Keynote Address by Mr Kola Luu, Executive Director, MAS, at Structured Products Asia 2007 Shangri-La Singapore
1 Ladies and Gentlemen. Good morning and thank you for inviting me to this Structured Products Asia 2007 conference. With increasing interest in this rapidly growing area, it is important for market participants to have a forum to discuss and understand the latest developments in the structured products industry. I understand that this is the third time this event is held but the first time that the organizers have chosen Singapore as the preferred location. I hope to see more of these in the coming years.
2 Structured products have come a long way since their introduction where they were utilized by companies wanting to issue debt at a lower cost. Today, we see structured products of varying complexities, involving an array of asset classes with an increasingly diversified group of investors. Apart from corporates and financial institutions; individual investors, in particular, High Net Worth Individuals (HNWIs), are also using structured products as an avenue for portfolio diversification. This phenomenon has helped propel the growth of the structured products market with global issuance in 2006, estimated at approximately US$ 3.8 trillion. While the United States and Europe are the bigger markets for structured products, growth in Asia has been encouraging. According to estimates by BIS, the gross market value of global OTC equity-linked derivatives at end June 2007 is US$1.1 trillion with Asian equity-linked derivatives accounting for about 17%. Structured finance or debt, too has grown to a sizable market with Fitch estimating total issuances of US$58.5 billion in 2006, while the issuance of commodity structured products in Asia is estimated at US$15 billion annually. This trend is expected to continue and it is not difficult to see why.
3 Asia as a whole has been enjoying sustained economic growth over the last few years with China and India leading the way. Middle Eastern countries have also achieved average growth rates in excess of 11% in 2006. While the current turbulence in the financial markets does pose a threat to global economic growth; it does not fundamentally alter the picture of a very resilient and dynamic Asia.
4 HNWIs in Asia continued to benefit from favorable market conditions. According to the Merrill Lynch Capgemini Asia Pacific Wealth Report 2007, total HNWI wealth in Asia grew by 10.5% in 2006 to US$8.4 trillion. This number is expected to grow at an annual rate of 8.5% to reach US$12.7 trillion by 2011. Many banks are expanding in the region to take advantage of the growing Asian wealth.
5 The Singapore fund management industry has done well in the last few years, thanks to strong economic growth as well as the increase in depth and breath of our financial markets. Singapore has maintained its position as a major forex trading center in the world, based on the latest BIS triennial survey on OTC FX volume. The trading of OTC commodity derivatives has also flourished over the years. Last year, total trading volume amounted to approximately US$600 billion, accounting for almost 8% of global trades. Singapore is also home to the largest REIT market in Asia ex-Japan with a total market capitalization in the region of USD$20 billion.
6 The Merrill Lynch report also noted an interesting investment trend for HNWIs in Singapore. On the average, alternative investments (including structured products) account for almost 10% of total portfolio allocation for 2006. This is in line with global averages for portfolio allocation and indicates the emergence of “new wealth”. This represents a group of young and sophisticated entrepreneurs who often prefer to play a more active role in the management and investment of their wealth. To meet the needs of these investors, banks provide structured products customized to clients’ investment objectives. This trend is likely to catch on in other parts of Asia as financial markets in the region matures and as transparency, governance, disclosure as well as risk management improve over time.
7 However, as structured products may involve multiple risk components, proper risk disclosure should be provided by relationship managers to the clients. Investors looking to invest in relatively more complex structure should also exercise extra caution before entering into such financial transactions. Many governments in the region have begun developing legislation and guidelines to provide investors with the information necessary to understand the nature and risk associated with complex investments. As an integrated financial services sector regulator, MAS also continually reviews existing regulations to ensure that they remain relevant to market developments.
8 For example, MAS has just completed a final phase of amendments to the Securities and Futures Act (SFA) and the Financial Advisor Act (FAA) which are aimed at
• enhancing MAS’ supervisory oversight of capital markets services and financial advisers’ license holders;
• increasing the responsiveness of MAS’ regulatory framework to market innovation.
9 MAS had also introduced a set of risk management guidelines earlier, which highlighted the importance of senior management oversight, strong risk management processes and operating procedures and need for competent personnel in the risk management, control and audit functions.
10 While growth in the financial industry has been robust, the need for manpower and expertise continues to be a key factor for continued success. In consultation with industry, MAS initiated the Financial Sector Manpower Conversion Scheme in 2004 to help re-channel manpower quickly to new growth areas in the financial sector. This is done through customised conversion training programmes in partnership with partners such as the Wealth Management Institute (WMI) and ACI Singapore. Over the last few years, WMI’s flagship Masters of Science in Wealth Management has provided the industry with a pool of highly qualified and competent wealth managers. Additionally, the programme has been crafted to provide wealth managers with expertise on specific asset classes, including a module on Structured Products, aimed at presenting participants with a good understanding of the risk and return of structured products, and their use in portfolio management.
11 Developments in Asian financial markets have been extremely encouraging and as Asian economies continue to grow and expand over the next decade, we can expect Asian wealth to increase in sync. The desire for customized products amongst HNWIs to meet their specific financial needs present an ideal environment for the structured products market to take off. Furthermore, as product innovation, market access and market conditions improve, the impetus for increased portfolio allocation for structured products within Asia would necessarily increase.
12 With that, I wish all delegates a fruitful conference ahead.