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Singapore: Noteworthy Developments in the Asset Management Industry

Introduction of OEIC and Enhancements to the EFM Programme

On 16 March 2016, Ms Indranee Rajah, Senior Minister of State for Law and Finance, speaking at the 17th Annual Conference of the Investment Management Association of Singapore discussed the growth in the asset management industry in Singapore and how it has performed well and has continued to prove its resilience in the face of global market stresses. She highlighted the following:

  • As of end-2014, the total assets under management ("AUM") in Singapore amounted to S$2.4 trillion, with a 5-year compounded annual growth rate of 14%.
  • Underlining Singapore's role as a regional asset management centre, over 80% of AUM in Singapore are sourced from outside Singapore, with the Asia-Pacific region as both the largest source and recipient of funds.

She attributed the growth to, among other things, government agencies working with the financial and investment community here – to develop and deepen Singapore's value proposition in asset management. Strong regional growth, a supportive regulatory infrastructure and conducive financial eco-system are factors that have catalysed the development of the asset management industry in Singapore.

More excitingly, she announced that as Singapore's asset management industry has attained critical mass, depth and level of maturity, the Monetary Authority of Singapore ("MAS") is working on initiatives that will lend greater support to the entire value chain in asset management in Singapore:

  • Introduction of a new regulatory framework for open-ended investment companies ("OEIC").
  • Enhancements to the external fund manager ("EFM") programme.

Introduction of OEIC

The MAS and the Accounting and Corporate Regulatory Authority of Singapore is currently studying the introduction of an OEIC framework for investment funds which would facilitate more local domiciliation of funds. An OEIC framework should offer a more efficient fund administration structure for asset managers who domicile their funds in Singapore and would:

  • cater to the core activities of an open-ended investment fund, which include the issuance and redemption of shares on a regular basis; and
  • allow an umbrella fund structure containing several sub-funds to be set up within a corporate-type vehicle. These sub-funds can be operationally distinct with different investment objectives, investors as well as assets and liabilities.

The OEIC framework is expected to encourage more asset managers to domicile their funds here and promote the further development of the fund administration industry in Singapore. The new OEIC will provide a much welcome alternative to the unit trust in Singapore.

The OEIC (or similar corporate-type vehicles) is not new and has been successfully introduced in various other jurisdictions, most notably in the more traditional international asset management centres, and is currently in the process of also being introduced in other global asset management hubs such as Hong Kong. To date, a significant majority of open-ended collective investment schemes managed or advised by asset managers in Singapore are domiciled offshore or formed as Singapore unit trust structures. The introduction of the OEIC framework may see a change in this trend going forward especially if asset managers are able to utilise the significant number of tax treaties that Singapore has with various countries.

Enhancements to MAS EFM Programme

To further their aim to diversify their investment portfolios, and to help anchor global asset managers here in a bid to further build up Singapore's asset management industry, the MAS will also be enhancing the current EFM programme.

The new EFM programme seeks to offer stronger incentives to fund managers who are committed to deepening their presence in Singapore. In particular, greater recognition will be given to managers who are committed to building their investment capabilities and strengthening their local talent pool to support the long-term development of their Singapore operations.

Venture Capital and the Fintech Industry

On 25 August 2016, speaking at the launch of Looking Glass @ MAS, the MAS' managing director Mr Ravi Menon highlighted the need for Singapore to develop its fintech scene to catch up with leading fintech ecosystems such as those in New York and Silicon Valley. Looking Glass @ MAS is an innovation lab located within the MAS building, which allows financial institutions and start-ups to experiment with fintech, as well as to facilitate consultations between various industry players and regulators. The Looking Glass @ MAS is a part of the MAS' initiatives to enhance the fintech ecosystem in Singapore.

