FINANCIAL SOUNDNESS STUDY OF SINGAPORE FOCUSING ON KEY

FINANCIAL INSTRUMENTS

OVERVIEW OF THE FINANCIAL SYSTEM

Singapore is major international financial center – having a large number of financial institutions as hereunder

Number of Financial Institutions and Relevant Organisations in Singapore (As on 18 Sep 2010 )

Type of Institution Number of Institutions

Commercial Banks 120

Local Banks

7

Foreign Banks

113

Foreign Full Banks

26

Wholesale Banks

49

Offshore Banks

38

Financial Holding Companies 1

Merchant Banks 46

Representative Offices of Banks 31

Institutions with Asian Currency Units 162

Money Changers 383

Remittances 84

Finance Companies 3

Money Brokers 10

Singapore Government Securities Market - Primary Dealers

12

Singapore Government Securities Market - Secondary Dealers

23

Approved Holding Companies 3

Approved Exchanges 3

Designated Clearing Houses 3

Recognised Market Operators 24

Holders of Capital Markets Services Licence

239

Dealing in Securities

98

Securities Members

24

Non-Member Companies of SGX-ST

74

Trading in Futures Contracts

48

Derivatives Clearing Members

21

Derivatives Trading Members

6

Non-Member Companies of SGX-DT

21

Leveraged Foreign Exchange Trading

18

Advising on Corporate Finance

32

Fund Management

113

Securities Financing

17

Providing Custodial Services for Securities

39

Real Estate Investment Trust Management

17

Holders of Financial Adviser's Licence 70

Advising others, either directly or through publications or writings, and whether in electronic, print or other form, concerning the following investment products, other than - (i) in the manner specified in paragraph 2 of the Second Schedule to the Financial Advisers Act (Cap. 110); or (ii) advising on corporate finance within the meaning of the Securities and Futures Act (Cap. 289)

62

Futures contracts

2

Contracts or arrangements for the purposes of foreign exchange trading

4

Contracts or arrangements for the purposes of leveraged foreign exchange trading

3

Life policies

52

Securities other than collective investment schemes

32

Collective investment schemes

51

Structured deposits

8

Advising others by issuing or promulgating research analyses or research reports, whether in electronic, print or other form, concerning the following investment products

43

Futures contracts

3

Contracts or arrangements for the purposes of foreign exchange trading

4

Contracts or arrangements for the purposes of leveraged foreign exchange trading

3

Life policies

26

Securities other than collective investment schemes

34

Collective investment schemes

39

Structured deposits

7

Marketing of any collective investment scheme

47

Arranging of any contract of insurance in respect of life policies

52

Exempt Financial Advisers 282

Banks

67

Merchant Banks

26

Finance Companies

1

Insurance Companies

13

Insurance Brokers

37

Capital Markets Services Licence Holders

138

Reinsurers

0

Exempt Financial Advisers - Companies providing financial advisory services to not more than 30 accredited investors

291

Exempt Fund Managers - Companies providing fund management services to not more than 30 qualified investors

514

Exempt Corporate Finance Advisers - Companies advising on corporate finance to only accredited investors

123

Exempt Leveraged Foreign Exchange Traders - Companies carrying on business in leveraged foreign exchange trading for the purpose of managing customer's funds to only accredited investors

