Tharman Shanmugaratnam: Key issues in Asian financial markets
Keynote address by Mr Tharman Shanmugaratnam, Chairman of the Monetary Authority of
Singapore, at the ACI (The Financial Markets Association) 52nd World Congress, Singapore,
15 March 2013.
* * *
Mr. Manfred Wiebogen, ACI Global President
Distinguished guests, ladies and gentlemen
1. I am delighted to be here today with all of you.
2. The last time Singapore hosted the ACI Congress was back in 2001. In fact, it was
just before 9/11. The world was in a very different place. Asia too was so different from
today. The wounds of the Asian crisis of the late 90s were still fresh. Investor confidence in
the various countries in the region was uneven. And Asian capital markets were by and large
in their infancy.
The new financial landscape
3. We are now in a new phase in global finance. Global finance is deleveraging, after
the great credit bubble that began more than a decade ago and came to an end in 2007. But
deleveraging still has some way to go, and some years to go, before the overall level of
leverage relative to economic activity gets back to a sustainable level.
4. The pace of deleveraging has been moderated so far by central banks, who have
taken onto their balance sheets unprecedented levels of both public and private sector debt.
Their actions have reduced the risks of catastrophe. But it also means we have a long way
yet to go in reducing debts and returning to sustainable growth.
5. We are also seeing important shifts in the structure of global finance, besides the
gradual contraction in global liquidity. It is too early to say where we will be five years from
now, but some of the broad brush-strokes in this new landscape of global finance are already
with us and likely to stay:
•
The return on equity in global banking has fallen, and will not return to pre-crisis
levels, given stricter capital and liquidity rules.
•
Deposits have become more important as a source of bank funding.
•
Banks in certain major jurisdictions have retreated from global markets, and
worryingly, and may stay in retreat for some time.
•
The securitised debt markets should recover, but with less leverage underpinning
them, and hopefully greater risk transparency.
•
In the derivative markets, there will be greater standardisation of products, and
much greater reliance on common market infrastructure - for trading, clearing and
reporting of trades. High volume, low-margin platforms will likely gain in
competitiveness.
•
Wealth management will remain a growth industry, especially in Asia, where the
pool of wealth is growing most rapidly and the need for diversification remains great.
•
And outside of intermediated finance, companies will seek new ways of raising
funds, including through private placements.
6. Will this mean a safer financial world? Maybe. That will depend on whether we
persist in seeing through the regulatory reforms that began a few years ago. It will depend on
whether we keep to a sensible balance in regulation - and that includes not over-doing bank
regulation and under-doing the oversight of shadow banking. It will also depend on whether
we all stay intensely alert to the risks of the future, including especially the risks that we do
not yet see or know, rather than focus only on the last battle or on preventing the last crisis
from recurring.
7. What of global capital flows? There too we see shifts, as global finance responds to
a two-track world of economic growth. The prospect of sub-par growth in the advanced
economies for a number of years, together with central bank actions to keep interest rates
very low, have led to what is becoming a furious search for yield. Pension funds and
insurance funds need better yields badly, and they are putting more monies in the emerging
markets and other risk assets.
8. This is likely to be more than a cyclical trend. We are seeing a secular shift in assets
towards the emerging markets. Advanced country funds in fact remain significantly
underweighted in emerging market assets, and are gradually correcting for this. At the same
time, sovereign debt ratings have been raised in several emerging economies, in Asia
especially1, at the same time that a number of advanced economies2 have seen their ratings
lowered. Asia is certainly not free from risks, and there is much work ahead to preserve and
improve sovereign ratings. But no one can assume that the recent rebalancing of risk
assessments vis-à-vis the advanced economies is temporary.
9 What this continuing shift in global funds also means, however, is that there is
critical need to add depth and breadth to Asian financial markets. It will not be possible to
absorb a greater share of global savings without developing this depth and breadth in
markets, and a robust market infrastructure. Otherwise, both global and Asian capital flows
within the region will lead to recurrent bubbles, whether in equities, property markets or
currencies, rather than find their way to the most productive investments in Asia's
economies.
10. Asia's financial markets have grown significantly over the past decade. But the
capital markets, and especially for bonds and securitised debts, remain small in relation to
Asia's GDP. Further, the region's financial markets are still relatively small and fragmented.
11. There is by the same virtue, great potential to develop Asian financial markets and
enable them to play a stronger role in promoting balanced and sustainable growth.
12. We will have to push ahead with reforms at two levels to develop these financial
markets. Gradual and progressive financial liberalisation can bring about more liquid and
broader domestic financial markets. It will also help spur domestic demand by households,
and provide smaller enterprises with better access to capital in several Asian economies.
