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Speech by Loh Boon Chye, CEO, Singapore Exchange at Euromoney’s The Global Borrowers and Investors Forum – Asia on 3 September 2019

SGX :ogo1. Thank you, Tony, for the introduction, and for giving me the privilege to speak at today’s Investors forum.

2. We are gathered here at an interesting time for the bond markets.  Ongoing global trade tensions continue to pose risks to the world economy.  However, even as global growth moderates, bond markets in emerging Asia are expanding. This is underpinned by the expectation that emerging Asia will remain one of the fastest growing regions in the world, leading global growth amid historically low interest rates.

3. Against this backdrop, I would like to share a few thoughts on how we can work together to bring Asian bond markets to a new level.

Where we are now

4. First and foremost, the global bond market is the largest securities market in the world, but gets less attention than the stock market. The general investor tends to be attracted to the short-term appreciation potential of stocks, compared to the stable, long-term income potential of bonds.

5. According to industry estimates, international bond market issuance in 2018 was US$6 trillion, compared to global equity issuance of US$710 billion. In the same year, the outstanding value for the international bond market stood at US$115 trillion, while global equity market capitalisation was US$73 trillion.

6. The relative size of the bond market underscores the importance of this asset class, even though it doesn’t dominate news headlines as much as equities and IPOs.  In an ideal world, the bond market deserves higher visibility, better accessibility and more trading activity than the stock market.

7. To be clear, bonds and stocks are two inherently different asset classes – their features, liquidity and volatility are not the same. It is also for this reason that both bonds and stocks serve different but equally important purposes, making them essential components in any diversified investment portfolio.

8. In today’s low interest rate environment, investors need to actively look for returns.  Fixed income should appear on the radars of more investors, as they search for incremental returns and yield.  For this to happen, more investors – including retail investors – ought to have greater and easier access to fixed income opportunities.

9. Asian bond markets have tremendous growth potential that issuers and investors can tap into.  In the first quarter of this year, bond issuance for total G3 Asia ex-Developed Markets (Japan, Australia and New Zealand) stood at close to US$81 billion, an increase of 6% year-on-year. China remained the largest issuer in the first quarter, dominating close to 70% of the issuance.

10. Another report cited that in the first half of this year, G3 bond issuance from Asia ex-Japan and ex-Australia was up more than 20% compared to a year ago.  At this current rate, G3 bond issuance is on track to beat the record that was set in 2017.

11. China’s US$13 trillion-bond market – the third largest in the world – cannot be overlooked. Its inclusion in major bond indices will have a significant impact. More importantly, the Chinese government’s initiatives to draw foreign investor participation into its onshore bond markets will lead to further internationalisation of its bond market.

12. One of the growth drivers of the Asian bond markets is the region’s rapid urbanisation rate, which is putting pressure on infrastructure and the environment. To sustain the region’s growth, long-term funding solutions such as infrastructure and ESG bonds will be necessary. In fact, Asia was the world’s fastest-growing green bond market last year, with issuance rising 35%.  China has also become the second largest green bond market globally, albeit largely domestic.

13. With global interest rates lingering at historic lows, and Asian bond markets maturing and opening up, now is the time for us to capitalise on the opportunities to further grow the markets in depth and breadth. As such, I believe there are three areas that we, as an ecosystem and community, can focus on in the medium- to long-term. These three areas are participants, products and platforms.

Where do we want to go

14. First, participants. My hope for the industry is to build an even bigger community of market participants, beyond what is now mainly a market for institutional and accredited investors. Retail investors in this region have tended to focus on single-country equities. A portfolio approach would provide them with the benefit of diversification from idiosyncratic risks.

15. Policy makers globally have also recognised the importance of retail investors in providing liquidity to the market. For example, in Europe, the European Commission had in November 2017 proposed removing obstacles to retail investors trading bonds ETFs on exchange to enhance the European corporate bond markets. China started a pilot in April this year to allow individual investors to buy local and regional government bonds.

16. That said, no bonds are fully guaranteed or fail-safe.  Ultimately, retail investors need to be aware of the risks and rewards of any investment. In an economic or industry downturn, for example, investors should be prepared that the chances of a company defaulting on its bonds are also higher.

17. There are many steps that the industry can undertake, in order to gradually expand market access to more retail investors. This includes growing investor education, increasing the information flow within the bond market, as well as developing products that better suit the profile of retail investors.

18. While there are valid reasons why bond markets are largely institutional in nature, broadening the diversity of investors could lead to greater liquidity for all.

19. This brings me to my second point on products. Part of the reason retail investors have less exposure to bonds is because there is a relatively limited range of exchange-traded fixed income products that are accessible, low cost and transparent.  More bond products would therefore be welcome to meet investors’ varying investment objectives.

20. In Singapore, the successful launches of Temasek’s retail bonds and Azalea’s Astrea private equity retail bonds demonstrate the robust retail appetite for new product types.  We hope more issuers in the region will follow suit and provide innovative products to widen investors’ choices. Regular debt offerings by established companies and large state-owned enterprises in ASEAN can help build a virtuous cycle to keep Asian bonds top of mind for investors.

