Opening Address by Mr Lim Cheng Khai, Director, Monetary Authority of Singapore, at the Investment Management Association of Singapore’s 4th Regulatory/Legal Roundup Forum on 10 February 2017
Mr Rodney Lim, IMAS Regulatory Committee Chairman,
Ladies and gentlemen,
1 Good afternoon, and happy lunar new year to all of you. Thank you for having me at this year’s IMAS’ Regulatory Forum again. I am very happy to be here for the second year.
2 2016 has been an eventful year. The effects of the geopolitical and economic events that we witnessed last year will continue to be felt through 2017. As the developments unfold, we will have to continue to keep a close watch on issues that will impact Singapore’s financial sector. Today, I will share a few key areas that MAS will focus on for the asset management industry in the coming year.
Asset Management in Asia Continues to Grow
3 The asset management sector has experienced growth in assets under management (AUM) of about 40% over the past decade. Global AUM rose from US$52 trillion in 2007 to US$71.4 trillion in 20151. In the same period, AUM in Asia (excluding Japan and Australia) grew much faster. Starting from a low base, it has more than doubled from US$2.4 trillion in 2007 to US$5.2 trillion in 20152.
4 If we were to look at a more recent trend, global AUM grew just 1% in 2015 compared to 8% in 2014. The asset management industry was affected by slower growth in emerging markets and fears of monetary policy normalization in the US. Nonetheless, Asia (excluding Japan and Australia) still did well in 2015, with a 10% growth in AUM. In tandem, Singapore’s AUM grew by 9% to S$2.6 trillion (US$1.8 trillion) in 2015. This growth is accounted for almost entirely by net inflow of funds. Strong growths were registered by private equity/venture capital (at over 40%) and real estate funds (at over 80%). Traditional asset managers registered a more modest growth of 4%. While the 2016 numbers are not in, we are hopeful that our asset management industry is still growing well.
Strengthening Fund Resilience in an Uncertain Operating Environment
5 In 2016, we witnessed a number of unexpected events like Brexit and the outcome of the US presidential election. These events caused volatility in the markets and flight to safe haven currencies and assets. Even though markets recovered swiftly after both events, the longer term implications for asset managers are still not clear.
6 Against the backdrop of market uncertainties, liquidity risk management in funds has become an important focus for regulators worldwide. Regardless of where we stand on whether the asset management industry poses systemic risk to the wider financial system, individual firms will need to stay resilient under the new norms. In this regard, one of MAS’ key regulatory priorities this year, is to encourage fund managers to strengthen their liquidity risk management and fund resilience.
7 Open-ended funds typically offer liquidity to investors, notwithstanding that the underlying investments could be less liquid than the redemption terms. This poses a mismatch between the liquidity promised to investors and the liquidity of the funds’ underlying investments. In periods of market stress, it may be difficult or expensive for open-ended funds to adjust their positions to meet the increase in fund redemptions. As a result, funds may be unable to meet large redemption requests, or can only do so in a manner that is detrimental to the remaining investors.
8 Historically, the asset management sector, with the exception of some money market funds, has generally been resilient in the face of market stresses. However, recent events like Brexit has caused some real estate funds in the UK to halt redemptions. And there may be more of such events in stall. The ongoing Brexit negotiations and the policy uncertainties in the US still cast a cloud over the markets. The upcoming elections in France and Germany, depending on how they turn out, could also spark another selloff. As populist movements gain momentum worldwide, there could be radical shifts in policies that would affect investor confidence and market sentiment. Hence, it is important that asset managers stay prepared for any market disruptions and safeguard the interests of investors during such events.
9 To strengthen the structure and resilience of the asset management industry, the Financial Stability Board or FSB has issued three key recommendations for regulators:
i. requiring funds’ investment strategies to be consistent with the terms governing fund redemptions;
ii. enhancing the use of liquidity risk management tools; and stress testing of funds; and
iii. enhancing data reporting requirements to facilitate monitoring of funds’ liquidity risk.
I will highlight two key initiatives that MAS is working on, to strengthen the resilience of our local asset management industry.
10 Firstly, MAS plans to introduce a set of guidelines on liquidity risk management for fund managers this year. The guidelines will cover the liquidity risk management processes over the life of a fund. These include factors to consider during initial product design, ongoing liquidity risk management, stress testing and the use of liquidity risk management tools. The guidelines will be principles-based and fine-tuned over time. MAS will continue to engage IMAS and its members as we develop the guidelines. Some IMAS members have also taken steps to enhance their liquidity risk management frameworks in recent years. This is a positive development, and we encourage IMAS members to continue to strengthen your liquidity risk management processes.
11 MAS has also recently commenced a study to collect more fund data for our supervisory purposes. We want to do this without causing excessive burden on the industry. The aim is for MAS to have a better oversight of the profile and risks of individual funds and on a system-wide basis. This is also in line with a broader push by global regulators and IOSCO to collect more data to identify risks and structural vulnerabilities in the asset management sector. We will work closely with you in the coming months to seek your feedback and suggestions, on the scope, frequency and manner of the data collection.
