1   Good morning. It is a pleasure to be here today at the Derivatives and Securities World conference.  I would like to extend a very warm welcome to all of you, especially to our visitors from overseas. 

2   I was told that it is customary to begin the welcome remarks, by reflecting on the state of the derivatives market.  Indeed, growth of the derivatives world in the past few years has been astronomical.  There are many ways to measure this growth.  Data from the BIS, for example, showed that the notional value of outstanding derivatives, both OTC and exchange-traded, almost tripled in the last 5 years.  In 2004 alone, it rose 26% and is now almost US$300 trillion.  The growth of the derivatives world, however, goes beyond sheer volume.  The number and types of participants have also expanded.   

3   Singapore has benefited from this growth.  We've just released the results for the MAS Treasury survey for 2004.  The detailed results are available on the MAS website.  But let me share with you a few headline numbers.  Daily turnover for treasury products continued to increase for the fifth year in a row to US$204 billion. This was up by 21% on a year-on-year basis; the largest increase since 2000.  A quarter of the volume came from derivatives. 

4   What is driving the growth in derivatives?  Let me suggest 3 factors.  First, there is a global search for yield, resulting from a protracted period of very low interest rates.  This is most apparent in the pension industry, where many pension funds, both private and public, are currently under-funded and at risk of becoming even more so.  According to a study by Watson Wyatt, pension fund assets in the developed world rose by 7% in 2004, while pension fund liabilities rose by about 10% .  

5   The search for yield meant that more investors are seeking newer and more complex assets.  Many of these assets have to be structured via derivatives - to suit different risk profiles.  CDOs or collateralized debt obligations are an example of this.  In the US, more high-yield bonds are now issued into CDO than directly into the market.  The search for yield also meant that there is more focus on enhancing returns via active management or alpha.  Again this translates into more demand for derivatives since they tend to be more efficient than cash transactions for expressing views and managing risks.  

6   The second factor behind the growth of derivatives is the rise of the hedge fund industry.  Globally, the number of hedge funds has risen from fewer than 1,000 in 1990 to over 8,000 in 2004.  Assets under management have grown 40 times to almost a trillion dollars.  In recent years, hedge funds have seen increased investment from more traditional investors such as pension funds, universities, endowments and charitable organizations. These institutional investors accounted for about one-third of assets under management last year, up from just under one-fifth in 1992.

7   Singapore has also observed rapid growth in the local hedge fund industry. There are currently more than 80 hedge fund players based in Singapore managing about US$6bn.  This year, we expect to see the number of Singapore-based managers rise significantly; along with an expected jump in the average launch size, as larger hedge funds begin operations out of Singapore. 

8   The third factor is technological advancement, particularly in derivative exchanges.   I should not dwell too much on this because the 2 gentlemen speaking after me are far better equipped to talk about this subject. I'll just make one point.  There has been a lot of debate about the relative merits of open-outcry trading versus electronic trading.  But I believe electronic trading has improved efficiency and widened access to a wider pool of participants.  It has given exchanges the ability to introduce after-hours trading to remove time zone barriers, and remote trading to knock down geographical boundaries.  Investors can now trade multiple markets in multiple time-zones.  All these can only serve to draw in more participants and, translating eventually to higher trading volumes.

9   In Singapore, the SGX has successfully transitioned from floor to screen. A whole new screen trading community has sprung up in response, to tap the access provided by SGX to several Asian derivative contracts.  International exchanges have in turn, established local points of presence, via telecommunications hubs, to provide seamless high-speed access on par with that in their home countries.  

10   All these factors - the search for return, the hedge fund industry and technological advancement - bode well for the derivatives industry.  However, while much attention has been focused on the front office, it is important that we ensure that the middle and back office keep pace with the rapid growth of the industry.  As more participants enter the market, as instruments become more complex, the infrastructure of the industry must continue to evolve.  This includes systems for settling trades, for managing market and counterpart risks, for performance measurements and so on.    

11   The settlement backlog in the credit derivatives market, which I believe most of you are aware of, is an example of a situation where the front office has developed much more quickly than the back office. The complexity of the instruments is only one reason behind the backlog. The other reason is the number of new participants, particularly hedge funds, in the credit derivative market.  We are happy that the 14 leading banks in the US have made a commitment to the New York Fed to address these issues. Here in Singapore, the MAS is also working with market participants to improve the settlement procedures for credit derivatives.

12   In the same vein, we welcome SGX's plans to launch a central counterparty facility to clear OTC energy and freight derivatives. This, we believe, will go a long way towards preventing the problems that have plagued the credit market.  It will also support the growth of the market by drawing in more participants.

13   In conclusion, the outlook for the derivatives industry is bright.  Volumes and participation will continue to grow strongly.  But effort should also be placed in developing the market's infrastructure, so that it can cope with this growth.  In this way, we can ensure that derivatives will not become, in the words of Warren Buffet, the "financial weapons of mass destruction".

14   I wish you a very successful seminar.