Opening Address by Mr Ng Nam Sin Asst MD MAS at the 6th FIA Asia Derivaties Conference
Distinguished guests, Ladies and gentlemen,
Good morning. It is my pleasure to join you today at FIA’s 6th Annual Asia Derivatives conference. To all our guests from overseas, I bid you a very warm welcome and I trust that you are having a pleasant stay in Singapore.
2010 Post Crisis Era
I would like to start by providing some quick highlights on how the Singapore’s financial sector thus far this year. Generally we have done well. In the second quarter of 2010, Singapore expanded by 18.8% on a year-on-year basis. For 2010 as a whole, the Singapore economy is expected to expand by 13 to 15%. The financial services industry has fared well through the crisis too. Let me provide some highlights:
a. In 2009, total assets under management (AUM) by fund managers in Singapore grew by 40% to reach S$1.2trillion (approximately US$861bn). This latest AUM size has exceeded the pre-crisis peak in 2007.
b. The latest survey by the Bank for International Settlements (BIS) ranked Singapore as the 4th largest FX centre globally and 6th largest OTC interest rate derivatives centre, underscoring Singapore’s development as key derivatives trading centre in Asia.
c. In the commodities space, Singapore remains the leading Asian hub in both physical and futures trading. Singapore is Asia’s price discovery and trading centre for refined oil products and rubber, and a key OTC commodity derivatives trading hub, accounting for more than 50% of Asian volumes.
Opportunities and Risks
Turning to the global derivatives market – global futures and options volume has grown strongly in 2010. The total number of futures and options contracts traded on 76 exchanges worldwide tracked by the Futures Industry Association rose 32% between 1H2009 and 1H2010 exceeding pre-crisis growth levels of 30% in 2007. Similar to the trends we observed in other asset classes, in the derivatives space, emerging markets in Asia Pacific and Latin America led the recovery in the number of exchange traded futures and options contracts.
As we emerge from the 2008 financial crisis, the economic and financial landscape will be quite a different one. Broadly, there are two observations.
Firstly, global growth will be centered on emerging markets, particularly, in Asian countries with strong economic fundamentals. It is expected that Asia will be an important driver of global growth in the medium term.
Secondly, the global financial crisis has revealed regulatory gaps and weaknesses in the global financial system. The crisis triggered extensive reviews of the financial regulatory framework. In the US, the Dodd Frank reform bill was introduced. The Financial Stability Board (FSB) is studying the possibility to standardize OTC derivatives contracts to be traded on exchanges or electronic platforms and, where appropriate, cleared through central counterparties.
These measures aim to increase transparency and reduce systemic risk in the markets. They would likely impact the OTC industry and its business models.
Long Term Sustainable Growth
How do we see the industry shaping up to address these challenges? Derivatives as a risk management tool have played an important role in supporting economic growth. It facilitates risk management, investments and enhances asset management capabilities, be it in trade or commodities. In the context of Asia, we can see three key elements that could shape this industry:
Firstly, the financial industries in Asian countries are in different stages of development, some more sophisticated than others. Financial services, availability of products and risk management tools are essential to facilitate economic growth. Here, there is scope for more Asian-based financial products with underlying in equities, fixed income, and commodities. Volumes on SGX’s Nikkei 225, MSCI Taiwan and Nifty Futures are evidence of such demand. The establishment of the Singapore Mercantile Exchange (SMX), the first pan-Asian multi-product commodity and currency derivatives exchange, would provide investors broader access into Asian markets.
Secondly, the infrastructure for trading and risk management needs to be developed. The Singapore Exchange has just announced the upcoming launch of Asia’s first central clearing platform for OTC financial derivatives, starting with clearing of US dollar and Singapore dollar interest rate swaps. It is encouraging that major international banks and local banks have applied to be clearing members of the SGX CCP. This shows that the global drive towards enhancing OTC derivatives risk management is gaining momentum globally and also in Asia.
Of course these two developments must work within a regulatory regime of high standards and at the same time, allow for well-managed risk taking and innovation.
Third point is on competency building. This is the key to ensuring high standards and professionalism. In this respect, MAS has been working closely with the industry and with training institutes such as the Institute of Banking and Finance (IBF) and the Risk Management Institute (RMI) at the National University of Singapore to increase the supply of skilled risk management talent. The RMI, as the lead training provider on risk management under the Financial Industry Competency Standards (FICS), which is an over-arching national standard, offer a broad range of training programs in risk management. It is also collaborating with professional bodies such as the Professional Risk Manager (PRM) and Global Association of Risk Professionals (GARP) to deliver training for their professional qualifications.
Fundamental research would also play a key role in developing intellectual capital. In the area of derivatives, it is even more important that investors, regulators and industry players have in-depth understanding and continuously keep up to date on developments and implications. In this area, MAS has supported the establishment of knowledge centres in areas such as risk management, like the RMI. Besides generating industry-relevant applied research, these centres serve as important focal points to bring practitioners, policymakers and academics together for knowledge transfer and open discussions.
In summary, we believe that there is strong potential for growth in the derivatives market in Asia. There is scope for more Asia-based products, but its development has to be accompanied by investments in risk management infrastructure and competency building. Only with these, then we can have orderly and sustainable long term growth. On this note, I wish you fruitful discussion for the rest of this seminar.