1

Holders of Trust Business Licence 44

Exempt Persons Carrying on Trust Business

34

Banks

19

Merchant Banks

9

Advocates and Solicitors

6

Registered Insurers 148

Direct Insurers

62

Life Insurers

11

Including Life Insurers with defined market segments

4

General Insurers

45

Including General Insurers with defined business lines

10

Composite Insurers

6

Reinsurers

25

Life Reinsurers

3

General Reinsurers

14

Composite Reinsurers

8

Captive Insurers

61

Authorised Reinsurers 6

Life Reinsurers

2

General Reinsurers

3

Composite Reinsurers

1

Lloyd's Asia Scheme 20

Representative Offices of Insurers and Reinsurers

2

Insurance Brokers 64

Direct Insurance Brokers

40

General Reinsurance Brokers

11

Life Reinsurance Brokers

0

Direct and General Reinsurance Brokers

11

General Reinsurance and Life Reinsurance Brokers

2

Insurance Brokers Licensed To Place Business With Lloyd's

6

Exempt Insurance Brokers Carrying on Business as Direct Insurance Brokers

23

Other Relevant Organisations 16

The centerpiece of Singapore’s financial system is the ADM, which intermediates large cross-border interbank and nonbanking lending flows. The keyplayers in the ADM are local banks and large international FIIs.

Though it has undergone major structural changes in recent years, Singpaore’s financial sector is still dominated by the banking industry. The commercial baking sector accounts for more than 85% of the total financial sector assets.

VULNERABILITIES AND SOUNDNESS OF THE FINANCIAL SYSTEM

Risks to financial stability

Singapore financial sector has been resilient in the face of major economic downturns in recent years. It has weathered 4 major shocks – Asian crisis in 1997-98, a sharp drop in electonics exports in 2000-01, outbreak of SARS in early 2003, and the economic crisis of 2008.

The links between the ADM and the domestic financial system – via local banks and foreign banks that are active in the Singapore domestic baking market – do not seem to present undue sources of vulnerability.

Local banks carry out considerable operations through overseas branches and subsidiaries. They appear to be managed effectively and are supervised under the MAS consolidated supervision network. The operations have been generally profitable enhancing the resilience of Singapore’s banking system.

The net market value of local bank’s derivative exposures is small in absolute amounts as well as relative to their assets and capital positions. Net mark-to-market values amounted to only $20.5 billion at end September 2008. Local banks derivatives activities are concentrated in foreign exchange and interest rate products. Foreign banks account for 76% of the estimated potential counterparty credit risk exposures in local banks’ derivative books.

Stress results indicate that potential stress loss exposures of Singapore’s systemically important banks are well contained.

Operations of systemically important foreign bank branches appear to be managed prudently. Despite a sharp decline in operating profits as a result of increased provisions, the 10 largest foreign banks have remained profitable since 1999 and their net incomes have only grown over the years.

Nevertheless the financial sector is subject to a number of potential risks. The risks include i) negative shocks in external demand ii) persistent weakness in the labor market iii) a sharp increase in interest rates iv) declines in asset prices.

ROLE OF MAS

MAS is guided by 12 key principles when carrying out its supervisory work. These principles collectively characterise MAS' supervisory approach as risk-focused, stakeholder-reliant, disclosure-based and business-friendly. These principles seek to:

Emphasise risk-focused supervision rather than one-size-fits-all regulation.Assess the adequacy of an institution's risk management in the context of its risk and business profiles.Allocate supervisory resources according to impact and risks.Ensure institutions are supervised on an integrated (across industry) and consolidated (across geography) basis.Maintain high standards in financial supervision, including observing international standards and best practices.Reduce the risk of failure rather than prevent the failure of any institution.Place principal responsibility for risk oversight on the institution’s board and management.Work with relevant stakeholders, professionals, industry associations and other agencies.

Rely on timely, accurate and adequate disclosure by institutions rather than merit-based regulation of products to protect consumers.Empower consumers to assess and assume for themselves the financial risks of their financial decisions.Give due regard to competitiveness, business efficiency and innovation.Adopt a consultative approach to regulate the industry.

INSTITUTIONAL FRAMEWORK FOR FINANCIAL STABILITY

Systemic liquidity is well managed. The policy objective is to ensure the smooth functioning of the payment system and more generally the financial system at all times. As monetary policy interventions take place in the exchange market, domestic market operations are aimed at maintaining cash balances in the banking system close to the level which has been found sufficient to avoid payment system difficulties. The daily cash balances are allowed fluctuate between 2% and 4%. The range accommodates uneven distribution of liquidity which interbank transactions have not mitigated.

