Welcome Address by Mr Ng Nam Sin, Assistant Managing Director, Monetary Authority of Singapore, at the Clearstream's 2nd Global Securities Financing Conference Asia on 31 March 2011
Mr Stefan Lepp, distinguished guests, ladies and gentlemen,
1 Good morning. It is my pleasure to join you today at Clearstream’s 2nd Global Securities Financing Conference Asia. It has been a year since the inaugural conference was held in Singapore.
2 As the Global Securities Financing Summit continues to grow its footprint in Asia, I am encouraged to see Clearstream’s operations in Singapore and the region doing likewise. One example is the inclusion of Singapore investment funds for order routing, settlement and custody through Clearstream’s infrastructure. This helps to create more efficient investor access to funds based in Singapore.
Moving towards a more robust OTC derivatives and repo market in the post-crisis period
3 Looking at today’s conference agenda, the topics to be discussed are indeed timely and relevant. The financial landscape has evolved rapidly since the financial crisis. National regulators and international bodies are actively engaging in various regulatory reforms to promote greater transparency and risk management in the global financial system.
4 In the OTC derivatives market, the lack of risk controls and transparency have led policymakers to commit to implementing a series of regulatory reforms by 2012. There are four key pillars identified under the reforms. These include pushing for standardization of OTC derivative contracts, mandating the trading of OTC derivative contracts on exchanges or organised trading venue, imposing central clearing requirements and introducing trade reporting requirements for these instruments.
5 MAS has contributed to many of these international discussions, such as at the Financial Stability Board (FSB), to help shape new regulatory standards. In tandem, the industry has also taken the lead in implementing various initiatives which promote greater market stability.
6 Recently, the Singapore Exchange (SGX) expanded its existing OTC commodities CCP clearing capability. It launch the clearing of OTC financial derivatives. Starting with interest rate swaps, this new clearing service can facilitate the industry in managing their post-trade counterparty credit risks. I am heartened to see that market participants have responded positively to this new initiative with 11 global and local financial institutions signing up as clearing members of the CCP to date. The establishment of such risk management infrastructure will allow Singapore to better serve the needs of market participants and support an orderly growth of derivative activities here.
7 The repo market also saw its resilience being impacted by the uncertainty amidst the crisis. At that time, there were concerns whether repo markets could continue to serve as a reliable source of funding liquidity. The repo market has also shown that it was vulnerable to the unexpected withdrawal of liquidity by financial institutions in times of volatile prices and heightened counterparty risk. In addition, there were also questions raised about the robustness and transparency of practices and systems in the repo markets.
8 Recognising this market need for reliable liquidity pools, the introduction of CCPs into the repo markets may play a useful role in helping financial institutions better manage their credit risks and improve the collateral liquidation process in times of stress and default events.
9 Nonetheless, repo clearing and settlement arrangements may vary across countries. In considering whether to adopt the use of CCPs, be it in the OTC derivatives or repo markets, there are a few key factors to consider. For example, there is a need to ensure that the CCPs are well regulated and able to meet international standards such as those set by the Committee of Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commission (IOSCO). The effectiveness of CCPs will also depend on their risk management capabilities, given that risks are often concentrated. Other possible considerations include whether the CCP operates in a country with a strong regulatory and legal framework, and whether the CCP has access to central bank liquidity in emergency situations.
Enhancements to Singapore’s liquidity management infrastructure and framework
10 In this same conference last year, we shared some of the measures taken by central banks globally to reduce tensions and fears of uncertainty in their domestic money markets. MAS has also taken various measures in expanding the breadth of collateral usage in Singapore, where a number of global well-known issuers have issued Singapore dollar debt.
11 MAS continues to foster a more vibrant securities lending and repo market. For example, while the risks of a securities lending transaction apply to all financial institutions, there are differences in the regulatory requirements imposed on the different sectors such as insurers and capital market services licensees. To address these differences, there are plans to harmonise existing securities lending rules.
12 The proposed changes include the (i) requiring of minimum provisions in agreements governing securities lending; (ii) alignment of the specified range of eligible assets as collateral; and (iii) requiring both securities borrowed or lent and collateral to be marked-to-market daily. These are indeed positive developments, which take into consideration industry feedback from a public consultation done in 2009.
13 In the Singapore repo market, MAS operates a repo facility that lends Singapore Government Securities (SGS) to Primary Dealers (PDs) on an overnight basis when the securities are not readily available from other sources. This provides PDs with greater confidence in carrying out their duties as market-makers. To further boost the liquidity and robustness of the SGS market, amendments were made to the Government Securities Act (GSA) in January last year. These amendments enhance MAS’ repo facility and allow the Government to issue new SGS to MAS when demand for specific bonds exceeds MAS’ holdings. This allows MAS to on-lend to PDs on an overnight basis and to redeem the bonds the following day.
14 To facilitate the banks in better managing their liquidity, MAS announced in July 2010 that it will be issuing short-term bills as part of money market operations to increase the availability of high quality liquid assets to banks. Currently, there are three instruments in Singapore's money market operations, namely foreign exchange swaps, borrowings and repos. MAS Bills will be the fourth instrument. These bills are negotiable, so banks needing liquidity can sell them or pledge them as collateral in interbank repo markets or enter into repo transactions with MAS at the Intraday Liquidity Facility and the Standing Facility.
Regional Capital Market Development
15 Beyond liquidity management, MAS is also an active contributor to regional capital market development. MAS is a member of the ASEAN Capital Markets Forum (ACMF), which brings together ASEAN capital markets regulators to discuss strategic capital markets issues. The common goal is to achieve greater integration of the region’s capital markets under the ASEAN Economic Community Blueprint 2015.
16 In line with this broad directive, a number of ASEAN exchanges are working towards the development of the ASEAN Trading Link. This is an electronic trading link that connects the securities markets of ASEAN countries so as to facilitate cross-border trading. Four of the exchanges including the Singapore Exchange, Bursa Malaysia, the Philippine Stock Exchange and the Stock Exchange of Thailand, have recently completed the design study of the technology framework. Depending on the vendor selection process, we expect that the link will go live by the end of this year.
17 As chair of the ASEAN Working Committee of Capital Market Development (WCCMD), MAS works closely with member countries to identify and address specific bond market development gaps using a structured approach. Leveraging on the member countries’ experience, coupled with expertise from the private sector, the intent is to facilitate the region’s bond market development in terms of enhancing cross-border access and improving clearing/settlement efficiency. The development of a more efficient regional capital market will support the long-term growth and attractiveness of ASEAN as an asset class.
18 In conclusion, the global regulatory landscape is evolving and the regulatory reforms will change the way financial institutions conducts their businesses. They should seize the opportunities to build the infrastructure for more robust risk management and better management of liquidity. In addition, market participants should remain vigilant against expected and unknown risks that may arise from time to time. These continuous efforts can help ensure that future industry growth remains orderly and sustainable.
19 On this note, I wish everyone a fruitful discussion today. Thank you.