Jacqueline Loh: Integrating Asia's capital markets
Keynote address by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority
of Singapore, at the ASIFMA (Asia Securities Industry and Financial Markets) Annual
Conference 2014 "Developing Asia's Capital Market", Singapore, 5 November 2014.
* * *
Mark Austen - CEO, ASIFMA
Ashley Alder - CEO, Hong Kong Securities and Futures Commission and my fellow keynote
speaker
Fellow regulators and central bankers
Distinguished guests
Ladies and gentlemen
1. It is my pleasure to join you this afternoon at the ASIFMA annual conference held in
Singapore.
2. We have a very ambitious agenda ahead of us. The title of the conference,
"Developing Asia's Capital Markets", certainly does not do full justice to the breadth of topics
covered in the breakout sessions and roundtable discussions over these two days. These
topics are very wide ranging indeed, from traditional equity and debt markets, to foreign
exchange, investment banking, fund management, financing of Asia's infrastructure needs,
market infrastructures; as well as specific geographic markets China and India. Each
segment not only aims to address opportunities and challenges in each market or asset
class, but also opportunities and challenges across markets and asset classes.
3. Accordingly, I will focus my remarks on integrating Asia's capital markets as a
natural pairing to the conference theme on developing Asia's capital markets.
I. Economic dynamism and wealth creation in Asia
4. Asia remains the fastest growing and most dynamic region in the world today and is
likely to remain so in the foreseeable future. According to projections by The Conference
Board, China's growth in the next ten years will average close to 5% per annum, with India at
about 4.2% and the rest of Asia at 4.5%.1 These projected growth rates for Asia are well
above the 3.8% for emerging economies as a whole, and the 1.7% expected for the
advanced economies over the same period. Looking further into the future, the Asian
Development Bank has projected that the sum of the GDP of China, India and ASEAN in
purchasing power parity terms could quadruple by 2030 and even exceed that of the US and
Europe combined.2
5. Asia's already large middle class, will continue to register strong growth. In ASEAN
for instance, the middle class is projected to rise to two-thirds of the population by 2030, from
less than a quarter in 2010.3 The rapid expansion of the middle class will, from the demand
side, spur the growth and development of a wide range of goods and services.
6. Alongside Asia's sustained economic development in the medium-term, financial
services will be an important facilitator of growth as well as a growth engine in its own right.
As income increases and wealth accumulates, the demand for modern services is likely to
grow faster, as they have higher income elasticities. Thus, we expect that demand for
financial services in Asia - such as wealth management - will rise more than proportionately
to the increase in household income. For instance, assets under management attributed to
mass affluent and high net worth investors in Asia is expected to expand by 60% to reach
USD 176 trillion by 2020.4
7. These positive economic factors will continue to drive the growth of Asian financial
institutions and Asian capital markets. Today, five of the top ten largest banks in the world by
market capitalisation are Asian banks.5 Primary market capital-raising in Asia via IPOs is the
highest in the world. In the debt market, capital raised via Asian bond issuances have also
doubled since 2009 after having achieved record sales in each of the past three years.
II. Asia's capital markets are ripe for closer integration
8. The strong growth of Asian economies and financial markets has created the
conditions that are driving greater financial integration in the region. In China, home to the
largest bank in the world by assets, banks and asset managers have acquired sufficient
scale domestically to expand and look abroad to grow their businesses. Since 2012, the total
amount of RQFII quota awarded by China has more than doubled for qualified foreign
institutional investors to purchase mainland RMB-denominated securities. The RQDII
scheme will allow qualified domestic institutional investors to purchase RMB-denominated
securities abroad, which was recently approved. In Myanmar, one of the most under-banked
countries with bank loans amounting to just one-fifth of GDP6, the issuance of nine licences
to foreign banks (including two Singapore banks) will help to bring much-needed capital for
economic development, financial services and technology transfer. These are but two
examples of the blossoming of financial services in Asia - whether through cross-border
channels, overseas expansion or domestic liberalisation - which will integrate the region
financially.
9. Financial integration brings clear benefits to both users and providers of financial
services. It leads to more effective mobilisation of savings from surplus countries to countries
that need capital, and improve the efficiency of investment allocation. A well-developed and
competitive financial sector can thus be a catalyst to spur and sustain economic growth. The
opening up of the financial sector to foreign participation adds to the sector's development as
foreign financial institutions also promote competition and innovation, and create the urgency
for local institutions to upgrade capabilities. This has been our experience in Singapore.
