Securities finance profile: Singapore 2016

Securities finance profile: Singapore 2016

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SBL 

Access to the securities borrowing and lending (SBL) in Singapore conforms to international standards, with no unusual restrictions. 

Almost all SBL is carried out bilaterally and there are no unique trends in terms of collateral accepted. However, transactional costs are high compared to the rest of the region; Singapore charges a 0.2% stamp duty payable on all transactions. 

Generally, there is no stamp duty payable for derivatives instruments and there is less liquidity in the Singapore SBL market than other big markets in the region. Demand comes from hedge funds, such as long-short hedge funds, and event arbitrage. 

The Singapore Stock Exchange (SGX) has a securities lending programme which operates via the Central Depository (CDP) that safe-keeps securities for both retail investors and institutions and acts as the counterparty for all lenders and borrowers. Retail investors are very sophisticated in Singapore and participate in lending stocks. Liquidity of the CDP, however, is quite small compared to offshore supply. 

Singapore data

Offshore SBL dominates the market and it’s often cheaper in terms of costs. The entry cost to the SGX securities lending programme is usually around 7% at a minimum. While this is comparatively expensive, there are other draws to onshore SBL, according to James McCaughey, director in Scotiabank’s prime services division: 

“What we have found is that the outlook of retail investors in Singapore can be longer term compared to the average in international markets, which provides some stability to the CDP pool. The CDP might be more expensive, but it provides a compelling combination of hard-to-borrow stocks and stability, which is unusual in SBL markets.” 

Unusual since the financial crisis, Singapore allows naked short selling (making a short sale without having the underlying asset in place). But its by-laws are very severe. “Market practice is to arrange pre-borrowing and there are also severe fail-to-deliver penalties. Personally, I tend not to see any failed trades from a stock loan point of view,” said McCaughey. 

The Singaporean regulator has had, in many ways, a more relaxed approach to short selling. Not even during the 2008 financial crisis were shorts banned and it has been behind its contemporaries in introducing transparency to shorting. 

However, it has recently introduced the practice of mark-up, where short sales have to be flagged at the point of trade. The Monetary Authority of Singapore (MAS) and the SGX are proposing, among other measures, to introduce a short position reporting regime in Singapore.

“Singapore is and always will be innovative and the SGX is very collaborative,” said McCaughey. “The regulators here are very proactive, open to listening and open for business. People enjoy doing business here.” 

Synthetics 

There are no major differences between the mechanics of the synthetics market in Singapore and other markets in the region, such as Hong Kong, Korea or Taiwan. Total return swaps are becoming more popular as Basel III requirements create demand for long term liquid assets, which offer protection in a stress scenario. 

“Total return swaps are becoming more widely used as a tool to generate liquidity for institutions. Swaps can free up assets on the balance sheet of financial institutions. There is also a need for longer term trades, so there is also a trend for evergreen and extendable transactions,” says Joel Wong, associate director in prime finance for Scotiabank. 

While some types of synthetics are growing in popularity, Singapore remains a relatively small market for securities finance, which has limited the growth of a vibrant synthetics market. 

“There are always comparisons and questions drawn between Singapore and its Northern contemporaries, such as Hong Kong, regarding things like jurisdictional superiority,” says McCaughey. “Hong Kong has, in part, due to its proximity to China, recently experienced much greater liquidity in its equity market and, in turn, this has resulted in more demand in the stock loan market. The flight from emerging to developed markets has also assisted. 

“That said, in these volatile markets and as the focus of investors moves to safe havens, the focus on China may diminish. At some point, we will see demand and liquidity move to ASEAN markets as investment value and confidence returns. Accordingly, you might see increased uptake of synthetic finance and securities finance in general.” 

Repo 

Singapore’s fixed income repo market is driven by triple-A rated Singapore Government Securities (SGS), which trade between Singapore-based onshore banks. 

There is also an active offshore market, although the capital controls on lending SGS offshore means that this is limited, according to global head of repo at Standard Chartered Ed Donald. Despite their stellar rating, SGS are not widely recognised by large global cash investors in the West, although this is slowly changing. 

Offshore dominates the equity repo market and USD is traded widely. There aren’t any specific restrictions to enter the repo market in Singapore and most transactions are done bilaterally. 

Tri-party collateral managers, that take away the day-to-day duties of substituting equity collateral, have become very popular, according to Scotiabank’s Wong. This is particularly the case for equities which tend to be more volatile than fixed income. 

This means that on a day-to-day basis there is a larger volume of collateral movements, a burden which can be eased by collateral managers.

“The Singapore repo market does not have as much depth and liquidity as other markets in the region, such as Hong Kong, but the Singapore repo market is still significant and Singapore government bonds are very high quality, liquid collateral,” says Wong.

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