Secondly, at the regional level, we have to inject greater momentum into improving
crossborder market access and harmonising rules and standards.
Key themes in the development of Asia's financial markets
13. Let me now touch on three themes that will influence the development of Asia's
financial markets in the decade ahead:
i. Firstly, the changes in the OTC derivatives markets as a result of global reforms;
ii. Secondly, the harnessing of technology to transform Asia's financial infrastructure;
and
iii. Thirdly, the increasing international role of the RMB.
I. Structural shifts in the OTC derivatives markets as a result of global reforms
14. First, the structural shift in the global OTC derivatives markets. Most of you will be
familiar with the changes that are coming into place, in steps, as a result of global reforms -
more standardised products, and more robust market infrastructure: central counterparties
for clearing, trade repositories for reporting, swap execution facilities for trading where
appropriate. The global reform process is now shifting from rulemaking to implementation.
15. We are already seeing the shift in Asia's OTC derivative markets. The new market
infrastructures are expected to provide greater transparency and allow risks to be managed
more effectively among market participants. Market practices will be redefined, with the need
to report and clear selected OTC derivative trades within more than one jurisdictions.
16. However, we are also seeing a proliferation of Central Counterparties (CCPs) and
trade repositories being set up in Asia. While this will provide choice to Asian market
participants, it may also increase risk and lead to higher costs.
17. Regulators will need a comprehensive view of risks in the cross-border,
interconnected market. Having multiple CCPs and trade repositories in the region may risk
fragmentation, and may hamper monitoring of systemic risks as regulators may see only their
own segments of the market. Market participants will also face additional costs if CCPs and
trade repositories lack economies of scale.
18. Asian regulators will therefore need to work closely together to enable infrastructural
entities to offer their services across different jurisdictions. For example, the infrastructure of
a DTCC global trade repository and AsiaClear CCP in Singapore offers the prospect of
effective surveillance by regional regulators and economies of scale. We will continue to
ensure that our market infrastructure operates in a transparent and accessible way so that
the needs of regional regulators and the industry can be met under clear and robust
guidelines.
19. At the global level too, there are real benefits for regulators to ensure
interoperability in market infrastructure to allow for more effective risk monitoring. However,
interoperability will require time and effort, as risk management practices such as margin
eligibility standards have to be harmonised across CCPs in different jurisdictions.
20. As Asia's infrastructure is still at an early stage of development, we have an
opportunity to harmonise practices while making the changes needed to respond to
emerging global regulatory reforms. It is heartening to note that Asian regulators are working
closely on OTC derivatives regulations. A good example was the joint letter from Singapore,
Hong Kong and Australia to the US CFTC, expressing our concerns on the extra-territorial
application of the US rules.
II. Harnessing technology to transform Asia's financial infrastructure in a
gamechanging fashion
21. Regulators everywhere are confronted with highly connected global markets.
Collecting and managing information is now a core competence in itself, for effective
surveillance of the financial markets. Similarly, market participants are making greater use of
technology in risk management - performing complex portfolio valuation and mitigating risks
such as through intra-day margining at CCPs, and often across global books and in multiple
time zones and jurisdictions. Moving collateral across markets swiftly and efficiently is also
now a core competence.
22. Besides risk management, technology can be useful in developing liquidity in Asian
markets. It can bring greater pricing efficiency and transparency, as we are seeing in the US
and EU financial markets as trading moves to electronic platforms.
23. In Asia, there is room for our financial markets to embrace greater "electronification"
of trading, notwithstanding our smaller markets. To illustrate, an estimated 80% of trades are
executed in electronic platforms in developed country FX markets, whereas 85% of
FX trades in Asia are still executed by voice. A reduction in transaction costs can promote
greater liquidity for Asian asset classes, and broaden participation from investors including
retail traders.
III. Growing regional and international role of the RMB
24. Let me go on to the third theme I wanted to talk about, which is that of RMB
internationalisation, and how this will shape Asia's financial markets development.
25. The status quo will not last. Currently, only 0.6% of global payments are settled in
RMB, vastly below China's share of global trade (10%) or investment flows. There is clearly
room for growth.
26. In the long run, if we envisage China with deep and liquid capital markets, and a
largely liberalised capital account, the RMB market will potentially play a transformational
role in Asian finance. For now, even with limited convertibility, there is considerable potential
for greater use of the RMB. The economic fundamentals are driving this. Besides China's
growing share of global trade, there is a rapidly growing trade between China and the rest of
the Asian region, and especially ASEAN. Further, China's foreign direct investments are
expanding strongly, especially into Asian markets. Outbound Foreign Direct Investment (FDI)
from China has increased almost seven-fold in the last seven years (to US$77 billion in
20123), and is expected to expand further in the coming decade. A growing part of this FDI is
expected to be RMB-denominated, and this too will contribute to greater offshore use of the
RMB.