Asset Managers as Stewards of Good Corporate Governance
12 Good corporate governance is another area that MAS wants to foster. It is not just the responsibility of the board or the management of a company. Shareholders and investors – asset managers included – also have an important role to play in supporting sustainable businesses. Asset managers are well-positioned to influence the long-term performance of companies due to their relatively larger shareholdings in their investee companies (as compared to retail investors). Asset managers stand in good stead to engage the boards and management of their investee companies on a wide range of topics, such as strategy and long-term sustainability. You can also help set the tone and expectation for the company’s governance practices. In addition, asset managers have a fiduciary duty to clients to preserve and enhance the long-term value of the companies that they invest in.
13 Large international asset managers have already warmed up to this role. The UK’s Financial Reporting Council has a Stewardship Code, which many large, internationally active asset managers are signatories to. In the US, many large asset managers have been expanding their corporate governance and stewardship teams. In Singapore, an industry working group, led by Stewardship Asia Centre3, issued the Singapore Stewardship Principles, or SSP, last November. The SSP provides guidance on the core behaviour and activities that active and responsible shareholders should adopt in their engagement with companies’ board and management. Effective stewardship by shareholders and investors is an important complement to strengthening corporate governance. We strongly encourage the asset management industry to adopt and embed the principles in their day-to-day operations. We are encouraged to see that more than 40 asset managers have already pledged their support for this initiative, and we hope that more would follow suit over time.
Technology as Enabler – Capitalising on Opportunities and Mitigating Risks
14 Last year, I spoke briefly about robo-advisors – that we were giving thought to different robo-advisory models, and how to have a scalable framework that caters to various robo-models and strategies. Since then, the global robo-advisory market has continued to grow4. Here in Singapore, a number of startups and fund managers have also engaged MAS on their interest to offer digital advisory services in the last few months. To provide better clarity to industry players on our expectations of robo-advisors, MAS will soon consult on our proposals on the governance, supervision and management of algorithms for robo-advisors. We welcome your feedback during the consultation.
15 Whether traditional managers see robo-advisory models as disruptors or enablers, technology presents an opportunity for us to enhance portfolio allocation strategies, operational efficiency and client experience. Globally, traditional asset managers are already looking at the possibility of adopting technologies like blockchain or distributed ledgers to enhance operational efficiency and cut trading costs. Asset managers can also leverage on technology to enhance or expand their distribution channels, offer the convenience of fund investing on the go, and reduce transaction costs for investors. Anecdotally, direct online distribution has yet to take off in a big way in Singapore. Nonetheless, the opportunities are aplenty as we make a more concerted push towards being a smart financial centre. Asset managers today are much better placed to use new technologies to enhance value for customers, and increase efficiency and manage risks effectively.
16 As we gear up for a technology-enabled asset management sector, it is equally important for cyber security measures to be strengthened. Investors must have confidence in the resilience of online channels against cyber threats. Though 2017 has barely started, we have already seen a few incidences of cyber-attacks around the world. Last month in Austria, ransomware was used to hijack the central key management system in a ski resort. All the hotel guests were either locked inside or out of their rooms until a ransom was paid to get the system back up. The hotel gave in to the demand. Innovatively amusing in a way, but it also goes to show that cyber criminals are constantly pushing the boundaries. Earlier this week, some securities firms in Taiwan also came under a coordinated distributed denial of service or DDoS attacks. Luckily, the securities firms were able to resume operations quickly without having to give in to the demands of the perpetrators. But the harm is already done, in the form of trading disruption to customers. So far, the asset management industry has not had its big hacks. But this may be a matter of when, not if. So, the asset management industry cannot afford to be complacent, and needs to raise and strengthen its cyber defense and resilience.
17 Looking ahead, 2017 will be another busy and eventful year for all of us. The prospects for the asset management sector in Singapore and Asia remain bright, but we also need to navigate the risks and threats to keep us on an even keel. On our part, MAS will continue to maintain an open channel with the industry to discuss regulatory and supervisory developments that are of mutual interest.
18 On this note, I wish you all a fruitful session this afternoon. Thank you.1 Source: BCG, Global Asset Management 2016 “Doubling Down on Data”
2 Source: BCG, Global Asset Management 2016 “Doubling Down on Data”
3 The industry working group comprises Association of Chartered Certified Accountants, Asia Pacific Real Estate Association, CFA Singapore, CPA Australia, Hermes Equity Ownership Services Ltd, Investment Management Association of Singapore, Institute of Singapore Chartered Accountants, Securities Investors Association (Singapore), Singapore Institute of Directors, Singapore Venture Capital and Private Equity Association and Stewardship Asia Centre.
4 AUM in US grew from US$50 billion in Dec 2015 to an estimated US$61 billion in June 2016.
Sources: Bloomberg, BenefitsPRO