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 (MAS) 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.
"The two banks (DBS and UOB) are around halfway towards their encumbrance limits," said Mr Bernard Wee, executive director of financial markets development, and fintech and innovation group at MAS. "There will be sufficient time before we revise that."
Mr Wee was speaking at the Euromoney/European Covered Bond Council Asian Covered Bond Forum here 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 Mr Jerome Cheng, senior vice-president in Moody's structured finance group.
Mr Ben McCarthy, head of Asia-Pacific structured finance at Fitch, said that given the typical over-collateralisation of 15 to 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 spokesman, in response to an International Financing Review query. "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 said 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.