With qualified intermediaries operating within an environment based on transparency and disclosure, investors would have a suitable basis for making well-informed decisions. This is another step towards realising the “caveat emptor” philosophy. BIS Review 69/2000  4  New licensing principles MAS will therefore adopt the following licensing principles for securities activities conducted through the internet: Interpretation of the activities of an investment adviser and a dealer Context and circumstance Our first principle is that MAS will examine the context and circumstance in which activities are conducted, to determine whether licensing is required. This applies to both investment advice and dealing in securities. Suppose, for example, a web page of a business school provides a tool for calculating the value of shares. Should we require the business school to be licensed? In deciding this, MAS would take into consideration the fact that the business school’s primary mission is education, not investment advice. In this context, we are unlikely to require the business school to be licensed to provide such a tool on its web page. Interpretation of the activities of an investment adviser Fact versus opinion Our second principle relates to investment advice. In determining what constitutes investment advice, MAS will use the “fact versus opinion” test as a general guide, supplemented, where appropriate, by the context and circumstance principle. The presence of interpretation, selectivity or subjectivity will require licensing. Let me explain. A wealth of information on securities is available on the internet.

Credit derivatives form one potential growth area. Credit risk is an important issue for banks, particularly in Asia. Before credit derivatives were invented, banks generally had to stop extending new loans or services to customers to whom they had excessive exposure. This worked against the banks’ efforts to maintain valued client relationships. Credit derivatives provide banks an alternative. Banks can now repackage and divest excess credit risk exposures, and continue to service their clients. MAS has studied how credit derivatives should be captured under the existing capital adequacy framework for banks. It has circulated draft guidelines to industry players and associations for comments. MAS has now finalised the guidelines,4 which address capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure. If banks assume credit exposure via the use of derivatives, they will be subject to capital charges. But if banks use credit derivatives to hedge their underlying risk exposures, they will be granted relief, depending on the degree of risk transfer. For example, where the hedge is imperfect, because of mismatches in maturity, asset or currency, regulatory relief will still be available, albeit to a smaller extent. A second promising area is that of securitisation. Like credit derivatives, securitisation allows banks to manage their credit risk and capital more effectively. In its basic form, securitisation involves pooling assets in a special purpose vehicle, which is then funded by issuing securities.