GOVERNMENT SECURITIES (AMENDMENT) BILL

GOVERNMENT SECURITIES (AMENDMENT) BILL: Order for Second Reading read.

The Second Minister for Finance (Mrs Lim Hwee Hua): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill proposes three main changes to the Government Securities Act: First, expressly empowering the Monetary Authority of Singapore (MAS) to regulate

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primary dealers; second, allowing early redemption of Singapore Government Securities (SGS); and third, allowing MAS to enter into securities lending arrangements using SGS.

Sir, let me explain the first amendment to empower MAS to regulate primary dealers. Primary dealers play an important role in providing liquidity, underwriting issuance and giving market feedback. In practice, MAS has been appointing primary dealers and issuing them directions in relation to their role as such. The amendment in clause 6 of the Bill proposes a new Part VIIA which sets out a regulatory framework for MAS’ appointment and regulation of primary dealers. Part VIIA will also allow MAS to issue directions to, revoke the appointment of, suspend and inspect the primary dealers.

The second amendment will allow Government to redeem SGS before maturity at market price. Currently when MAS conducts buy-back operations for illiquid issues to concentrate liquidity in key benchmark issues, the securities bought back are kept on MAS’ books until maturity. As premature redemption of these securities is currently not allowed, Government continues to pay interest on these securities to the MAS. The practice of early redemption is common among central banks and will provide more flexibility in the management of SGS. This amendment is provided for in clause 5 of the Bill.

The third amendment relates to the securities lending arrangements between MAS and the primary dealers. An efficient bond market relies on market-makers who are able to effectively price and deliver the bonds on-demand. To facilitate market-making, MAS currently operates a sale-and-repurchase or commonly referred to as a repo facility that lends SGS to primary dealers on an overnight basis when the SGS are not readily available from other sources. This provides the

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primary dealers with greater confidence in delivering SGS to investors and enhances the overall liquidity, efficiency and robustness of the government securities market. This arrangement is formalised in clause 3 of the Bill.

The second and third amendments together will also enhance MAS’ existing repo facility. The amount of SGS which MAS can lend currently is limited to its own holdings. When demand for specific SGS exceeds MAS’ holdings, Government can issue new SGS to MAS to lend to primary dealers on an overnight basis. Government will then redeem the SGS the following day, to be allowed for under the proposed second amendment.

Other amendments in the Bill are administrative in nature.

Sir, I beg to move.

Question proposed.

3.02 pm

Mdm Ho Geok Choo: Mr Speaker, Sir, in the history of the Singapore Government, we have had the happy situation where we operate on a balanced budget and have not needed to borrow funds through the issuance of government bonds to finance expenditures. However, we must make plans to withstand another financial tsunami like the sub-prime crisis which rocked us in September 2008. Singapore may survive another round but at what expense, we do not know. To prepare for the odd chance that there is another financial tsunami, the Singapore Government would do well to fortify its financial arsenal, and the Government Securities (Amendment) Bill is indeed timely.

However, I would add a cautionary note in relation to the power of the Government to borrow money by issuing securities. A recent example is that of

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Dubai, where its overleveraged Sovereign Wealth Fund was unable to meet its interest payments, resulting in a crisis for Dubai. Dubai was fortunate that its neighbour Abu Dhabi bailed it out; and this is a reminder for the rest of us that when we issue securities, we must be mindful to do so prudently and not over-reach ourselves. Singapore has come a long way in building up our capability as a sovereign debtor, and we must be careful not to mar this reputation by excessive borrowing.

The Bill provides MAS with the authority to appoint financial institutions as primary dealers of Government securities. Singapore Government Securities provide a sound investment opportunity with little or no risk of default, for both individual and institutional investors. To meet demand from investors, the appointment of primary dealers allows Government securities to be more easily distributed, and helps the Government reach a greater pool of counterparties. At the same time, it is much easier for the Government to deal with just a group of primary dealers, rather than having to deal with many different counterparties who hold Government securities in varying amounts.

Sir, the Government Securities (Amendment) Bill provides MAS with the regulatory powers to keep a check on the conduct of the primary dealers. For example under new section 29C, public and customer interests are given due importance. We do not want to have a situation where primary dealers, through manipulative machinations, pull the wool over the eyes of government securities investors. The painful Minibonds saga where huge amounts of money, especially of the old and ill-informed investors, who squirreled away their life savings, only to see it wiped away in one fell swoop, are invaluable lessons. And Mr Speaker Sir, these lessons are enough to last us a lifetime.

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It is to be noted that new sections 29C and 29D together appear to impose quite a heavy obligation on primary dealers. If a primary dealer fails to observe directions issued by MAS under new section 29C, it may have its appointment as primary dealer cancelled. Can the Minister please provide examples of such directions that MAS may possibly issue, to give potential primary dealers a better idea of what they will be entering into?

Also, there are regulatory capital requirements for primary dealers in New York. Would there be similar regulatory capital requirements for primary dealers here in Singapore, and if yes, how much will this regulatory capital be?

With this, Sir, I support the Bill.

3.07 pm

Mrs Lim Hwee Hua: Mr Speaker, Sir, first, I would like to thank Mdm Ho for her support of the Bill. Let me clarify some of the concerns that she has raised.

First, Mdm Ho has highlighted that although Government is currently able to finance its expenditures without borrowing, we should nonetheless be prepared for any unforeseen circumstances such as the recent financial tsunami. The prudent principle of not raising debt to fund Government's public expenditures has been enshrined in our Constitution. The issuance of the SGS is for the purpose of developing our domestic debt market. So the proceeds raised are invested together with the rest of our reserves. Despite the recent financial crisis, Singapore has actually maintained its AAA Sovereign rating and kept our debt servicing cost low and this has also indirectly benefited our local companies and businesses. But nonetheless, we will continue to ensure that the

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Singapore Government spends within its means and continues to exercise discipline and prudence, and should another extraordinary financial tsunami hit us, our Constitution allows the Government to seek the President's approval to draw on our reserves, as was the case last year. But let me assure Mdm Ho that there are safeguards in place and the first of which is that the Government cannot borrow more than the limit that has been authorised by this Parliament which currently stands at $320 billion. The second is that the Reserves Protection Framework ensures that the proceeds raised are invested as part of our reserves and cannot be spent.

Mdm Ho also raised specific questions relating to the primary dealers. She commented that the Bill imposes quite a heavy obligation on the primary dealers. Let me clarify that the Bill merely formalises the existing arrangements for primary dealers and does not add to the obligations. The proposed legislation merely sets out a clearer legal and due process framework which will give greater certainty to all the stakeholders. That would include the Government, MAS, primary dealers and investors. As for examples of directions that the MAS has issued, they include the requirement for the primary dealers to fully underwrite the share of the SGS in an auction and the obligation to make two-way bids for SGS under all price conditions. Finally, she has a question about the capital requirements. I would like to clarify that only financial institutions incorporated in Singapore have to meet MAS' regulatory capital requirements.

Sir, I believe I have answered her questions.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mrs Lim Hwee Hua].

Bill considered in Committee.

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Mrs Lim Hwee Hua:

The Chairman: The citation year "2009" will be changed to "2010" as indicated in the Order Paper Supplement.

Clauses 1 to 8 inclusive ordered to stand part of the Bill.

Bill reported without amendment, read a Third time and passed.