27. The overseas expansion of Chinese corporates will be reinforced by the growing
presence of mainland Chinese banks as they grow their regional and international presence.
In Singapore, we extended Qualifying Full Bank (QFB) privileges to Bank of China and ICBC
as part of the China-Singapore FTA. Both banks are growing their Singapore operations as
Southeast Asian hubs. We are also seeing interest from other Chinese financial institutions.
28. The re-denomination of China's trading flows in RMB will allow Asian corporate and
financial institutions to more effectively manage their exposures to China. While USD would
remain an integral global settlement currency, RMB is likely to be increasingly used for trade
denomination and contract pricing.
29. As we see greater acceptance and use of the RMB as a trade settlement currency,
there will also be important implications for the interactions between China and Asia's
financial markets, and indeed for global financial markets.
30. For one, it will be critical to facilitate the development of a single fungible offshore
RMB market, as the market grows in multiple jurisdictions. (Currently, the industry has
designated different currency codes, such as the CNH and CNT, to reflect these existing
market frictions.) Regulators and market participants will have to work together to avoid
fragmenting liquidity across markets, and to promote efficiency in the offshore RMB market.
31. In addition, China plans to launch its international payment system, known as CIPS,
in 2014. The development of a single centralised cross-border RMB payments infrastructure
also augurs well for market efficiency and standardised practices for RMB payments across
the region.
Singapore's role as an offshore RMB market
32. As an international trading and financial centre, Singapore will seek to support the
growth of a resilient offshore RMB market in the Asian region by:
i. Building RMB liquidity;
ii. Enhancing access to RMB for funding and investment purposes; and
iii. Integrating the offshore RMB with existing Asian local currency markets.
33. Firstly, Singapore can leverage on its strengths as a key wholesale funding centre
to increase liquidity and circulation of the RMB in Asia. We are already seeing good
growth in RMB deposits, both non-bank and interbank. We are also one of the largest
centres for RMB payments outside Hong Kong. As a major regional funding centre,
Singapore has traditionally supported the liquidity of the Asian markets and can partner
China in promoting sustainable offshore use of the RMB.
34. In February this year, ICBC Singapore was appointed by the People's Bank of China
(PBC) as the RMB clearing bank in Singapore. The RMB clearing bank will be an important
channel for RMB liquidity to circulate between China to Singapore.
35. In addition, PBC and MAS together announced an expanded Currency Swap Facility
last Friday. This will see a doubling in the size of the swap facility from RMB150 to RMB300
billion. The scope of the Currency Swap Facility will also be expanded to allow MAS to provide
RMB liquidity to banks in Singapore, where needed. This backstop facility will further strengthen
confidence in Singapore's offshore RMB market, and encourage more financial institutions,
corporates, and investors to step forward and participate in the RMB market via Singapore.
36. Secondly, with a strong RMB pool, Singapore can provide enhanced access to
RMB funding for corporates and investors. Singapore is a major source of FDI to China
and serves as the Asia-Pacific headquarters for many multinational companies (MNCs) and
Asian corporates with operations in China. We also serve as the regional treasury centre for
a large base of Chinese corporates.
37. With the new RMB clearing arrangements, we can expect financial institutions
based in Singapore to reach out to local and regional corporate and investors and encourage
greater participation in the offshore RMB market.
38 Thirdly, Singapore can support the integration of offshore RMB with Asian local
currency markets and act as a test-bed for new RMB products. The development of a
wider range of RMB products will be healthy. It will create additional ways in which
corporates can redeploy their RMB funds in the offshore markets, and provide additional
products for investment.
39. The financial industry in Singapore has good expertise in developing FX and
derivatives instruments, with several emerging Asian FX teams based here. It is well equipped
to develop customised offshore RMB capital market instruments, especially for Asian market
participants. For instance, banks in Singapore can explore how to encourage offshore RMB
bond issuance in Singapore with longer maturity tenors and different issuer profiles.
Conclusion
40. Let me wrap up briefly. Global deleveraging is being accompanied by the continued
inflow of funds into Asia's emerging market economies. This shift poses risks if not
wellmanaged, but it is also an opportunity. The next phase of development in Asia's financial
markets is therefore critical. We have to develop greater breadth and breadth in Asian
markets, so that savings flows translate into sustainable economic growth rather than
recurrent bubbles in asset markets.
41. Thank you and I wish you a successful conference.