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 7
Banks
Foreign 113
Banks
Foreign Full 26
Banks
Wholesale 49
Banks
Offshore 38
Banks
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 12
- Primary Dealers
Singapore Government Securities Market 23
- Secondary Dealers
Approved Holding Companies 3
Approved Exchanges 3
Designated Clearing Houses 3
Recognised Market Operators 24
Holders of Capital Markets Services 239
Licence
Dealing in 98
Securities
Securities 24
Members
Non-Member Companies of 74
SGX-ST
Trading in Futures 48
Contracts
Derivatives Clearing 21
Members
 • 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 Market

4th 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 MARKETS
• The 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 MARKETS

Singapore’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 SINGAPORE
MAS' 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 SYSTEMS

1a. 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 network

o Advanced queue management capabilities
o Automated collateralised intra-day liquidity facilities
o 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_Port
al_SGSarticle.html

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