The liquidity management system has been complemented by an overnight borrowing facility since November 2000. Credit is provided through SGS repos at an interest rate of 2% points above the one-month interbank rate. With the inclusion of Singapore dollar into the Continuous Linked Settlement (CLS), the MAS has introduced a system to inject intraday liquidity into the banking system as an additional safeguard to ensure adequate liquidity in the system. MAS plans to establish a collateralized and automated intraday liquidity facility – which is open to all financial institutions participating in the MEPS – in conjunction with the introduction of the second generation of the MEPS.

MAS provides emergency liquidity assistance in the general market in the event of systemic market disruptions, including liquidity problems in a systemically important bank. Currently, such liquidity provision is collateralized with SGS. The MAS may consider accepting statutory bonds, corporate bonds or G7 government bonds as eligible collateral, in the event of extreme systemic crisis.

CORPORATE BOND MARKET DEVELOPMENT

The development of bond markets has been a key component of the government’s policy to enhance Singapore’s role as an international financial sector. In the past few years, MAS has implemented a series of initiatives to develop fixed income

markets, including tax incentives and liberalizing the CPF investment schemes to enable CPF members to invest part of their CPF savings in insurance products, unit trusts, equities, and fixed income securities.

To support the further development of corporate bond market it is recommended the authorities review and address the following issues

o Limited use of credit ratings may hinder the further development of the corporate bind market by limiting the set of potential investors.

o The CPF investment policy may constrain the domestic funds available to the corporate sector.

o The officially guaranteed rates of return on CPF accounts are likely to reduce the demand for corporate bonds in a low interest rate environment.

The Government of Singapore Investment Corporation (GIC) is the largest investment company in Singapore and is wholly owned by the government. It manages Singapore’s state assets by investing abroad in equities, fixed income and money market instruments, and real estate. Assets managed by GIC have reportedly grown to more than US$100 billion, but details of its investment has not been made public. Together with the MAS, the GIC

outsourced $35 billion to external fund managers to promote the development of Singapore’s fund management industry.

MARKETS

The Singapore government has introduced a number of measures to diversify and deepen its financial market. It has been actively promoting the development of capital markets to enhance the country’s role as a regional financial center and to reduce the reliance on bank financing.

Foreign Exchange Market4th largest in the world, has benefited from a time zone advantage and the presence of a large number of foreign banks and MNCs. The foreign exchange daily turnover averaged US$96 billion and surged to US$!21 billion in the first nine months of 2003. Foreign exchange trading in Singapore continued to be dominated by the G3 currencies. Spot and swap transactions accounted for about 90% of the total trading, the rest included forward, futures, and option contracts. About 90% of total turnover is accounted for by financial institutions (17% by Singapore incorporated institutions).

MONEY AND BOND MARKETSThe Singapore money market is liquid and dominated by the interbank market in foreign currency. The SGS market has continued to grow and the outstanding SGS volume was $62 billion (39.8% of GDP) at end September 2003. The SGS repo market grew in tandem.The corporate bond markets encompass the Asian dollar bond market and the Singapore dollar bond market. The total outstanding volume was $109.3 billion (outstanding Singapore dollar corporate bonds of S$54.8 billion and outstaidng foreign currency denominated bonds of about $54.5 billion.). Major issuers in the Singapore dollar corporate bond market were large Singapore corporations, financial institutions and statutory boards. The bulk of Asian dollar bonds are commercial paper and fixed rate notes with short maturities. Structured notes

issued include asset backed securities, bank subordinated debt, equity linked notes, credit linked notes, dual currency notes, interest rate linked notes, and collateralized loan obligations. Secondary bond markets are relatively illiquid since the bulk of the bonds are held until maturity.

