Singapore
13 July 2010
Dwarfed by many of its neighbours in terms of securities lending activity, Singapore’s ongoing stability during the financial turmoil means it remains an attractive destination for some investors
Image: Shutterstock
The tiny city state of Singapore is a major Asian financial market, but securities lending has not yet made a major impact. While the likes of derivatives and other complex financial instruments play a big role, administration is key to the country’s success.
But it hasn’t been all bad news, as the turmoil that engulfed the major markets over the past couple of years has left Singapore relatively unscathed.
“Singapore is a relatively small market for securities with the occasional special creating spikes in utilisation and rates,” says Martin Corrall, director and securities finance Asia Pacific product head at Citi. “Over the past two years volumes have remained relatively constant and as such Singapore has fared relatively well during this time period.”
Although the one party state is unlikely to promote any bad news, Singapore has not seen any major upset to its economy in the last couple of years. Indeed, visitors to the country are unlikely to notice much difference now compared to two or three years ago.
In terms of infrastructure, there are few jurisdictions that can compete with this one. Singapore has one of the best-educated workforces, strong communications links and a welcoming tax environment that encourages high earning ex-pats. This is coupled with a low cost of living and a historical connection to Western economies, so plenty of ambitious finance staff are attracted to the island.
While virtually every global banking player has a presence in the country, their securities lending operations tend to be run from Hong Kong or, occasionally, other jurisdictions. The securities lending market itself is mostly supported by local firms, often in association with the multinationals. “Opportunities are not as strong as in other markets in Asia and this does not give rise to fierce competition amongst firms or increase the maturity of the market in this region,” explains Corrall.
“Singapore is typically regarded as the smaller brother to markets like Hong Kong. This is demonstrated by the fact that the majority of broker dealers’ front offices are located in Hong Kong,” continues Corrall. “However, Singapore tends to be more of an operational hub providing global support. Singapore is making steps to increase its attractiveness for broker dealers as evidenced by recent structural announcements at the SGX.”
The Singapore Exchange has long been regarded as one of the more forward-thinking exchanges, and has made great strides in attracting new participants. All CDP securities holder can participate in the SGX securities lending programme. They can register as a lending participant even if they currently do not have eligible securities or the requisite quantity. Once registered participants have eligible shareholdings, the exchange will lend securities on their behalf.
By borrowing and lending in this way, lenders and borrowers remain mutually anonymous and with CDP as the principal all lenders are protected. Lenders can sell at any time, even if their securities are out on loan and lending is done based on an algorithm to maintain fairness.
From the start of July, the SGX has had a new organisational structure, which it says will capitalise on all opportunities within the Asian markets. There are now 10 business units and seven support units, which are designed to ‘provide sharper focus on key products and customer segments’.
“Singapore is known as a conservative country, but SGX is a surprisingly fast-moving organisation,” says one participant. “It tends to be much more proactive compared to other Asian exchanges, and it’s this that is going to attract more participants, rather than the actual changes that are made - even if the market is not quite as big or dynamic as you would like, you know the SGX is going to make sure you can make the most of it.”
Unlike markets in North America, there has been no restriction - temporary or otherwise on short selling, the regulators believing that the market was functioning perfectly well without them. But to put the market in line with other exchanges in Asia, the SGX recently implemented compulsory identification of short sales with daily published aggregated short selling volumes.
“The SGX made this move following the results of a consultation paper issued at the end of 2008 and after agreement with the Monetary Authority of Singapore,” says Corrall. “We view this as positive in the fact that what this move provides acceptable is in line with other markets in Asia.”
Corrall adds, however, that there is more that can be done, and certain changes have not helped the growth of the market: “The revised settlement day buy-in structure introduced last year has dampened interest in Singapore, which now presents operational challenges,” he says.
“Enhancement of withdrawal of buy-in options and/or fails coverage would improve the process; at Citi we have received numerous requests by various participants to provide same-day coverage due to ongoing concerns.”
But Corrall remains optimistic about the future: “The SGX is becoming more proactive in promoting itself in Asian markets as seen with the secondary listing of Prudential shares. We have also seen the introduction of Special Purpose Acquisition Companies (SPACs) to enhance Singapore’s position as the capital market of choice. They have recently announced a new organisational structure... and I would expect to see more innovative product solutions and market positioning in the future.”
Singapore has an uncertain future, says one participant. “It has been successful as a back office hub for decades, and this is likely to continue - although there will be competition from lower cost centres within Asia, especially India, which seems to be becoming the destination of choice for many of the world’s largest financial services companies.
