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.

10  11  12  Portals which reproduce investment research reports should (a) attribute the report sources accurately, (b) should not exercise editorial control over, or modify contents of reproduced reports, and (c) should not endorse or otherwise comment on the reports. The webpages of such entities should contain disclaimers to the effect that the views expressed are not those of the entities. Websites providing prospectuses and application forms in a passive manner should display disclaimers to the effect that they do not have the intention of inducing investors to subscribe for securities. BIS Review 69/2000  6  Going forward Several of the new licensing principles can be implemented based on the existing Securities Industry Act and licensing framework. Others will require amendments to the legislation. The new provisions will be included in the forthcoming Financial Advisers Act and the Omnibus Securities and Futures Act, and announced in 2001. MAS has already received a number of new applications which fall under the proposed securities licensing framework. These are currently being evaluated. As I have just discussed the licensing principles broadly, interested parties should approach MAS to discuss the details of the revised licensing framework in relation to their business models. MAS will also be seeking further comments from relevant industry players on these changes. Conclusion The vitality and dynamism of global capital markets have ushered in challenging times for the financial services industry. With technology breaking down geographic and sectoral boundaries, links between markets, institutions and instruments will flourish.