EQUITY AND DERIVATIVE MARKETSSingapore’s equity and derivative markets are well developed. The SGX was formed in 1999 by the merger of Stock Exchange Singapore and the Singapore International Monetary Exchange. Securities are traded on its Securities Trading Division (SGX-ST) and derivatives (including a broad range of international futures and options) on its Derivatives Trading Division (SGX-DT). SGX also has linkages with several international exchanges. As of end-September 2003, total stock market capitalization was S$487 billion (313% of 2002 GDP) and 556 companies were listed on the SGX-ST.

PAYMENT & SETTLEMENT SYSTEMS IN SINGAPOREMAS' role in the oversight of payment and settlement systems is to promote the safety and efficiency of these infrastructures. In this regard, MAS is empowered under the Payment System (Oversight) Act 2006 to supervise payment system operators such as the Automated Clearing House (ACH) and payment system participants.

1) Clearing and Settlement Systems a) New MAS Electronic Payment System (MEPS+) b) Continuous Linked Settlement (CLS) System c) Singapore Automated Clearing House (SACH) 2) Payment Media a) Cheques b) Interbank GIRO c) Credit and Charge Cards d) Debit Cards e) Stored Value Facilities (SVFs)

CLEARING AND SETTLEMENT SYSTEMS1a. New MAS Electronic Payment System (MEPS+)

MEPS+ is MAS’ 2nd generation real-time gross and government securities settlement system that replaced the prior MEPS in 2006.  MEPS first began operation in 1998.  The main feature of MEPS+ is the real-time and irrevocable transfer of funds and scripless Singapore Government Securities (SGS) between MEPS+ participants, subject to the availability of funds and/or securities.  The new system also

provides several improved features over the MEPS system. These include:

o Use of SWIFT message formats and networko Advanced queue management capabilitieso Automated collateralised intra-day liquidity facilitieso Automated gridlock resolution

All banks in Singapore are eligible to participate directly in MEPS+.  Regulated non-banks of systemic importance may also seek approval from MAS to participate in MEPS+.  MEPS+ is a designated payment system under the Payment Systems (Oversight) Act 2006.

1b. Continuous Linked Settlement (CLS) System

CLS is a global multi-currency settlement system that aims to eliminate foreign exchange (FX) settlement risk due to time-zone differences.  The CLS settlement service, provided by CLS Bank, allows both legs of a FX trade submitted by members to be settled simultaneously across the books of CLS Bank and therefore guarantees finality and irrevocability of the settlements.

CLS went live in September 2002 and initially settled FX transactions in seven major currencies - the Australian Dollar, Canadian Dollar, Euro, Japanese Yen, Pound Sterling, Swiss Franc and US Dollar.  The Singapore Dollar (SGD) was included in CLS in September 2003, together with the Danish Krone, Norwegian Krone and Swedish Krona.  As a result, FX trades involving SGD and other CLS currencies can be settled in CLS without exposure to FX settlement risks. 

CLS is a designated payment system under the Payment and Settlement Systems (Finality and Netting) Act. On an international level, CLS is overseen through a co-operative oversight arrangement led by the Federal Reserve Bank of New York.  MAS is a participating central bank of this oversight arrangement (the "Protocol") that provides a mechanism for mutual assistance in carrying out individual central banks' responsibilities in pursuit of their shared public policy objectives for the safety and efficiency of payment and settlement systems.

1c. Singapore Automated Clearing House (SACH)

The Singapore Clearing House Association (SCHA), formed in December 1980, is an association to establish, manage and administer clearing services and facilities for cheques as well as debit and credit items of its members.  It comprises MAS and the commercial banks in

Singapore that wish to become members.  As of 31 May 2009, the SCHA has 47 ordinary members and 50 associate members. The SCHA establishes the rules on the rights and responsibilities of participating banks, and provides SGD Cheque Clearing, USD Cheque Clearing and Interbank GIRO Clearing services, through the Automated Clearing House (ACH), which is operated by Banking Computer Services Pte Ltd (BCS) since 1981.

