Distinguished Guests, Ladies and Gentlemen.

It gives me real pleasure to join you tonight at the ACI Singapore's Annual Gala Dinner.

2   ACI Singapore was formed almost 30 years ago, in 1973, when it was known as the Forex Association of Singapore. Its long track record signals its relevance and value to the financial industry. The Association continues to play an important role in representing market participants and in educating the financial community. Members of ACI Singapore have also been very active in growing the industry and providing valuable feedback to the authorities on regulatory and developmental matters. It is also a great fraternity. Many of the most seasoned names in the financial industry have been associated with the ACI through the years.

The Financial Landscape

3   We have forged ahead with our financial sector reform initiatives over the last five years, in banking and insurance, asset management, the capital markets, and in S$ internationalisation. We have done so in a difficult environment, but have seen encouraging progress. Deregulation has led to a keen focus all around on risk management, on disclosure, and on market discipline. There has also been a general shift up the value chain of the financial industry, towards more complex, customer-centred and higher value products and services. And some segments of the financial industry have grown rapidly, even as overall business conditions have remained muted.

4   The asset management industry has been growing steadily, with funds under management doubling from S$150 billion at end-1998 to S$300 billion at the end of last year. We saw an influx of new players and a greater diversity of fund managers. The MAS' measures to free up and develop the debt market have also yielded encouraging results. Over the last five years, the Singapore Government Securities (SGS) market has seen daily turnover increase six-fold. The SGS market now serves as a liquid benchmark and has played a pivotal role in the development of the corporate bond market. The total volume of corporate debt issuance has grown to S$72 billion in 2001, a seven-fold increase over four years. Debt issuance has fallen this year, reflecting reduced corporate M&A activity and lesser needs for corporate funding amidst slow economic growth. However, the S$ bond market is now a key feature of the financial markets, providing a cost effective alternative to borrowers looking to raise long-term funds.

5   The equity business has not fared as well as the debt markets. The reasons are principally global. The deflating of the dot-com bubble in the US and elsewhere, the world and regional economic slowdown, and investor nervousness in the light of major corporate scandals and the prospects of a war in Iraq, have kept stockmarkets under a pall. New equity issuance has fallen off, most dramatically in the US but also in Asia and everywhere else. The amount of capital raised by US companies on the NYSE this year, or in 2001 (US$77 billion), is well below that seen even six years ago (US$178 billion in 1997), before the dot-com inspired frenzy in the markets. As someone recently quipped, there is a new global breed of non-profit organisations these days, previously known as investment banks.

Results of Treasury Survey 2001

6   The treasury business is another area that has grown well, and is transforming itself. Let me briefly share some of the key findings of the annual treasury Survey conducted by MAS, which has been released this evening together with the Biennial Report of the Singapore Foreign Exchange Market Committee.

7   The Survey showed that total treasury revenue increased by 54%, from S$5.2 billion in year 2000 to S$8 billion in 2001. Pre-tax profits rose 68%, to S$6.7 billion. Our markets have held up quite well, especially in the forwards and spot markets. Foreign exchange daily turnover in Singapore remained relatively stable last year, averaging about US$95 billion, despite a decline of 19% globally as reported in the 2001 BIS Triennial Survey.

8   What is especially noteworthy is the increasing role of capital market transactions, such as interest rate derivatives and credit derivatives. According to the MAS survey, capital market activities accounted for 45% of total treasury industry revenue in 2001, up from 28% the year before.

9   Some industry players have attributed the good performance in the local treasury industry to favourable market conditions and a stable cost structure. The change in accounting treatment arising from the adoption of FAS 133 (which required all open derivative positions to be marked-to-market) no doubt also contributed to an increase in recorded profits.

10   What is heartening is that a recent informal scan of treasury players in Singapore by the MAS suggests that treasury profits this year will be as good, if not better, than 2001. The main areas of growth appear to be the interest rate products such as SGS and interest rate swaps. The level of forex trading activity has also held up so far this year, recording an average daily trading volume of US$95-100 billion.

11   The MAS survey shows financial institutions moving up the value chain of products and services, to those that command higher margins than the traditional instruments. An increasing number of institutions have structured products capabilities in Singapore, and now offer a broad range of derivatives, asset-backed securities, and other asset-liability management instruments or investment products.

12   There is considerable potential in structured products and derivatives, globally and in Asia. Credit derivatives are becoming what they call 'the next big thing' in global finance, driven by the redistribution of risks from banks and insurance companies into the capital markets. A recent report by the British Bankers Association estimated that the global credit derivatives market, which amounted to about US$1.2 trillion in 2001, is set to double in 2002 and reach US$5 trillion by the end of 2004. Judging from the recent growth, Singapore is well positioned to capitalise on this trend.

