Published Date: 10 November 2008

Keynote Speech by Mr. Ong Chong Tee, Deputy Managing Director, Monetary Authority of Singapore, 12th General Meeting of the Asia-Pacific Central Securities Depository Group (ACG)


1   Good morning, distinguished guests, ladies and gentlemen. To our overseas guests, may I extend a very warm welcome to you.  I am glad to have the opportunity to speak at this meeting.   I understand that this is the first time the ACG is holding its General Meeting in Singapore, and I would like to commend the  SGX in hosting this. 

Global Financial Turmoil and Implications for CSDs

2   Some commentators have described the current market turmoil as the worst crisis since the Great Depression.  Indeed, the financial carnage has been unprecedented in scale.  Financial institutions have written down more than US$600 billion in credit-related losses, and the IMF estimated that up to US$1.4 trillion could be lost .   About US$30 trillion has been wiped out from the value of global equities since a year ago, with the MSCI World Index having declined over 60% percent this year alone.

3   While the crisis has been most severely felt in the US and Europe, Asia is not spared.  The epicentre of what started as US sub-prime mortgage defaults has its ripple effects felt globally affecting regional credit markets and also, the US  dollar funding market in Asia.  In the Asian Dollar bond markets, primary market activities have slowed considerably.  There has been an estimated US$15 billion of issuance this year, down from over US$50 billion last year. The Asian Dollar money markets have also been affected.  Here in Singapore, the impact on interbank funding has been relatively muted and even then, 3 month US$ SIBOR rose from below 3% in mid-Sep to a peak of almost 5% alongside the global US Dollar squeeze..  Levels have since eased with the decline in LIBOR rates.  Some of you are probably aware that MAS has recently entered into an FX  swap arrangement with the US Federal Reserve, along with 13 other central banks.  This can help to provide US$ funds to banks in Singapore should the need arise in future.

4   A positive factor has been that many Asian countries, including Singapore, have been developing our domestic bond markets since the Asian Financial crisis.  This provided an alternative source of funding in the current credit crunch.  Asian local currency bond markets have seen issuance this year of over US$120 billion, on track to exceed last year’s US$140 billion issuance.

5   However, the global economic environment is now in a period of considerable uncertainty given the headwinds of deleveraging and need to repair capital and shed troubled assets by major financial institutions.  Just last week, IMF issued its latest economic outlook and cut gobal growth forecasts again.  It noted  that prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen.  Developing Asia is expected to slow to 7.1% next year with Asean-5 at 4.2%. Many analysts and economists share the more negative outlook and are expecting economic prospects to be bleak for a protracted period as the credit knock-on effects broaden.

6   What do all these mean for central securities depositories (CSDs)?  CSDs have not been the focus in this crisis.  Nonetheless, I believe that some of the fallouts from this crisis will have implications on how CSDs operate in the future.  Let me share two thoughts. 

Shift Towards Greater Integration

7   First, the current crisis has demonstrated how integrated but yet segregated global financial markets are.  What do I mean?  “Integrated” - because market sentiments flow seamlessly across borders.  A sell-off in the US equity markets overnight can trigger a sell-off throughout Asian markets the next morning.  A failure of a major financial institution in the US can freeze inter-bank lending in Europe and Asia.  Why  “Segregated”?  Because the flow of funds and securities across borders are still not entirely seamless.  Institutions with assets in one market or currency cannot easily use them to fund liabilities or even to meet margin requirements in another.  Market structures, time gaps, currency differences, regulatory requirements and other factors can hinder the smooth flow of funds and assets.  

8   The experience of this crisis is likely to see increasing demands for a new global financial architecture and more integrated platforms.  I believe that CSDs have an important role to play in this. Already, the market structure of post-trade services is undergoing transformation in many regions because of public policies and technological innovation.  For example, in Europe, there is now a paradigm shift with the  introduction of the EU’s Markets in Financial Instruments Directive (MiFID) in November last year resulted in a greater push for interoperability and reduction of settlement and clearing for cross border transactions.   The current cost for cross border clearing and settlement is 10 to 15 times more expensive than for a domestic transaction as a result of market fragmentation with 23 CSDs and 8 CCPs . In response to this paradigm shift, private sector players have started a number of parallel initiatives with the aim of creating a unified clearing and settlement system for Europe. Notable efforts include Euroclear’s Single Settlement Engine platform and Clearstream’s Link Up Markets initiative, which aims to create either a pan-European CSD to serve the whole European continent, or a European ICSD to link up the various domestic CSDs, complementing the existing infrastructure setup in the domestic markets. However, it remains to be seen whether Europe will follow the steps of the US and have its own version of the DTCC, which clears and settles cash securities and OTC derivatives.

