Francis Repka, Deputy CEO, SG Asia Xuan Tran, Chief of Staff to the Head of SG CIB Asia Pacific

1. Fundamental Requirements to Attract Institutional Investors :The view from a financial intermediary Francis Repka, Deputy CEO, SG Asia Xuan Tran, Chief of Staff to the Head of SG CIB Asia Pacific 11th August 2005

2. Table of Contents • The Requirements of Institutional Investors • The Role of Financial Intermediary • The Infrastructure for the Development of OTC Derivatives Products (and the link with Organised Markets) Fundamental Requirements to Attract Institional Customers

3. The Requirements of Institutional Investors

4. The Requirements of Institutional Investors • Institutional investors common requirements : • A liquid and representative yield curve in the government bond market to act as a benchmark for performance evaluation. • The ability to manage interest rate risk through interest rate swaps and interest rate futures. • A credit market, i.e. the possibility to invest on corporate bond with an active credit curve and the support of independent rating agency. • For cross border investors, compelling is • Repatriation of capital + interest – a clear rule if specific capital inflow/outflows controls • Tax neutrality (including on financial flows) / withholding taxes issues on interest payments • Development of tailor-made structured products to meet specific requirements • A low access cost • Directly : licensing fees, no taxes based upon turnover • Indirectly : Narrow bid-offer on OTC (which require market participants with specific and contrary needs) Fundamental Requirements to Attract Institional Customers

5. The Role of Financial Intermediary

6. The Role of Financial Intermediary and the Use of OTC Derivatives • Educate end-users on the proper usage of derivatives products • Develop new products in local currencies together with local financial institutions • Service the investor community and the financial market place by providing liquidity • Arbitrage markets • Yield curve : provide liquidity • Cash-futures : enhance liquidity and reliability of the future market as a hedge • Intervention through Proprietary trading • Enhance liquidity • Specific needs / reading of the market Fundamental Requirements to Attract Institional Customers

7. The Infrastructure for the Development of Derivatives Products

8. The infrastructure for the development of derivatives products • Availability of basic product components is essential to develop and offer a broad range derivatives products for risk management and/or investment purpose • Basic components for FX derivatives • Spot and forward in local currency • Vanilla FX options • Cross-currency swaps market, especially when local investors are able to invest in foreign currencies • Basic components for developing Interest rate derivatives • A floating rate reference • Futures / Forward RAs on the floating rate reference • An active repo market • Bond future market would be a plus • Interest rate swap The yield curve of government bonds / financial bonds together with the recent issuance of floating rate bonds may become the reference point for further development of the interest rate swap market • Options : caps, floors once medium date reference (ie 3, 6 months) are enacted Fundamental Requirements to Attract Institional Customers

9. The infrastructure for the development of derivatives products • A sound operational framework • Sound banking system as counterparty risk is paramount • Regulatory framework ensuring fair playing field and transparency • Legal / Standardization of terms and documents. Master agreement / importance of netting including for BSA/CSA to develop interbank market • Tax → offset between accrued and MTM (unrealized) in trading books • Importance of regulation and self discipline of the industry for risk monitoring, market regulation Fundamental Requirements to Attract Institional Customers

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