10. International regulatory reforms are adding impetus to market integration. Let me
cite two examples. First, as new Basel 3 capital and liquidity rules come into force, banks are
seeking ways to manage their capital and liquidity more efficiently. Nowhere is this more
obvious than in the OTC derivatives market, where banks are trying to compress hundreds
and thousands of lines (and over USD 700 trillion of notional value7) of OTC derivative
transactions, so as to consolidate liquid collateral for margin efficiency. Second, as
jurisdictions roll out clearing and trading mandates for OTC derivatives, more transactions
will be traded and cleared on regional and global platforms to reap the benefits of scale and
liquidity. This will be instrumental in transforming complex webs of gross exposures into
smaller sets of net exposures, reducing systemic risk and strengthening the derivatives
market. These pressures will naturally drive more aggregation across geographies and asset
classes, and place the issue of market integration squarely on the agenda. Global reforms, if
they are implemented consistently, can also support financial integration by making it less
burdensome for financial institutions to comply with regulations in different jurisdictions and
for regulators to mutually recognise and defer to each other where appropriate.
III. Market integration is happening at two levels: among jurisdictions and among
participants
11. Over the last three years, market integration has been taking place in Asian financial
markets. It is steadily making progress in individual asset classes, among small groups of
countries, sometimes bilaterally, where there is common interest and where markets and
institutions are at similar stages of development.
12. We can see evidence of market integration among jurisdictions in several areas:
a. Banking. ASEAN is in discussions to complete a banking integration framework that
will allow qualified ASEAN banks to progressively expand in each other's'
jurisdictions. This initiative aims to create opportunities to strengthen regional banks
in ASEAN and improve banking services offered to local markets. Even in other
Asian countries where cross-border bank financing is restricted, we are seeing
pockets opening up. For example, since China issued cross-border RMB rules for
Suzhou Industrial Park (SIP) and Tianjin Eco City (TEC) in the middle of the year,
about RMB 2 billion of loans have been approved from Singapore-based banks to
companies in the two industrial parks.
b. Equity Markets. In 2012, stock exchanges and regulators in Malaysia, Thailand and
Singapore launched the ASEAN trading link to offer easy access to each other's
stock markets. Singapore and China have also established a Direct Listing
Framework for Chinese companies last year. The framework will facilitate interested
Chinese companies seeking direct listing opportunities in Singapore.
c. Debt Markets. ASEAN securities regulators have since April last year implemented
common disclosure standards, which would allow issuers to issue debt securities
across various ASEAN markets with a single prospectus. Under this scheme, the
time required to issue in multiple markets will be the same as that for issuing in one
market, reaping both cost and time savings for issuers. The cross border RMB
channels with SIP and TEC, which I mentioned earlier, would also allow corporates
in these locations to issue RMB bonds in Singapore. These initiatives in the debt
and equity markets will allow companies to diversify their sources of funding abroad,
more easily tap investors in overseas markets as well as broaden the array of debt
investment choices in local markets.
d. Fund Management. There are two similar initiatives for mutual recognition of
collective investment schemes in Asia. The first, among Singapore, Malaysia and
Thailand, led by the ASEAN securities regulators. The second, involving Singapore,
Korea, Australia and New Zealand, called the Asian Region Funds Passport under
the auspices of APEC. These initiatives will widen the opportunities for investors and
fund managers abroad.
13. In addition, we see evidence of partnerships among market participants, especially
in the area of OTC derivatives which has been typically a fragmented market:
a. Collateral Management. The global reforms for OTC derivatives have drastically
increased the demand for collateral. To date, Asian collateral is not widely traded or
commonly accepted outside of their home market. This has created inefficiencies as
financial institutions can neither obtain specific, nor deploy excess, Asian collateral
outside of their home market. Two developments have helped. First, private
partnerships such as that between Clearstream and SGX, allow customers to better
allocate and optimise collateral resources in Asia by enabling collateral to be
managed on a fully automated and real-time basis. Second, central banks have also
stepped in with cross-border collateral arrangements to permit the deployment of
head-office cash and government securities to support local currency liquidity
requirements of their branches and subsidiaries overseas.
b. Futurisation. Even before most jurisdictions introduce trading mandates, some
segments of the OTC derivatives markets are already coming together to create
exchange traded products. One example lies in Asian currency futures contracts
traded on exchanges like SGX. With the introduction of new listed contracts, market
participants have chosen to futurise some of their rolling forward contracts.
Compared with OTC markets, exchange-traded futures have more transparent
pricing, and are faster to execute and more cost effective.
14. These developments demonstrate that commercial incentives can be brought into
alignment with regulatory priorities, which aim to reduce aggregate risk in financial markets
and promote greater financial soundness and stability.
15. We also see promise for integration in infrastructure finance and insurance to
produce exciting outcomes.
16. The World Bank Group Singapore Hub, expanded from the initial set up in 2010,
draws together the different infrastructure expertise along the transaction chain - firstly,
project management of the World Bank; secondly, structuring expertise of the International
Financial Corporation (IFC); and thirdly, credit enhancement of the Multilateral Investment
Guarantee Agency (MIGA) - to deliver practical project advisory and financing solutions to
governments globally. This includes its ongoing efforts to develop a bankable
Public-PrivatePartnership (PPP) project pipeline for ASEAN. The Asian Infrastructure Centre of Excellence
(AICOE), set up in April this year, would also work with governments to catalyse
infrastructure development in Asia, starting with Southeast Asia. Similar to the Singapore
Hub, the AICOE will select infrastructure projects based on needs in the region, grow them to
a bankable stage, and match these projects with private investors.
