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Singapore hints at covered bond reforms

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Two key suggestions are for the Monetary Authority of Singapore to allow the use of covered bonds in repo transactions with the central bank and to lift the encumbrance limit (the percentage of a bank's assets that can be used in the collateral pool for covered bonds).

[SINGAPORE] Singapore's covered bond market may well be in line for the first local currency issues following hints from the regulator of changes to broaden the appeal of the instruments.

Two key suggestions are for the Monetary Authority of Singapore to allow the use of covered bonds in repo transactions with the central bank and to lift the encumbrance limit (the percentage of a bank's assets that can be used in the collateral pool for covered bonds).

Currently, the encumbrance limit for Singapore is 4 per cent, on par with Canada, but lower than 8 per cent for Australia and 10 per cent for New Zealand. Many other jurisdictions have no encumbrance limits at all.

"The two banks (DBS and UOB) are around halfway towards their encumbrance limits," said Bernard Wee, executive director of financial markets development, and fintech and innovation group at MAS.

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"There will be sufficient time before we revise that." Mr Wee was speaking at the Euromoney/European Covered Bond Council Asian Covered Bond Forum in Singapore last week, and the audience responded well to the regulator's apparent willingness to consider changes to accommodate issuers and investors.

"Assuming they are going to increase the encumbrance limit, this would bring more potential for covered bond issuance, in particular from foreign banks incorporated locally because this will allow them to sponsor a programme with a higher amount," said Jerome Cheng, senior vice-president in Moody's structured finance group.

"Increasing the encumbrance limit means restrictions on the sizes of their balance sheets would be alleviated." Ben McCarthy, head of Asia-Pacific structured finance at Fitch said that, given the typical over-collateralisation of 15-20 per cent for Asian covered bonds, plus the need to keep some suitable assets aside in case market conditions worsen and funding from senior bonds becomes difficult, the issue sizes could be quite small for foreign banks if the limit is not increased.

"For the industry as a whole, the current limit of 4 per cent is sufficient for the development of the covered bond market," said an MAS spokesperson, in response to IFR after the conference.

"MAS will monitor the utilisation levels and review the limit as appropriate."

Bankers at the conference also asked the MAS to make covered bonds eligible for use in repo transactions with the central bank.

Mr Wee's response was that request would be the easiest one to address. Industry experts expect the MAS to limit that to Singapore dollar covered bonds, at least initially.

Currently, covered bonds cannot be used for repo with the MAS, though allowing that will hugely increase their appeal to bank treasurers, who need to invest in high-quality liquid assets. In turn, that will make the asset class more attractive to issuers.

"Allowing repo eligibility of covered bonds would increase the demand and liquidity of the market, expand the investor base and help refinancing of portfolios," said Mr Cheng from Moody's.

"If covered bonds became repo-eligible, there could be more potential buyers of the underlying cover pool because investors could purchase the portfolio for issuing covered bonds, as well."

Mr McCarthy from Fitch said: "International investors might like the idea that there is always a market for Singapore dollar covered bonds, even if they can't repo them themselves, so it might increase the market for them."

The MAS spokesperson said that the central bank has been proactive in expanding the range of eligible collateral for its standing facility beyond Singapore government bonds to include Singapore dollar bonds issued by other sovereigns and certain well-rated corporate entities.

"Therefore, if there is a SGD covered bond issued under MAS Notice 648, we are open to review its eligibility under the standing facility," said the spokesperson.

The three main Singapore banks, DBS, OCBC and UOB, all have in place covered bond programmes, but have not issued in Singapore dollars and are considered more likely to be investors in covered bonds in that currency, since it makes more sense for them to use their allowances to raise offshore currencies.

Their onshore issuance costs are already so low that savings from covered bonds over senior bonds are greater overseas, plus it helps them meet their foreign currencies needs.

Among foreign banks, Citigroup and HSBC are incorporated in Singapore, while Standard Chartered and Maybank are understood to be going through the process currently.

StanChart and Maybank are seen as strong contenders to be among the first issuers of Singapore dollar covered bonds. Some sources also suggested the Housing and Development Board, the statutory body responsible for public housing in Singapore, could issue such notes.

Others said Australian banks, the most active issuers in Asia Pacific, could also issue Singapore dollar covered bonds in future if the market became attractive.

If the MAS follows through with the hinted reforms, it could bolster Singapore's chances of seeing offshore covered bonds of its banks given equal treatment to those from the 31-state European Economic Area.

Currently, covered bonds from banks in the EEA, rated at least AA- and meeting certain other criteria, are considered Level 1 high quality liquid assets, the lowest risk weighting for investors under liquidity coverage ratio guidelines.

Covered bonds from the likes of Singapore and Canada are deemed Level 2A, meaning investors need to hold slightly more capital against them, even though the notes may have higher or equal ratings to some EEA covered bonds.

There is no particular push for Singapore covered bonds to be deemed Level 1 instruments, but the EEA may need to rethink its treatment anyway when the UK leaves the zone following the Brexit vote. Post-Brexit, as things stand, covered bonds from the UK will be treated the same as those from Singapore.

"Brexit has the potential to change the standing of UK covered bonds," said a banker.

"If they allow UK bonds to maintain their current status, that could broaden it to somewhere like Singapore, too."