Why Singapore is the easiest place to do business

Is Switzerland losing its crown as the world’s premier centre for private banking and wealth management? Experts observe that high-net-worth wealth management is shifting towards Asia, particularly to financial centres like Singapore, where the rapid expansion of private bankers and money managers looking to capitalise on the growing number of super rich has been remarkable.

Singapore rightly deserves praise as being “one of the easiest places to do business”. Why? Substantial inflows of new wealth to the region from abroad are testament to a forward-looking monetary authority, an investor- and business-friendly environment, low taxation rates and a strict bank secrecy regime.

As pools of assets and cash multiply, so too do the incentives for Singaporean asset managers to do what they do best – making their clients’ assets work even harder. Consequently, Singapore, and Asia as a whole, is also experiencing unprecedented cross-border securities transaction flows as local investors look for returns around the globe.

Cross-border securities transactions proffer new challenges for Singapore’s wealth managers. Doing business with banks and financial institutions in Europe and the Americas entails an understanding of their current operating climates. The financial crisis in the West has caused Western firms to drastically re-draw their business models.

Although some signs of trust are returning, the mood is still fragile and the good old days of lending money without putting up collateral to guarantee the loans are over. And consequently the traditional inter-banking lending markets have switched from unsecured to fully secured transactions, using securities as collateral to cover exposures arising from various trading counterparties.

Not surprising, foreign firms expect their Asian counterparties to adopt similar risk-containment practices.

There is certainly no lack of interest in taking Singaporean securities as collateral to cover trading exposures. In fact, the city-state’s sovereign debt is in high demand.

There are only seven countries in the world with top credit ratings and stable outlooks from the three major rating agencies. Singapore deservedly ranks among the likes of Australia, Canada, Denmark, Norway, Sweden and Switzerland.

How does one go about operating in a collateralised, secure world? What will Singaporean firms need to do to use their portfolios of domestic assets to the fullest potential?

International collateral management is a complex field which requires sophisticated technology and a reliable stream of securities data. Some firms have built their own capabilities, while others look to agents to provide the vital tasks of valuing securities collateral, managing inventories and doing the necessary substitutions/transformations to ensure that the overarching transaction remains fully collateralised at all times.

Realistically, the entry barriers to building your own in-house collateral management expertise can be excessive. A mid-range software package can be purchased for USD 800,000, but this is only the tip of the iceberg: you will need operational staff to manage collateral flows as well as expensive data feeds to populate your asset pricing models.

In the end, you could well find that you needed to spend ten times the initial software investment. And, this does not include the year-on-year running fees.

There is another way - finding the right tripary collateral management agent to which you can outsource all collateral administration tasks. Astute institutions, in Asia and elsewhere, already optimise their available positions as collateral across asset classes and locations through their triparty agents.

They are also able to mobilise these securities as collateral quickly and efficiently, with the objective of minimising their overall funding costs.

An automated triparty agent with a global scope can play a pivotal role here. For example, a Singaporean firm can re-use the same domestic government bonds it owns to collateralise deals with different counterparties during a 24-hour timeframe.

First, the bonds can be posted with a local Asian counterparty during Asian business hours to obtain intraday credit. When the collateral is released at the end of the day, the same bonds can be used as collateral for an overnight repo with a US firm to obtain dollar liquidity – which in turn could fund yet another transaction. The bonds would be returned to you the next morning ready for use locally.

One of the toughest challenges for Singaporean financial firms in tomorrow’s transcontinental business environment will be getting the right collateral to the right place at the right time. It will be vital to manage assets held in different silos as a single pool of collateral to maximise collateral efficiency and optimisation.

The international central securities depositories (ICSDs), like Euroclear Bank, have been helping banks, central banks, corporates, global custodians and their clients, to manage their collateral, across multiple time zones; for over two decades. As neutral triparty collateral management agents, the ICSDs move more than USD 1 billion worth of collateral everyday.

Powering Singapore’s financial market’s assets for use as collateral on a cross-border basis will only increase in importance. The central securities depositories in Hong Kong, Taiwan and Korea have already put in place relationships with expert triparty agents to facilitate the flow of collateral for their members across borders.

The trend has started. And, demand is growing to source and mobilise collateral quickly and efficiently.

The main driver for all this attention to collateral management is, of course, better risk management. As Singapore grows as an international financial centre, attracting more and more foreign assets and trading counterparties, it must not underestimate the need to ensure its ability to withstand the default of an important trading partner.

Collateralising exposures simply makes good business sense.