13 October 2015

Singapore's role in ASEAN integration

Guy Harvey-Samuel, Group General Manager and Chief Executive Officer, HSBC Singapore
(This article was first published on 13 October 2015 by The Business Times)

Singapore’s hosting of SIBOS is the perfect platform for the banking sector to deliberate on how it can contribute towards ASEAN achieving financial and economic integration.

Singapore is hosting SIBOS this week where the banking industry will debate, collaborate and project global themes and trends relating to payments, funds management, and trade.

The last time Singapore hosted SIBOS was in 2003. That Singapore is hosting the industry’s preeminent international banking event again in 2015 reflects the growing global macro-economic importance of Southeast Asia.

The conference will also shed light on the opportunities and challenges facing ASEAN as it strives for greater economic integration, a lot of which are within the finance sector.

Singapore’s banking and finance community has an opportunity to take a prominent role in driving these discussions forward particularly in the areas where it has been a regional leader including payments innovation and opening of the funds management and securities markets across the region and beyond.

Driving bank innovation in trade finance and payments

The subdued conditions in global trade and changing construction of supply chains are impacting companies’ margins in the region, requiring them to drive process improvements and efficiencies.

This in turn requires banks to adapt their own practices and servicing in order to better help companies remain competitive by reducing back-end costs and increase their working capital.

A lot of this change will be in technology, such as mobile payments, digital banking, e-payments, mobile payments and automated investment advisory.

Singapore has already been driving a lot of developments in this space as part of its ambition to be a ‘smart country’. This strategy includes investing about SGD 2.2 billion to develop and attract innovation in digital and mobile payments, block chain technology for faster and cheaper payments, data services, web services, and fintech support.

Increasing intra-regional fund flows

From a funds management perspective, the growing importance of ASEAN markets cannot be ignored. According to the 2014 Monetary Authority of Singapore (MAS) Asset Management survey, assets under management of Singapore-based Asset Managers grew by 30% y-o-y to SGD 2.8 trillion, with 81% of this sourced from outside Singapore and 68% invested in Asia-Pacific markets.

The unprecedented growth is driving local and global institutional investors to expand their presence in the region.

Against this backdrop, it is well recognised that Asia needs to create a platform where Asian funds can be sold across the region and give regional asset managers’ efficient and direct access to markets in which they do not yet have a presence.

Singapore is involved in two schemes that are currently being developed: ASEAN Collective Investment Scheme (CIS) framework which brings together Malaysia, Thailand and Singapore; and the Asia Region Funds Passport involving Australia, New Zealand, the Philippines, South Korea, Thailand, and the recently joined Japan.

Within the ASEAN CIS framework, the MAS has approved five Singapore-domiciled funds enabling them to be distributed in Malaysia. Conversely, four Malaysian-domiciled funds have been submitted to the MAS for registration in Singapore. Elsewhere, the Securities and Exchange Commission in Thailand has approved one local fund to qualify under the framework for distribution in the other markets.

However, the comparatively small number of ASEAN countries participating in both schemes - along with the challenges faced due to differing legal systems, tax, regulatory standards, degree of investor protection and customer preferences – illustrates the significant complexities in getting these schemes off the ground.

More broadly, the ASEAN investment framework requires funds to register with the host market regulator in every market of distribution compared to the European framework where a funds’ authorisation is a jurisdictional ‘catch-all’. Emulating the European model will certainly make ASEAN more attractive for fund managers and investors.

Creating an open securities market in ASEAN

As a collective, the various securities markets within ASEAN provide exciting opportunities for retail and institutional investors. When aggregated, ASEAN would be the fifth largest economy in the world joining the ranks of the United Kingdom, Germany and Japan.

These opportunities have begun to be explored. For example, the SGX has partnered with the Bursa Malaysia and the Thailand Stock Exchange to create a pan-ASEAN securities market offering more than 3600 companies with a combined market capitalisation of above USD 2 trillion.

However the current administrative costs, along with a lack of compatible infrastructure to clear and settle stocks across the markets, are inhibiting the current flow of trade. The key to unlocking the potential of this tricountry partnership – and for an ASEAN common market more broadly – is enabling brokerage firms to have membership to trade on the exchanges within the region, and to develop a central structure and entity where cash can be settled.

Whilst progress on this front has been slow, alternative approaches are being developed.

The SGX and the Taiwan Stock Exchange (TWSE) have been studying the feasibility of a link between both markets to provide investors with a mutual market access solution. Unlike the ASEAN Trading Link which is a multilateral set-up, the SGX-TWSE link may be structured as a bilateral access channel facilitated through virtual members created by the exchanges on both sides.

If successful, the SGX-TWSE link could be the template for other stock connects in future.

Singapore as a conduit for regional institutional investors’ entry into China

Outside of ASEAN, the opening-up of China’s capital markets provides ASEAN investors with the opportunity to access its significant domestic saver base.

Despite recent dislocations, market interest in China is increasing and institutional investors are looking to banking custodians to connect them with regulators and guide them through the new investment channels.

After a relatively slow start, the utilisation of China’s Renminbi Qualified Foreign Institutional Investor (RQFII) scheme - which provides international investors access to China’s domestic capital markets - is increasing. As of June 2015, Singapore has the highest RQFII quota utilisation rate in the region, outside of Hong Kong reinforcing its role as a financial conduit for regional investors to participate in the China market.

Beyond the current global market dislocations, Southeast Asia has strong macro-economic fundamentals. However, the potential economic and demographic dividend that ASEAN presents will be greater when the region can be treated as a whole and not only the sum of its parts. Both Singapore and its banking industry have a strong role to play in this becoming a reality.

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