Published Date: 31 August 2007

Speech by Mr Kola Luu, Executive Director,Financial Markets Strategy Department, Monetary Authority of Singapore at the ACI Forum


Good afternoon, ladies and gentlemen,

1   It gives me great pleasure to have the opportunity to speak to such a distinguished group of central bankers and market practitioners from all across Asia. I would like to thank ACI for putting together this forum to serve as a platform for participants to gain insights into the opportunities and challenges within Asia, the world’s fastest growing region. To our overseas guests, a very warm welcome to Singapore and hope that you will enjoy your stay here.

International Growth

2   Over the last decade, the global economy has experienced a period of impressive progress and growth. The United States, the world’s largest economy, continues to push forward with a strong 3.4 percent growth in the second quarter of 2007 and have seen an impressive 1.8 million jobs created over the last one year. Europe too, is registering strong economic growth and Japan is showing positive signs of recovery.

3   Here in Asia, economies have recovered strongly from the 1997 financial crisis. The greatest success story still lies with China. The Chinese economy is powering ahead with double-digit growth as China counts down to the 2008 Olympics Games. In South Asia, India is also showing impressive results, with the Asian Development Bank projecting an annual growth rate of 8% for 2007. ASEAN’s economic activities have remained resilient, as growth in consumption and exports strengthen across most economies. Although there have been some recent financial volatility across global markets, medium term economic fundamentals in Asia remain strong.

4   Against the backdrop of strong global and regional economic growth, Asia is seeing a relentless growth in its capital markets. Over the past decade, the Asia bond market has quadrupled in size to more than US$2.8 trillion, as investors seek a third channel of finance to supplement traditional banking lending and equity financing. China’s economic expansion has seen an unprecedented increase in the demand for commodities, fuelling much growth in the commodities market. Positive results were also noted in foreign exchange trading, with healthy growth across forex trading centres globally.

Growth of Singapore Market

5   Aligned with global and regional trends, domestic capital markets in Singapore have performed well over the last few years. The Singapore corporate debt market grew healthily in 2006, supported by a surge of property-related debt issuances, as construction projects grew in the midst of a booming economy. Another discernible trend noted was the increase in the number of foreign issuers tapping the SGD bond market. Compared to 2005, new issuance attributable to foreign issuers doubled in volume. In March 2007, MAS also issued the inaugural 20-year Singapore Government Securities (SGS) to serve as a benchmark for longer dated interest rate products and to boost the investor base.

6   Positive results were also noted in the Singapore Foreign Exchange market. The latest survey results released by the Singapore Foreign Exchange Market Committee (SFEMC) reaffirmed Singapore’s position as a major Forex Centre in Asia. The survey showed that average daily traditional foreign exchange turnover for April 2007 was US$223 billion, a 40% increase compared to October 2006. OTC foreign exchange derivatives grew a significant 68% over the same period. While Singapore’s growth is commendable, the market has once again seen London pull ahead. Daily trading volume in UK is currently 3 times more than Singapore and has showed tremendous growth over the last three year. One reason for the slower rate of growth could be the use of electronic trading platform. While adoption rate is 60% and 50% in the UK and US respectively, electronic trading platforms have not taken off on the same scale in Asia. As the market progresses, it is important that Asia keep pace with development globally and increase the adoption rate for electronic trading.

7   In the commodity derivatives trading arena, the Singapore Exchange (SGX), has developed SGX AsiaClear®, a joint effort with the industry. This clearing facility serves to mitigate risk, bring about operational efficiencies and enhance the OTC oil and freight forward agreements (FFA) market. Since its inauguration, AsiaClear® has received much positive feedback and has helped SGX clinch the Exchange of the Year – Asia 2007 award, by Energy Risk magazine. With its success, we hope that further development can be made on the facility, to expand its product coverage to include FX and Interest Rate products and potentially various other derivative products, and to extend its geographical reach across Asia.

8   MAS is also in the process of assuming regulatory responsibilities for the trading of commodity futures from International Enterprise, Singapore. The intent is to subject commodity futures to the same regulatory framework as other types of future contracts, streamlining licensing and compliance requirements, and facilitating Singapore’s growth as a hub for commodity trading.

9   With strong economic growth in the region, another notable development is the rise in the number of High Net Worth Individuals. The Merrill Lynch Capgemini Wealth Report estimated an annual growth rate of 6% for global high net worth financial wealth; with Asia-Pacific leading the pace while US growth slows. Total AUM in Asia is expected to reach more than US$10 trillion by 2010. Major Private Banks are taking advantage of the growing Asian wealth and expanding into the region. 