Section 59 of the Banking Act allows MAS, in conjunction with the banks and other financial institutions, to establish a Clearing House to facilitate the clearing of cheques and other credit instruments, and regulate its operation. The following subsidiary legislation pertains to clearing house operations:

Payment Systems (Oversight) (Singapore dollar cheque clearing and inter-bank Giro) Regulations 2006

2. Payment Media

2a. Cheques

In July 2003, banks in Singapore migrated to a new cheque clearing system, known as the Cheque Truncation System (CTS).  CTS originated as an initiative from the SCHA and the Association of Banks in Singapore (ABS) to enhance the operational efficiencies of the banking industry.  CTS is the world's first nation-wide end-to-end cheque truncation system, leveraging on advanced imaging and internet technologies to capture cheque images at the point of deposit and transmitting the images over a secured communication network. 

In September 2002, MAS had amended the Bills of Exchange Act and issued the Bills of Exchange (Cheque Truncation) Regulations 2002 to facilitate the establishment of CTS.

Both Singapore dollar (SGD) denominated cheques and United States dollar (USD) denominated cheques presented to, and drawn on banks in Singapore, are cleared through CTS.  Note that for USD cheques to be cleared in ACH, both Presenting and Paying banks must be participants of ACH.  In 2008, the ACH processed 82.5 million SGD-denominated cheques and 957,000 USD-denominated cheques, with total values of S$579.1 billion and US$36.9 billion respectively. 

The SGD cheque clearing system and USD cheque clearing system are designated payment systems under the Payment Systems (Oversight) Act 2006.

2b. Interbank GIRO

Interbank GIRO (IBG) system allows customers of a participating bank to transfer funds through direct debits and credits, to the accounts of other participating banks.  Previously, it involves the exchange of magnetic media containing payment instructions from the participating banks via ACH.  In July 2001, the SACH enhanced the IBG system to a browser-based eGIRO system, thus eliminating the manual delivery of magnetic tapes between participating banks and the ACH.  Participants can now send and receive GIRO items, including returned and rejected items, electronically via a secured communication network.  With eGIRO, clearing cycles for the direct credit and debit transactions are shortened significantly.  In 2008 the number of eGIRO transactions processed was 81.6 million, and the value processed was S$213 billion.

The Interbank GIRO is a designated payment system under the Payment Systems (Oversight) Act 2006.

2c. Credit and Charge Cards

A credit or charge card represents a granted line of credit that allows the holder to make purchases or obtain a cash advance up to an approved credit limit.  For credit cards, the debt incurred can be settled in part; interest is charged on the amount of extended credit.  For charge cards, the full amount of the debt must be settled by the end of each billing period.

2d. Debit cards

A debit card allows cardholders to make payments and cash withdrawals from their deposit accounts through an Automatic Teller Machine (ATM) or an Electronic Funds Transfers at Point of Sale terminal (EFTPOS).  Debit cards can be broadly categorised into 2 groups: PIN-based debit cards and signature-based debit cards.  NETS EFTPOS is an example of a PIN-based debit card while VISA Electron and MasterCard Debit are examples of signature-based debit cards in Singapore.  As at 31 December 2008, there were about 84,000 terminals in Singapore.   There were a total of 182 million debit card transactions worth $20.5 billion in 2008. 

2e. Stored Value Facilities (SVFs)

A Stored Value Facility (SVF) is a form of prepaid electronic cash or card that can be used within the system of the SVF issuer.  The SVF issuer is known as the holder of the stored value.  An SVF is also known as e-money.  Usage of SVFs usually does not require Personal

Identification Numbers (PINs) or signatures.  The Payment Systems (Oversight) Act 2006 (“PS(O)A”) and its related regulations governs the issuance and management of SVFs.

SOURCES

http://www.mas.gov.sg/data_room/Financial_Databases.html

http://www.moneysense.gov.sg/publications/quick_tips/Consumer_Portal_SGSarticle.html

http://www.mas.gov.sg/about_us/annual_reports/annual20062007/100b_STATS.htm