One of the key developments raised in Mr Menon's speech is the intention of the MAS to "review some of the regulatory requirements placed on venture capitalists", so as to encourage funding for fintech start-ups. While no exact framework or proposals have been announced at the moment, these may potentially (and many hope will) include the relaxation of certain regulatory hurdles for the setting up of a venture capital fund management company in Singapore, as well as possible incentives for venture capital funds.

With the hedge fund industry facing headwinds due to uncertain global economic conditions, venture capital investments have generally stepped more into the limelight recently. It is no surprise that this coincides with the MAS' moves to encourage fintech venture capital funding amongst other private equity / venture capital initiatives.

The emphasis on venture capital has almost never been more apparent. Even a major real estate developer in Singapore has recently set up a venture capital arm, the aim of which is to invest in technology sector start-ups which can provide innovative real estate sector solutions. It would seem that not only has the regulator identified with the growing venture capital scene, industry players (from various sectors) have taken a similar interest in technology-related venture capital funding.

As Mr Ravi Menon points out, Singapore is in abundance of "many start-ups and good ideas chasing funds", and the developments around the fintech venture capital funding space is definitely one to watch.

Coupled with the much anticipated developments in respect of the OEIC framework and EFM programme mentioned above, Singapore is further enhancing its credentials as a frontrunner in the asset management and investment funds sector.

Leveraged and Inverse ETFs in Singapore

Exchange traded funds ("ETFs") are deemed collective investment schemes in Singapore.

ETFs are growing in popularity in Asia. The SGX has introduced a number of incentives to aid ETF liquidity and encourage new products in Singapore, for example, the SGX has waived clearing fees for ETF block trades until 31 December 2017. Certain ETFs may also fall within the definition of Excluded Investment Products, which can then be distributed by intermediaries to individual retail investors without the enhanced regulatory safeguards applicable to more complex investment products (termed as Specified Investment Products).

The MAS has also eased rules on financial advisers relating to investing in ETFs on behalf of retail investors. The MAS had proposed, among other things, to allow financial advisers to help retail investors transact in both listed and unlisted collective investment schemes (such listed collective investment schemes would include ETFs) if such dealing is incidental to their financial advisory activities. Previously, financial advisers (approximately 50 firms in Singapore) could only advise clients to buy ETFs from brokers, instead of directly assisting them with the transaction through a platform. While the MAS will issue a public consultation on the draft legislative amendments in due course, it has, in the interim, on a case by case basis, effectively granted permission for financial advisors to facilitate the buying and selling of ETFs for clients.

Leveraged ETFs typically aim to deliver a daily return equivalent to a multiple of the underlying index return that they track. For example, if the underlying tracked index rises by 10% on a given day, a two-time (2x) leveraged ETF aims to deliver a 20% increase on that day. Alternatively, leveraged ETFs can track the performance of an index which is itself a leveraged index on an underlying index or benchmark.

Inverse ETFs, by contrast, typically aim to deliver the opposite of the daily return of the underlying index that they track. For example, if the underlying tracked index rises by 10% on a given day, a one-time (-1x) inverse ETF aims to deliver a 10% decline on that day. Again, inverse ETFs can alternatively track the performance of an inverse index on an underlying index or benchmark.

The portfolios of leveraged / inverse ETFs ("L/I Products") are typically rebalanced on a daily basis in order to produce the specified leveraged or inverse return.

Prompted by the popularity of L/I Products in various markets, including Asia, the MAS had on 5 August 2016 published a revised list of Frequently Asked Questions on Offers of Shares and Debentures and Collective Investment Schemes ("MAS FAQ") which includes an additional section providing guidance to the industry on its requirements for L/I Products.

Some of the key guidance under the MAS FAQ include restrictions on naming, for example, L/I Products should be clearly differentiated from traditional ETFs that track the unlevered performance of its underlying index. Further, the name of an L/I Product should not contain the term "ETF", or any other derivative or form of such term. The MAS FAQ also sets out various compliance and disclosure requirements.

The introduction of L/I Products in Singapore should enhance the competitiveness of Singapore as a location for product manufacture and innovation.