MAS' Issue of Risk Management Guidelines

13   The move towards structured products in Asia reflects the active restructuring of corporate debt across the region, and a greater awareness of the importance of managing and hedging market and credit risks in an increasingly uncertain market. There is greater acceptance of the role of OTC derivatives.

14   However, although structured products were designed mainly to mitigate financial risk, they redistribute risk rather than reduce it. The increasing complexity of such products, and the resulting greater transmission of volatility between financial markets, has itself become a source of risk for financial institutions globally. New risks are therefore emerging even as old risks are being redistributed. Financial institutions must therefore enhance their risk management capabilities to respond to this new risk environment.

15   In this regard, MAS issued a set of guidelines on sound risk management practices for industry consultation last week. The consultative paper covers the measurement and management of credit, market and liquidity risks, as well as internal controls that will help mitigate operational risks. The guidelines highlight best practices with respect to three key areas - keen oversight by board and senior management; sound risk management policies and operating procedures; and strong risk measurement, monitoring and control capabilities.

Asia Risk Exchange

16   The guidelines are an important step in our move to make Singapore a premier risk management center in the Asia Pacific region, which is one of the recommendations of the Economic Review Committee's Financial Services Working Group (FSWG). Taking a step further, the FSWG has suggested that Singapore establish an Asia Risk Exchange (ARX) to accept and facilitate the exchange of risks between financial institutions and the capital markets.

17   The ARX will be a value-adding institution to the financial landscape. It will enable banks to hedge residual portfolio risks and credit risks; allow insurers to insure catastrophic and sudden event risks; and the capital markets to securitise ARX risks. As the ARX will primarily undertake risks and exposures which players are unwilling or unable to assume individually, it should complement rather than displace existing market players. It should enhance the financial system's risk management capability. MAS and the industry have embarked on a study of the ARX's feasibility. We welcome views from industry experts and potential partners.

Challenges for the Treasury Industry and Professionals

18   The financial industry is perhaps the most fluid, dynamic and competitive, globally. Professionals in the industry face the constant challenge of staying relevant, and in having to upgrade themselves. The foreign exchange market in particular has undergone several important structural changes in recent years. At a macro level, the number of major players in inter-dealer markets has decreased significantly due to numerous mergers and acquisitions, and the introduction of the Euro in 1999 has eliminated many trades. At the micro level, there has been significant evolution in trading technology and in the process of price discovery.

19   The rise of electronic trading is expected by many to adversely affect liquidity in the forex markets. Technology erodes the information advantages that financial institutions have had. Greater price transparency could very well explain part of the drop in inter-dealer spot forex trading seen in BIS' triennial survey. It has also caused a compression in spread. While there have been no large negative effects on the industry yet, we have not seen the full effects of technology yet. The deepest changes in the forex markets may be yet to come.

20   We have to keep evolving and moving up the value chain to stay relevant. This will require new skill sets, to take advantage of new growth opportunities. Consolidation of the industry and the slowdown have resulted job losses. However we also seeing a structural change in employment patterns in the industry. Some jobs lost will not be regained even in an upturn, particularly those more susceptible to be overtaken by technology.

21   The jobs that do come back when the market recovers may require different skill sets, depending on where the areas of growth are. Other jobs that return might need the acquisition of additional expertise to support the broader suite of services demanded by tomorrow's customers. This structural change in job requirements is true not only in the treasury business but in investment banking, corporate finance, commercial banking, and even in research.

22   Individually, financial sector professionals will have to be both vigilant and agile. We have to keep skilling up to keep pace with the opportunities. The MAS also encourages institutions, industry associations and other major players to develop a training infrastructure that supports skills upgrading. We would like to see more institutions developing organisation-wide, comprehensive training plans that are strategically aligned with business needs. We are also encouraging the setting up of more industry or corporate training centres.

23   To support these initiatives, MAS is co-funding some of the training undertaken by financial institutions and industry associations through the Financial Sector Development Fund. It is seeking to enhance the skills and capabilities of the financial sector workforce by helping to defray the costs incurred by financial institutions in providing relevant training to their staff.

Conclusion

24   In the face of increasing uncertainties and economic difficulties in Asia, the Singapore financial markets have held up well. This is due to the industry's prudent conduct of business, a mindset toward embracing global competition, and a collaborative relationship with the regulator. ACI Singapore has played an important role in these progresses that we have made. The regular, candid and constructive dialogues that the MAS have held with members of ACI Singapore have been significant in advancing the industry. MAS will continue this close partnership with industry players.

25   We must not let up. The way we conduct and monitor business will continue to undergo dramatic transformation, and the standards expected of us from our customers and the marketplace will continue to rise. More importantly, competition at the global level will intensify. We have faced these challenges squarely before and done well. Working together, we can do it again.

26   I wish you another fruitful year ahead. Thank you.