved without compromising regulatory effectiveness, as the RBC framework is more risk-sensitive and results in more appropriate capital charges for business risks undertaken by SGX members.

12   For SGX futures members, the aggregate capital requirement remains largely unchanged.  Individual members can expect differences in their new capital requirements, as this will depend on the risk profile of the activities undertaken by each individual member.

13   The RBC regime is benchmarked to international best practices, and has been tested with actual data from SGX members.  We will further build up our local experience over the next 12 to 24 months and assess the need for further refinement to the framework.

14   To facilitate a smooth migration to the RBC framework, SGX members will have 12 months to switch to the new capital regime.  Details of the RBC regime will be released together with the rest of the Securities and Futures Regulations, at the end of June.

Introduction of New Fee Structure

15   The second initiative that I would like to mention today is the new fee structure for intermediaries under the SFA.

16   Under the SFA, a single Capital Markets Services licence will be issued to intermediaries for the various regulated activities they engage in.  These regulated activities are: dealing in securities; trading in futures contracts; leveraged foreign exchange trading; advising on corporate finance; fund management; securities financing and providing custodial services for securities.  Licence fees will be levied on each activity undertaken.  The amount of licence fees payable by a corporate licensee will therefore correspond to the types of regulated activities it undertakes.

17   I will now describe how the modular fee structure works.  An SGX member who only deals in securities will pay an annual licence fee of $8,000 under the new fee structure, compared with the existing fee of $15,000.  If the member also trades in futures contracts, it will have to pay an additional annual fee of $2,000 for conducting futures broking activities.  Add on fund management and corporate finance advisory activities, and the member will pay a further $4,000 for each activity.  The rest of the regulated activities will attract a licence fee of $2,000 per activity.  A typical full-service stockbroker that trades in shares and futures, and provides securities financing and custodial services will pay an annual fee of $16,000, compared with $16,200 presently.

18   Representatives of stockbrokers will pay an annual fee of $800.  Representatives who engage in other regulated activities will pay a fee of $300.  This is a flat fee, regardless of the number of regulated activities that a representative is involved in.  A representative of a typical full-service stockbroker will pay a flat annual fee of $800, compared to $1,100 presently.  Those representatives who are engaged solely in futures broking will pay $300, compared to their existing low fee of $100.

19   The new fee structure has been formulated to be consistent with the modular licensing framework.  Companies engaging in more activities pay fees according to the number of activities they engage in.  The fees take into account the supervisory efforts related to the various regulated activities.  A few licence holders may have to pay higher licence fees, as in the case of some futures brokers.  In these cases, we have made sure that the increases are moderate and reasonable.  The fee revisions, as a whole, are not expected to impose further regulatory costs to the industry.  They are expected to have a neutral impact on MAS' capital markets fee revenue.

20   Ladies and Gentlemen, in concluding here, l like to wish SGX, State Street and all Participating Dealers and market makers success in the trading of the STI ETF.

21   Thank you.