17. These efforts will help make infrastructure financing more accessible to a broader
group of investors, and help banks to recycle their capital more quickly to other greenfield
projects. Transactions can be structured such that institutional investors can, through capital
market instruments such as infrastructure projects bonds or securitisation, take over the
financing of projects from banks after the construction phase is completed. By facilitating
financing to what industry estimates to be USD 300 billion of marginal bankable projects in
Asia, these integration efforts will enhance long term growth prospects of Asian economies.
18. One less-talked about area where market integration holds great promise is in
insurance. Although natural catastrophes - and damage caused by them - have risen in Asia
in the last ten years, we remain significantly underinsured against perils like flooding. As
disaster risk exposures grow in scale, size and complexity, it would exceed the individual
capacity of local insurance markets, and governments, to insure the risks of its populations
and communities. PPPs between public and private sectors, and across national borders,
can be effective in maximising the benefits of insurance. Such examples of horizontal
integration between markets are key in managing the region's rising exposures to natural
catastrophe risks.
19. Collation of natural catastrophe risk data and analytics across ASEAN countries is a
necessary first step toward more comprehensive catastrophe protection, paving the way for
insurance integration in this region. Currently, the fragmented market structure in ASEAN
constrains data sharing and the capacity of domestic insurers to pool and underwrite risks. In
Singapore, key partners from academia and industry, alongside the MAS, have come
together to form a work group to explore the establishment of a Natural Catastrophe Data
Analytics Exchange. This Exchange serves as a regional platform to collect data and model
less understood regions at risk in Asia-Pacific, facilitate better pricing of such risks, and
eventually pave the way for more comprehensive insurance against these risks.
20. In combination, these comprehensive efforts among jurisdictions and participants
are very encouraging. And if they are completed successfully and demonstrate meaningful
benefits for the countries involved, they can be replicated very quickly to other interested
jurisdictions. Singapore is helping to drive many of these market integration initiatives
through our participation in ASEAN/ASEAN+3, APEC and G20, but also bilaterally with our
economic partners.
21. Vertical integration through the value chain can achieve cost efficiency and more
effective surveillance, particularly in capital markets and in OTC derivatives. Let me
elaborate:
a. Capital Markets. Although the ASEAN Trading Link created horizontal integration
opportunities for investors to access ASEAN stocks of members in the trading link,
settlement and custody still goes through non-exchange channels. This Link can be further
enhanced and it is the reason why the ASEAN regulators and exchanges set up a task force
to design the ASEAN Capital Markets Infrastructure Blueprint to implement post-trade
linkages that are vertically integrated with exchange trading. The post-trade infrastructure
linkages, which will allow investors in one country to purchase shares in the other markets
through their local broker and hold them in their local account, will lower not only cost and
transaction time, but also settlement risks.
b. OTC Derivatives. Many jurisdictions will eventually implement the full suite of
trading, clearing and reporting mandates. Indeed, the way the OTC derivatives market has
blossomed today - if we extend the metaphor - is to "allow a thousand flowers to bloom". In
other words, a bank could trade a currency derivative on an electronic platform in Singapore,
clear the transaction through a central counter party in London and report it to a repository in
the US. And the bank could be using different platforms, clearing houses and trade
repositories for different types of derivatives. But if all three activities in the trade cycle could
be vertically integrated into the same platform, with the trading linked to post-trade services,
it would not only be more efficient for the bank, but also be more convenient for regulators to
access transactional data from the same market infrastructure for market surveillance and
monitoring financial stability.
IV. Concluding remarks
22. I am genuinely excited by the opportunities that I see in Asia's capital markets. An
integrated capital market is not only bigger, but offers more choices for investors, more
sources of financing for companies, and generally deeper liquidity and better pricing through
competitive spreads. Over time, greater scale and greater integration within and across asset
classes can create opportunities in new financial products, such as through securitisation.
23. Singapore is well positioned to offer integrated capital market solutions, given that
many of the different parts of the value chain - trading, clearing, settlement, reporting - are
already being offered in Singapore across the spectrum of asset classes including equities,
bonds, foreign exchange and derivatives. At the same time, financial institutions that are able
to harness innovative technology to increase productivity or differentiate their business
offerings would be better positioned to capture these opportunities. With technology
transforming activity across financial markets, the profile of jobs in finance will change in the
years to come. Through the Institute of Banking and Finance, MAS is working with the
industry on an enhanced set of desired competency standards to grow the pipeline of skilled
talent ready to service the growth in capital markets in Asia.
24. I hope I have touched on the key themes and issues that you will be discussing over
these two days, and may I wish you a most fruitful conference ahead.
25. Thank you.