Singapore eases restrictions on foreign derivatives firms

The Monetary Authority of Singapore (MAS) has liberalised its Singapore dollar non-internationalisation policy, to allow greater participation in its capital markets by international investors and financial institutions.

Singapore’s deputy prime minister and MAS chairman Lee Hsien Loong said certain restrictions would be lifted this month while addressing an investor forum in Singapore earlier this week.

Before last Wednesday, MAS required Singaporean financial institutions to maintain documentary proof to demonstrate that any Singapore dollar foreign exchange option transactions with non-resident entities were for hedging purposes. This restriction has now been removed.

Also, cross-currency repos, cross-currency swaps and asset swaps may now be transacted freely. Previously, the regulator viewed these transactions as a form of Singapore dollar lending and required full Singapore dollar collateralisation on large trades.

But, aware of the critical role that hedge funds played in precipitating the Asian financial crisis at the end of the 1990s, MAS is continuing to prohibit financial institutions from extending Singapore dollar credit facilities exceeding S$5 million to non-residents, when the proceeds may be used for speculation against the Singapore dollar exchange rate.

Back in 1997, hedge funds had built-up large short currency positions on the Thai baht. The pressure of these bets caused the currency to be devalued in June 1997, and helped to precipitate the Asian crisis.

Though the global macro style, typically involving large punts on exchange rates or interest rates, has fallen out of favour among hedge funds since the heyday of George Soros and others in the 1990s, there is evidence that it is making a return.

“Long-short equity continues to be the predominant strategy used by hedge funds active in Asia,” said Joanne Murphy, Hong Kong-based head of hedge funds products and marketing for Asia at Bank of Bermuda. “However, global macro is beginning to come back into vogue – we believe these funds will increase their exposure in Asia this year.”