9   In Asia, clearing and settlement processes are already well-developed within each country, but much work needs to be done in establishing linkages to enhance cross-border arrangements and to lower transaction costs. Buoyed by the growth in regional bond markets, ASEAN plus 3 finance officials have set up a Group of Experts comprising members from the region’s domestic CSDs and banks under the Asian Bond Market Initiative process.  This Group of Experts will help to evaluate the options of an Asian regional settlement intermediary for the region’s bond markets, as well as identify the barriers to cross-border transactions. The initial proposals under evaluation include the creation of a regional settlement intermediary (RSI) as well as an Asian payments bank to eliminate settlement risks on foreign exchange transactions. There is a need for regional CSDs to work together to develop industry-led solutions to enhance interoperability and access by global and regional investors, and to foster developments in Asian currency denominated products.

10   To be sure, market integration measures go beyond the efforts of CSDs alone.  There must also be harmonization of standards and practices. Differences in legislations, regulations and tax treatments have impeded regional and international investors from cross-border trading activities.  Regional efforts aimed at harmonizing standards and adopting market best practices will become more relevant if they converge with globally accepted norms.  However, given the diversity in the size and development stage in the different Asian markets, we should also consider a more pragmatic approach when aligning domestic regulations and policies with international standards, and not merely go for a  “one size fits all” approach.

11   I am pleased to note the progress made as seen through bilateral agreements and the efforts of working groups or committees at the various regional fora.  Just last month, the ASEAN Capital Markets Forum (ACMF) announced the introduction of the ASEAN and Plus Standards Scheme for cross-border offerings of securities, which brings ease and cost savings to issuers who issues securities in more than one ASEAN country. The ASEAN Common Standards are based on the international standards on cross-border offerings of the International Organization of Securities Commissions (IOSCO) and fully adopts the accounting and auditing standards of International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISA). This streamlines the offering process as issuers will only be required to issue a common set of disclosure documents, together with the appropriate wrap-around for the additional requirements, to investors in each jurisdiction.

Demand for Safety and Efficiency  

12   My second set of observations are around the need for safety and efficiency in financial infrastructure.  Market participants are now more cognisant of settlement risks.  As they seek to lower this risk, they want to do so in a cost-efficient way.  The global consolidation among financial institutions and the need to manage costs will be strong impetus to employ better and more efficient market platforms.  Then, for the CSDs, to lower risks, without raising cost, CSDs will need to harness technology as a key enabler.  The new pre-settlement matching service (PSMS) of SGX Prime is a testament that IT can be used to lower risks without significant costs to the customer.

Efficient Regional Clearing and Settlement Solution

13   In a sense, this strive for efficiency through technological advancement is already happening in the trading part of the value chain.  In the US and Europe, we have seen new trading venues encroaching into the space of traditional exchanges.  These new trading platforms brings increased competition at both the trading and post-trade levels.  Already, new players like Chi-X and Turquoise have gained market share.  It was reported that Chi-X has captured about 14% of trading in FTSE 100 stocks since its launch over a year ago, while Turquoise which is backed by the major investment banks, has snatched 4% of stocks traded in 13 European markets.  The new trading platforms are positioning themselves to compete on cost and speed of trade execution, with the time for a trade to be done taking a mere millisecond or two in some cases.

14   This influx of competition has prompted defensive responses from the existing exchange and clearing operations to reduce their fees in an effort to compete with these new ventures and maintain their market share. For example, at the trading front, Deutsche Börse has cut its algorithmic trading fees, alongside other exchanges, on its Xetra platform in a bid to fend off competition from rival bourses and alternative trading systems. On the clearing side, LCH.Clearnet has announced wide-ranging fee reductions last year that have significantly reduced the cost of clearing in the London equity market. Eurex Clearing also reduced its clearing fees for equity transactions earlier this year.

15   We have also witnessed the arrival of dark pools into Asia, particularly in Singapore, Hong Kong and Japan, as a result of investors trying to find liquidity with anonymity and stocks to trade in the Asian market. These dark pools include BlocSec, Instinet, Liquidnet, and POSIT. With this new wave of alternative trading venues coming in, offering strong value propositions in both speed and cost, regional exchanges, clearing houses, and securities depositories will need to continually upgrade their technology and systems to compete in a marketplace where high-speed trading execution is crucial. Activities will gravitate to those that can deliver the best value to their customers at the lowest costs.

Concluding Remarks

16   In conclusion, the current economic and financial market stresses will present challenges amidst what has been described as unprecedented times.  This will also mean an even greater impetus to the efforts in harmonizing standards and market practices across financial markets, as well as in financial infrastructure interoperability and integration.  Asian markets will see similar trends to build more efficient Asian financial systems.  Exchanges, clearing houses and securities depositories which are proactive in aligning their business with this long term trend will have the potential to reap the benefits of a more integrated financial system. On this note, I wish all of you a fruitful meeting ahead and to our overseas visitors, have a pleasant stay in Singapore.