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     FrontPage Edition: Mon 4 June 2007

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Growth of structured finance products in Singapore


Speech by Ms. Tay Bee Bee, Director Monetary Authority of Singapore

Derivative FitchGlobal Structured Credit Conference 14 May 2007, Pan Pacific Hotel Singapore

An Excerpt

According to Fitch, structured finance issuance has outstripped corporate issuance for the past 2 years.
Notably, among the various securitized asset classes, Collateralised Debt Obligations, or CDOs have registered the fastest growth in recent years.
In the last 5 years, CDO global issuances have grown more than 6 fold to US$600 billion in 2006, with the market doubling in the past year. Excitingly, the growth trend in structured finance and CDOs are expected to continue in the next few years...
While the prospects for the Asian market look promising, the market is not without its challenges. It is clear to market practitioners that there are a host of issues that need to be addressed in many countries in the region. These issues would need to be resolved if we were to see explosive growth of structured finance in the region...
Implications for Singapore
As the Asian market grows, we can expect to see the risks and challenges faced by the US and European markets replicated here.
What can the authorities do to mitigate these risks? Singapore¨s approach is to ensure that our regulatory framework remains appropriate and robust in addressing these market developments. For example, we have issued banking guidelines with respect to securitization and credit derivatives and we are constantly reviewing the framework to take into account new instruments and financial innovations.
Financial institutions also need to raise their risk management capabilities and oversight to deal with such new instruments...
Our approach has served us well. Over the last 3 years, Singapore managers originated more investment CDOs than any other country in Asia ex-Japan, with an estimated S$6 billion of CDOs in 2006.
In addition, from managing predominantly US-based deals, Singapore managers are now looking at increasing the Asian content in their deals. A number of international CDO managers have also set up shop in here, with the view to manage Asian-based CDOs.
Now, allow me to take a moment to highlight some of the progress we have made in the regulatory regime in Singapore, to keep pace with the market development and growth in structured finance products.
In Asia, Singapore has been pro-active in providing clarity and certainty on the treatment of CDOs into our regulatory regime. Banks have been allowed to invest in all tranches of CDOs, while insurance companies have been permitted to invest in the equity tranches of CDOs since January 2006.
Also, MAS has updated and amended the banking rules on securitization in September 2005. As an illustration of the amendments, synthetic arbitrage transactions are now clearly excluded from the scope of those rules.
Previously, banks acting as originators or managers in securitisations had to seek MAS¨ prior approval for these transactions. With the amendments, they need only notify MAS after the transaction. Banks have welcomed these and other changes to the rules.
Allowing financial institutions to invest in CDOs is, of course, only a first step in facilitating participation in this new asset class.
Another issue is the amount of regulatory capital that banks and other financial institutions are required to hold against the credit exposures they have acquired.
In this respect, MAS has also taken steps to refine the calibration of regulatory capital required for CDO investments. This was done through recent amendment to MAS Notice 628 to banks.
Previously all CDO investments, regardless of rating, were deducted in full from capital. With the amendment, tranches rated BBB- and above are risk weighted at 100%.
The treatment is closer to the risk weights under proposed Basel II standardized approach, which applies a 20% risk weight for investments rated AA- and above.
However, even with this adjustment, we are still more stringent than Basel II standards for rated tranches for the time being.
Manpower Training
Lastly, I would like to share with you our thoughts on manpower and training. The availability of skilled professionals for structured finance is crucial and the MAS is committed to developing the talent pool for the industry.
First, we have put in place a Financial Training Scheme. This scheme provides co-funding for short-term courses or attachments for risk management professionals.
Last year, we also launched the Finance Scholarship Program. The aim of this program is to help groom a critical mass of specialists in targeted fields, such as financial engineering and risk management. The scheme provides scholarships for the pursuit of higher degrees at top-ranked universities in these fields globally, as well as in Singapore.
These efforts are complemented by efforts undertaken to provide suitable training program for CDO professionals. An example is the Certificate in Financial Engineering, launched by The Risk Management Institute, in collaboration with the UC Berkeley.
In conclusion, Asia is entering a very interesting phase in the development of the structured credit market for the region. We strongly believe in this vision and are committed to building Singapore as a centre for structured finance activities. We welcome you to be a part of this exciting growth and development.

Full Text of Speech

Source: Media Release 14 May 2007

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