Loh Boon Chye, CEO of Singapore Exchange Group, says investors worldwide are grappling with four challenges as they emerge from the constraints of the COVID pandemic.
He spoke last week at the annual conference for the Investment Management Association of Singapore, addressing a room full of asset management executives, fintech companies, and service providers to the buy side.
Loh styled his view of these challenges as “four Cs”, but Covid wasn’t one of them. Rather, he says the asset-management industry has to navigate questions involving crypto, cloud, carbon, and China.
He called for investment firms to deepen their expertise in technology and new-economy sectors, both within their portfolios as well in their own businesses, to ensure Singapore continues to grow as a global hub for wealth management.
Loh noted that in Asia, both institutional and retail participation in blockchain-based finance continues to increase, with more customers of asset managers requesting access to digital assets.
SGX has so far not offered cryptocurrency futures (unlike CME, for example), but is thinking about what kinds of products would suit its global derivatives business, risk management experience, and market infrastructure.
Loh hinted that the exchange was more likely to support blockchain infrastructure projects rather than speculative crypto contracts. “Beyond crypto as an investment, store of value or means of payment, it is more important to look to leverage the technology behind it,” Loh said.
To that end he spoke about tokenizing securities. “Tokenization can open markets, increase liquidity, and make the settlement process more efficient,” he said, noting SGX has a stake in local fintech ADDX, which is using smart contracts to provide fractional access to illiquid, private asset classes and private companies.
“This is a direction of travel for asset managers as they seek to provide new and differentiated products and services,” Loh said.
He also noted decentralized finance, or DeFi, as a trend to watch. “By putting so-called TradFi applications on the blockchain, DeFi creates a platform for innovative, inclusive, and transparent financial services,” Loh said.
But he said DeFi will take time to evolve before it’s ready for traditional financial institutions to use. “Ecosystems need to be ready for an entirely DeFi-run financial system, independent of traditional financial infrastructure,” Loh said. This will require policymakers to agree on standards and put guardrails in place.
“Until then, centralized and decentralized marketplaces will co-exist,” Loh said. “The question is how to bring the best of these two worlds together.”
SGX is part of a movement among various “Singapore Inc.” institutions to do that. Loh cited MarketNode, a joint venture with Temasek, to build capital-markets infrastructure for fixed income. MarketNode is working with the Monetary Authority of Singapore to launch by the end of 2022 as a pioneering fund-processing utility built on distributed ledger technology. This should give asset managers a tool to automate client onboarding and back-office processes.
Loh noted that asset managers have been migrating data storage and computing to cloud for several years now. They are deploying artificial intelligence and machine-learning programs via cloud to derive better results in risk management, compliance, asset allocation, portfolio construction, and customer analytics.
Stock exchanges are looking at cloud as well for trading and clearing. Loh didn’t have a specific announcement but he noted SGX is interested in harnessing cloud so long as data storage is reliable and secure, and the exchange can always access its data. But this is not a simple migration.
“Moving to cloud would impact our participants,” Loh said. “It’s a decision that must be undertaken together,” noting that some exchange clients will prefer to stick to traditional methods of executing, clearing and settling trades – especially as any such tech change involves costs. Many firms will prefer to avoid those costs while they continue to grapple with margin compression in the face of ETFs, rising costs of regulation, or difficult market conditions.
Loh said last year ESG-related flows to Asia-based mutual funds doubled to $100 billion.
As a result, many asset managers are interested in fintech solutions to provide ESG data sets and tools to quantify the impact of sustainable investing, and improve the transparency of climate-related disclosures.
“Asset management plays a role in facilitating decarbonization, including marketing green financial solutions,” Loh said. To be more effective, asset managers will need to work alongside governments to agree on ESG metrics, to disseminate information, and improve the quality of data.
This year MAS is launching an ESG data portal called Project Greenprint [first revealed last year by DigFin in conversation with MAS’s Sopnendu Mohanty]. Loh says new tools on the portal will automate ESG disclosures by listed companies, so Singapore-based fund managers can access that data instantly.
Similarly, MarketNode – the bonds-on-blockchain project referenced earlier – is launching a database with corporate issuers that covers ESG data, with the aim of offering this to asset managers.
And SGX has launched a platform called Global Carbon X, in partnership with Temasek, DBS and Standard Chartered, as a marketplace for data for project risks and impacts. Loh says this is a precursor to enabling carbon trading.
Loh noted China is the driver of long-term growth for all of Asia, and that investors will need to have access to its capital market. SGX is keen to develop projects to internationalize that access. Last year, SGX listed a Chinese government bond ETF issued by CSOP Asset Management. Loh says is the first ETF using the government’s recently released framework for Variable Capital Companies, a fund structure with favorable tax and regulatory treatment that is designed to boost Singapore as a funds hub.
SGX has also developed a link with Shenzhen Stock Exchange to allow investors on both exchanges to access exchange-traded funds and ETF-related options.
Loh added that the deal with Shenzhen is just one of many collaborations with other exchanges. “Today’s challenges cannot be addressed by one country, one industry, or one company,” he said. “Competition is not just about winners and losers. The ecosystem also matters.”