SGX expects more ETFs to be converted to EIPs after MAS widens definition

Singapore Exchange (SGX) expects up to 20 Excluded Investment Products (EIPs) including exchange-traded funds (ETFs) to be accessible to retail investors without enhanced safeguards.

This comes after the Monetary Authority of Singapore (MAS) announced on Wednesday that it has broaden the definition of EIPs for collective investment schemes. The move is expected to see several ETFs converting to EIP status over the course of the next few weeks, according to Chew Sutat, Executive Vice President of SGX.

The ETFs that will be converted to EIP will be predominantly cash-based, which means the ETF funds will buy into the underlying securities to track the benchmark indices.

"With the scope of EIP ETFs expanded, retail investors have improved options for simple and low-cost method of diversification. Investors should take the time to understand the rewards and risks associated with ETFs so that they can secure long-term returns in this product class," says Mr Lim Kok Ann, Chief Executive Officer, DBS Vickers Securities.

Hon Cheung, Managing Director of ETF provider State Street Global Advisors, said, "ETFs are a powerful tool allowing retail and institutional investors to directly access market opportunities from blue chips to other asset classes in a single, cost-effective trade on the exchange. As ETFs generally hold a basket of stocks tracking an index, for e.g., the STI, investors are able to reduce concentration risk over holding single stocks."

To further promote ETFs as investment products, SGX will waive ETF clearing fees for both institutional and retail investors for a promotional period of June 1 to December 31, 2015.

In order to encourage institutional investors to report over-the-counter ETF transactions to the exchange for greater transparency, SGX also announced in January 2015 a longer-term initiative to waive clearing fees for ETF block trades for a period of about 3 years - between February 2, 2015 to December 31, 2017. This would help institutional investors minimize the cost of reporting whilst reducing their counterparty risks.

Previously, all investment funds which used derivatives were classified as Specified Investment Products (SIPs). SIPs are more complex products and can only be sold to retail investors with enhanced safeguards, including an assessment of these investors' investment knowledge or experience.

MAS said it has taken on board industry feedback that funds which make limited use of derivatives are relatively less complex and should be made more accessible to retail investors.

The central bank said these are funds which invest only in simple products such as shares or gold, but may use derivatives for efficient portfolio management including the hedging of risks.

"Fund managers will now be able to reclassify such investment funds as Excluded Investment Products (EIPs). Retail investors can then access these investment funds which have been reclassified as EIPs more easily as they will no longer need to be assessed on their investment knowledge or experience,'' MAS said.