Singapore has recently introduced a new requirement for family offices to allocate at least S$50 million into Singapore-listed securities, a move aimed at strengthening its capital markets. This initiative comes in response to a persistent challenge: the local stock market has been struggling with declining trading volumes and limited institutional participation, a trend not unique to Singapore but reflective of a global landscape dominated by the US dollar and US equities.
The timing of this requirement is significant, as it coincides with broader geopolitical and economic shifts. The US is weaponizing its position as the primary reserve currency and monetising its role at the centre of the global infrastructure and trade. Foreign aid policies and tariff strategies are being recalibrated, and if the much-rumoured “Mar-a-Lago Accord” materializes as more than mere speculation, US debt could become militarized. Under this potential framework, the US government might impose zero interest rates on foreign-held US Treasury securities as a means of charging governments for military aid.
One of the immediate criticisms of Singapore’s directive has been the lack of sufficient investable products on the Singapore Exchange (SGX). However, one underutilized asset that could be further developed is the Singapore Depository Receipt (SDR) market. Introduced in May 2023 as part of the Thailand-Singapore DR Linkage, SDR’s were designed to enhance regional investment opportunities. Currently, a handful of Thai and Hong Kong companies, including Tencent Holdings and BYD, have SDR’s listed on SGX, all denominated in Singapore dollars. Despite its potential, adoption has been sluggish, with half of the market activity driven by retail investors, likely due to only local securities companies actively sponsoring the product.
SDR’s, as they exist today, represent a beneficial interest in an underlying security listed on an overseas exchange. They are issued on an unsponsored basis by intermediaries without any formal agreement with the underlying foreign company. As a result, these foreign firms are not subject to SGX’s reporting requirements. In contrast, American Depositary Receipts (ADR’s) can be either unsponsored or sponsored. While unsponsored ADR’s, similar to SGX SDR’s, do not need to fully comply with SEC regulations, sponsored ADR’s require a formal agreement between the foreign company and a depositary bank, ensuring compliance with SEC disclosure rules. Sponsored ADR’s have two tiers, Levels 2 and 3. There are differences, the most important is that Level 3 allows foreign companies to raise capital by issuing new shares.
If Singapore were to evolve its SDR market into a sponsored model, it could establish a three-tier system:
Level I: Minimal disclosure, with SDRs traded over-the-counter.
Level II: Listed on SGX, requiring partial compliance with SGX regulations.
Level III: Fully SGX-compliant and capable of raising capital.
Granting sponsorship rights to global banks could encourage the development of a market-making framework for SDR’s, ensuring liquidity and stability. Additionally, incentives could be provided to ETF’s and funds to incorporate SDR’s into their portfolios.
To facilitate international adoption, Singapore could also introduce a treaty-based tax exemption framework, standardizing withholding tax rates for SDR’s, much like the US Qualified Dividend Income (QDI) treatment for ADR’s. Furthermore, allowing convertibility between SDR’s and their underlying foreign shares could promote arbitrage opportunities, improving price efficiency.
Finance is like water, innovation tending to emerge in response to barriers. In the 1970s, the Eurobond market was born as a reaction to US currency controls, creating offshore pools of US dollars that required fixed-income instruments outside US regulations. Today, as the US re-establishes barriers Singapore could position itself as an alternative gateway. A well-structured SGX SDR market might offer investors access to US-listed companies through a non-US, non-dollar-denominated structure. The critical question remains whether the current US administration would find such an initiative beneficial enough to engage in negotiations.
Beyond the US, SDRs are not limited in scope. They could be used to provide access to European luxury brands, Japanese technology firms, and other high-demand sectors that Singapore’s domestic equities market cannot currently satisfy. By expanding and refining its SDR framework, SGX could unlock a new avenue for capital inflows, reinforcing Singapore’s role as a leading financial hub in the region.
Idle thoughts of an idle man at the weekend.
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