But it also wants to be seen as an investment destination, and this will be difficult. It’s up against the likes of Japan, South Korea and China, but more importantly it’s in competition with Hong Kong, and I can really only see one winner there. That said, its political and economic stability will always mean some investors will be keen to put their money on the island.”
But it hasn’t been all bad news, as the turmoil that engulfed the major markets over the past couple of years has left Singapore relatively unscathed.
“Singapore is a relatively small market for securities with the occasional special creating spikes in utilisation and rates,” says Martin Corrall, director and securities finance Asia Pacific product head at Citi. “Over the past two years volumes have remained relatively constant and as such Singapore has fared relatively well during this time period.”
Although the one party state is unlikely to promote any bad news, Singapore has not seen any major upset to its economy in the last couple of years. Indeed, visitors to the country are unlikely to notice much difference now compared to two or three years ago.
In terms of infrastructure, there are few jurisdictions that can compete with this one. Singapore has one of the best-educated workforces, strong communications links and a welcoming tax environment that encourages high earning ex-pats. This is coupled with a low cost of living and a historical connection to Western economies, so plenty of ambitious finance staff are attracted to the island.
While virtually every global banking player has a presence in the country, their securities lending operations tend to be run from Hong Kong or, occasionally, other jurisdictions. The securities lending market itself is mostly supported by local firms, often in association with the multinationals. “Opportunities are not as strong as in other markets in Asia and this does not give rise to fierce competition amongst firms or increase the maturity of the market in this region,” explains Corrall.
“Singapore is typically regarded as the smaller brother to markets like Hong Kong. This is demonstrated by the fact that the majority of broker dealers’ front offices are located in Hong Kong,” continues Corrall. “However, Singapore tends to be more of an operational hub providing global support. Singapore is making steps to increase its attractiveness for broker dealers as evidenced by recent structural announcements at the SGX.”
The Singapore Exchange has long been regarded as one of the more forward-thinking exchanges, and has made great strides in attracting new participants. All CDP securities holder can participate in the SGX securities lending programme. They can register as a lending participant even if they currently do not have eligible securities or the requisite quantity. Once registered participants have eligible shareholdings, the exchange will lend securities on their behalf.
By borrowing and lending in this way, lenders and borrowers remain mutually anonymous and with CDP as the principal all lenders are protected. Lenders can sell at any time, even if their securities are out on loan and lending is done based on an algorithm to maintain fairness.
From the start of July, the SGX has had a new organisational structure, which it says will capitalise on all opportunities within the Asian markets. There are now 10 business units and seven support units, which are designed to ‘provide sharper focus on key products and customer segments’.
“Singapore is known as a conservative country, but SGX is a surprisingly fast-moving organisation,” says one participant. “It tends to be much more proactive compared to other Asian exchanges, and it’s this that is going to attract more participants, rather than the actual changes that are made - even if the market is not quite as big or dynamic as you would like, you know the SGX is going to make sure you can make the most of it.”
Unlike markets in North America, there has been no restriction - temporary or otherwise on short selling, the regulators believing that the market was functioning perfectly well without them. But to put the market in line with other exchanges in Asia, the SGX recently implemented compulsory identification of short sales with daily published aggregated short selling volumes.
“The SGX made this move following the results of a consultation paper issued at the end of 2008 and after agreement with the Monetary Authority of Singapore,” says Corrall. “We view this as positive in the fact that what this move provides acceptable is in line with other markets in Asia.”
Corrall adds, however, that there is more that can be done, and certain changes have not helped the growth of the market: “The revised settlement day buy-in structure introduced last year has dampened interest in Singapore, which now presents operational challenges,” he says.
“Enhancement of withdrawal of buy-in options and/or fails coverage would improve the process; at Citi we have received numerous requests by various participants to provide same-day coverage due to ongoing concerns.”
But Corrall remains optimistic about the future: “The SGX is becoming more proactive in promoting itself in Asian markets as seen with the secondary listing of Prudential shares. We have also seen the introduction of Special Purpose Acquisition Companies (SPACs) to enhance Singapore’s position as the capital market of choice. They have recently announced a new organisational structure... and I would expect to see more innovative product solutions and market positioning in the future.”
Singapore has an uncertain future, says one participant. “It has been successful as a back office hub for decades, and this is likely to continue - although there will be competition from lower cost centres within Asia, especially India, which seems to be becoming the destination of choice for many of the world’s largest financial services companies.
But it also wants to be seen as an investment destination, and this will be difficult. It’s up against the likes of Japan, South Korea and China, but more importantly it’s in competition with Hong Kong, and I can really only see one winner there. That said, its political and economic stability will always mean some investors will be keen to put their money on the island.”
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