Remarks by Mr Ong Chong Tee, Deputy Managing Director, Monetary Authority of Singapore, at the Launch of SGS E-Bond Platform held at Bloomberg, Capital Square, Singapore, on Wednesday, 10 May 2006 at 6pm
1 Good evening ladies and gentlemen. I would first like to thank Bloomberg for inviting me here this evening to share some thoughts on the occasion of the launch of the SGS E-Bond platform.
2 Allow me to first sketch the some of the recent developments in our domestic bond markets, and why this SGS E-Bond platform is an important milestone in our market development.
3 Prior to 1998, our bond market was small and undeveloped. The Government had no need to raise funds in the capital markets for budgetary reasons. So Singapore Government Securities (SGS) were issued mainly to meet banks' demand for liquid assets as part of their statutory requirements. The SGS market was relatively small and the secondary market inactive, with average trading volumes at only S$100m to S$200m per day. The market infrastructure was adequate but, rudimentary. Some of you would remember that in those days, MAS acted as a broker for SGS transactions between Primary Dealers. So if DBS wanted to buy a bond, it placed an order with MAS, and we would then call other PDs to ask for an offer.
4 Then, as you all know, the Asian crisis came in 1997. One of the lessons that emerged from the crisis was that we need to develop a bond market to act as a viable alternative source of financing for corporates. This will avoid having an over-concentration of risks in the banking sector.
5 So in 1998, MAS embarked on a series of measures to develop the domestic bond market. Part of this was centred around growing the SGS market to provide a benchmark yield curve and a hedging instrument for the private bond market. Today, the outstanding size of the SGS market has almost quadrupled since '97 to almost S$80bn. Daily trading volume is now about S$1.5bn to S$2bn, almost five times that in '97.
6 Private debt securities also grew. Outstanding corporate debt as at end 2005 has grown to S$137bn, a six-fold increase since the crisis. We have a wide range of foreign issuers, ranging from supranationals, to financial institutions, and multi-nationals.
7 As the markets grow in size, the market micro-structure must also evolve in tandem. MAS could act as the broker when the daily volume was S$200m, but not when it is S$2bn. In 2000, MAS ceased to be the broker between primary dealers. Instead, PDs make 2-way prices to each other through electronic dealing machines. This was a very positive step because it enhanced market liquidity and encouraged PDs to manage their risks more pro-actively. But the structure was still not ideal from the perspective of price transparency. When 2 PDs traded with each other bilaterally, the transaction was opaque to the rest of the market.
8 Price transparency is important for 2 reasons. First, market stability. In times of market stress, information on the last traded prices and volumes can be critical in helping to dispel rumours and stabilise markets. Second, attracting more participants. A common feedback from end-investors, both domestic and abroad, is that greater transparency will encourage them to participate in the S$ bond market more actively. For these reasons, the MAS has, with the support of the PDs, decided to migrate inter-PDs trading to an electronic platform.
9 Many of you would recall that our first experience with E-platforms was in 2001, under the "Asian bond portal" and "Bonds in Asia". Unfortunately, neither was successful. One main reason was the high costs of running a stand alone platform, which made it commercially unviable for a relatively small market like SGS. Learning from this, we explored the possibility of running a platform which would ride on the infrastructure of information service providers. We held a tender, and eventually chose Bloomberg to deliver the SGS E-Bond system.
10 We decided to launch the platform in 2 phases. The first phase, a Request-for-quote (RFQ) module, was successfully launched in July last year. The second phase has been successfully tested and will be launched today. This is a quote-driven electronic order book where price providers can leave their bids and offers.
11 Anecdotal feedback to the E-Bond platform has been positive. We have already seen a surge in participation in the SGS market, particularly from foreign investors. In a short space of 3 months after the first phase launch, the proportion of SGS held by foreign investors more than doubled, from 6% to 14%. Bloomberg also mentioned to me that a number of other countries are studying our platform, with the intention of launching a similar platform at home. I have every confidence that the second phase of the E-Bond platform will be just as successful.
12 Now let me switch to a slightly different topic, but still under the theme of market infrastructure. This is with regards to the structure of the S$ money market. As you are aware, MAS' monetary policy has been centred on the management of the exchange rate. With an open capital account, MAS does not pursue an interest rate or money supply target. This stance has not changed. Liquidity in the system is managed through our daily money market operations (MMO) where we either inject or withdraw liquidity from the system to ensure that an appropriate level of liquidity is maintained in the banking system. The level of interest rates is then determined by participants in the inter-bank market, taking into account their demand for reserve and settlement balances.
13 Besides MAS' money market operations, we have also considered other ways to more effectively manage the liquidity within the banking system to ensure that the inter-bank payments system functions smoothly. For example, in Sep 2001, we introduced a two-week averaging mechanism for banks' minimum cash balance requirements.
14 In the same vein, we will be introducing the MAS Standing Facility on 1 June 2006. This MAS Standing Facility will allow Primary Dealers to initiate Singapore dollar deposit or borrowing transactions with MAS on an overnight basis. There has been a series of discussions with our SGS Primary Dealer community on the mechanics of this facility.
15 The MAS Standing Facility will provide some key benefits :
(a) It will allow MAS to better fine-tune the amount of liquidity in the system, as dealers can approach MAS to borrow more funds if they are short or lend funds if they are long;
(b) This will ease potential frictional demand for liquidity; and
(c) This will reduce sharp intra-day interest rate volatility.
16 At its heart, the MAS Standing Facility will complement MAS' existing money market operations. I should emphasise again that the introduction of the MAS Standing Facility is not a departure from our exchange rate based monetary policy regime, and is not a lead-in towards interest rate targeting. A key difference between the MAS Standing Facility and the standing facilities of other central banks such as the Bank of England, European Central Bank, and Reserve Bank of Australia, lies in the interest rates at which banks are charged when borrowing or depositing with the facilities. While other central banks base borrowing or deposit rates around a fixed policy rate set by the central bank, the MAS' Standing Facility is unique in that the borrowing rate will be a market-determined one.
17 In conclusion, we have come a long way since we started developing our bond market in 1998. Being a small country, to develop the market further, we need to globalise the Singapore bond market by attracting more international players to issue and to invest in Singapore. I am heartened to note that a recent report by a major investment bank estimated the value of foreign issuance in S$ debt in the first four months of 2006 to triple that of the same period a year ago. Another major investment bank just informed us yesterday, that they are working on twice as many projects on S$ issues a month compared to before. Along the way, we will need to continue to refine market infrastructure to facilitate this growth. As examples, we are studying with SGX on how we can revitalise the SGS bond futures contract and, we are exploring the setting up of a central lending facility for Singapore-dollar bonds - among other pipeline projects.
18 Finally, I would like to thank the Primary Dealer community for their hard work and support throughout the process of consultation on the standing facility and the implementation of SGS E-Bond. Special thanks too, to Bloomberg, who has worked hard to build, run and deliver the SGS E-Bond system in such a short time. I bid you an enjoyable evening.