21. As mentioned earlier, the rising focus on sustainability in this region could drive more opportunities for ESG bonds. The MAS recently renamed its Green Bond Grant Scheme as the Sustainable Bond Grant Scheme to include social and sustainable bonds. It also lowered the minimum issuance size requirement and extended the grant scheme by a further three years.  These initiatives will help catalyse the ESG bond market.

22. While green bonds have attracted large inflows from institutional investors, it is not just institutional investors who are looking at impact investing. The next generation of retail investors, who are much more aware of environmental and social issues, will likely demand for sustainable investments. Currently, there are limited ESG-related products for retail investors and the average retail investor may find it difficult to invest directly in green bonds.  This presents opportunities for the industry to consider ways to make green investments more accessible for the general investor.

23. With the rise of passive investing, bond ETFs are increasingly being used by institutional investors. A recent research study by Greenwich Associates showed that 60% of institutional investors surveyed invested in bond ETFs, up from just 20% in a similar study in 2017.  Bond ETFs are bought and sold on the open exchange just as stocks are, providing liquidity and price transparency.  Assets in global bond ETFs stood at more than US$1 trillion.

24. While one can argue that ETFs are not bonds, bond ETFs offer investors liquid exposure to Asian fixed income for much needed yield, while investing in Asia’s growth prospects.  For retail investors, they are a cost-efficient way to access fixed income, with price transparency and the ability to transact intra-day.  SGX will continue our efforts to work with product issuers to bring more fixed income ETFs to the retail market.

25. Last but not the least – we need to transform bond trading platforms in order to expand participation in the bond market, almost like how equities are traded. Such platforms will help to develop liquidity and market activity.

26. Given the long-term and non-homogeneous profile of bonds, investors may not require bonds to be as liquid or volatile as equities. However, what investors require would be the ability to get in and out of the bond market easily, allowing them to put on or take off risk as and when the need arises. This means a platform that allows for a fair price discovery process and orderly trading with sufficient liquidity.

27. At SGX, we see the potential to connect or combine the over-the-counter (OTC) and exchange-traded worlds using technology.

28. A few years ago, we embarked on developing SGX Bond Pro, a screen-based institutional trading platform for Asian and Emerging Market (EM) Bonds. With bond markets shifting towards electronic trading, coupled with global investors pivoting towards Asia, we saw the chance to create a solution that offered participants the ability to trade bonds efficiently, control information disclosure and streamline operations.

29. We are excited that since then, Bond Pro has on-boarded a diverse participant base comprising global and regional dealers, bank treasuries, wealth and asset managers, family offices and hedge funds across the Asia Pacific, UK, Switzerland and the Middle East.

30. Leveraging SGX’s global reputation in risk management and clearing capabilities, participants on the platform face SGX as an independent and neutral general counterparty.  Our platform offers multiple trading protocols to cater to different clients’ needs and various bond liquidity profiles. We are pleased that our investor base has shown they are ready to adopt new trading protocols.

31. Bond Pro currently offers G2 Asian and EM sovereigns and corporate bonds, as well as SGD corporate bonds. Given our existing 40% market share for listed G3 Asia-Pacific bonds, our ambition is to build Bond Pro into a leading G3 Asian bond trading platform.

32. Technology will be the way to transcend product and geographical boundaries. Hence, last year we made a strategic investment in Trumid, a US-based fintech company and electronic trading platform for corporate bonds, which will help to augment Bond Pro’s offerings.  Trumid will also tap SGX’s network in Asia to deliver global access to US dollar credit products.

33. Our end goal is to create a bigger, more connected and accessible bond market – allowing both buy-side and sell-side participants around the world to have seamless cross border connectivity into multiple market places.

34. If we can successfully unlock greater liquidity for institutional participants, what more the future possibilities for retail investors?  It is still early days but we look forward to its prospects.

How do we get there

35. To sum up my thoughts, growing the depth and breadth of the Asian bond market is well within our reach.

36. The interactions between participants, products and platforms will encourage more innovation, create wider pools of liquidity and generate synergistic benefits for everyone.

37. Singapore, as the core gateway for Asian bonds, is well-placed to effect change.  SGX, as Asia’s leading listing venue for international bonds with more than US$2 trillion issued to date, will continue to actively promote both our primary and secondary debt markets.

38. All of us here, as participants in the ecosystem and community, can take this vision forward and make it a reality. It requires regulators, exchanges, financial institutions, issuers, credit rating agencies, multilateral agencies, intermediaries and professional parties – just to name a few – to have a common vision and desire to work together to achieve a greater good.

39. With this, I end my sharing and hope it has provided some food for thought for today’s discussions. Congratulations to Euromoney for putting together another highly relevant agenda with an impressive line-up of speakers.  I wish you all a fruitful forum.  Thank you.