10   In addition to a host of traditional wealth management products and services, private banks are also providing structured products that cater to the specific needs of their clients. This is especially true, given the emergence of “new wealth”, a group of young and sophisticated entrepreneurs who prefer to play a more active role in the management and investment of their wealth.  Retail clients too, are increasingly being offered structured products in addition to traditional loans and deposits. As these products may involve multiple risk components, it is important that risks of such products are assessed and appropriate risk disclosure is made to the clients


11   With the rapid growth in the capital markets, we are seeing the creation of an entirely different landscape. Risk management has taken on a different dimension with the rise in complexity in traded products and the enormous volume that flows through our financial system annually. As development in financial instruments advances, there is a compelling need for technical expertise in risk management, technology infrastructure and support functions to keep pace. The challenges that need to be addressed include not just how to measure and monitor market, operational and legal risks; recent market volatility also reinforced the need for market participants to develop models and appropriate level of expertise to assess and ascertain credit risk. Additionally, the mismatch in the pace of development, where the front office is often developing at much faster pace than the support functions, has also created an impetus for the development of a standardized electronic settlement system, as we look towards reducing the strain on the limited amount of human resources. 


12   How should we respond to these challenges? The transnational nature of the derivatives market and the advancement in technology has increased the linkages of our markets. This means that an appropriate response to the challenges would require a concerted effort involving industry players and international regulators across different jurisdictions. In addition, any approach would require one to manage the fine balance of having an efficient risk management system to avoid systemic risk, while at the same time, allow for the growth and development of the market. This task may prove daunting, but MAS, like any other regulator, understands the importance of getting this balance right.

13   To achieve this, MAS takes into consideration industry practices in the formulation of its guidelines to the industry. Our principle based guidelines, which matches supervisory intensity to the risk profile of the supervised institutions, provides opportunities for financial institutions to grow and innovate, with the provision that financial institutions have in place risk management practices which is commensurate with their risk taking activities. In line with developments in the markets, MAS had published a set of guidelines on Risk Management Practices , which emphasized the importance of:

• board oversight in the formulation and implementation of risk management policies and procedure;
• senior management’s role in ensuring sound and effective policies and procedures are in place;
• strong risk management processes and operating procedures that marries prudent risk limits with appropriate risk measurement, monitoring and reporting;
• and the need for competent personnel in the risk management, control and audit functions.

This is intended to provide a set of basic requirements for financial institutions to implement a risk management framework that commensurate with the size, complexity of their businesses.

14   Additionally, given the current backlog that we are seeing in various business functions, the need for a pool of trained professionals is more important than ever. To encourage continued education and training, The Institute of Banking & Finance developed the Financial Industry Competency Standards (FICS), which was launched in two phases in September 2005 and June 2006. The FICS is a framework, developed with the assistance of industry practitioners and benchmarked to international standards. It provides best practices guidelines for specific job functions and aids the development of training and assessment programs that are both effective and job-specific.

15   Since its launch, various banks have adopted FICS for their in-house programmes, including Credit Suisse, DBS, UOB, just to name a few. In April 2007, UBS launched its Asia Pacific Wealth Management Campus in Singapore, developing relationship management programmes for its staff to cater for its growing portfolio of High Net Worth clients. These programmes were leveraged on FICS guidelines and demonstrate the level of acceptance of FICS guidelines in the industry. This is an encouraging trend and I hope the adoption rate can be extended to more financial institutions.

16   Other than training, we could also explore the possibility of developing an OTC electronic clearing system. With it, we will be able to reduce the strain on back office resources, enhance inter-market accessibility, thereby, reducing the costs of capital and promoting greater regional flows.  In the United States and the UK, efforts have been made to develop such facilities, a good example it’s the Depository Trust & Clearing Corporation (DTCC) based in New York. Its subsidiary, Deriv/SERV which provides electronic matching and confirmation of OTC credit, interest and equity derivatives, has established itself as the major platform for global derivatives dealers. Currently, it provides automated post-trade services for more than 800 dealer and buy-side customers in 30 countries. We commend such efforts as they present positive steps towards enhancing post-trade efficiencies. As I alluded earlier, SGX’s AsiaClear® has worked well for OTC commodity products and could extend its value proposition to clearing of OTC financial derivatives during Asian time zone.

17   Last but not least, the increase in sophistication of investors may mean that they are no longer content to invest in traditional instruments. As investors seek to diversify their risk by increasing allocations into different asset classes in their portfolios, it is important for our market to create a more varied range of products and services. In recent years, we have seen the introduction of newer asset classes such as REITs and asset-backed securities in Asia. We have tapped on our positive REITs experience to develop Singapore's capital markets for infrastructure financing. By establishing a conducive tax and legal framework, we have provided an efficient means for financing infrastructure projects. With the growing financing needs for infrastructure in Asia, Singapore is poised to be a centre for financing regional infrastructure projects from both the traditional loans and capital markets.


18   To summarize, I believe that capital markets growth in Asia has been extremely positive. However, as our capital markets deepen and products complexity increases, we can expect challenges to abound. A heighten awareness to the changing environment and a swift but balanced response to these challenges would be instrumental in overcoming these obstacles. With this note, I end my speech and wish everyone a wonderful day ahead.