Modification to the Single Entity Limit for Country-Specific Government Bond Funds

Circular No.: CFC 02/2020
26 August 2020
To: Holders of capital markets services licence in respect of fund management for retail investors Dear Sir/Madam MODIFICATION TO THE SINGLE ENTITY LIMIT FOR COUNTRY-SPECIFIC GOVERNMENT BOND FUNDS The Code on Collective Investment Schemes (“Code”) currently allows the 10% single entity limit1 to be raised or disapplied for investments in public debt securities and money market instruments where the issuer is, or the issue is guaranteed by, a government, government agency or supranational (“Public Debt Instruments”) that has a minimum long-term credit rating (“Sovereign Rating”) as follows:
(a) Under Paragraph 2.4(a) of Appendix 1, the single entity limit may be raised from 10% to 35% where the Sovereign Rating is at least BBB by Fitch, Baa by Moody’s or BBB by Standard and Poor’s (including such sub-categories or gradations therein); (b) Under Paragraph 2.6(a) of Appendix 1, the single entity limit does not apply where the Sovereign Rating is at least AA by Fitch, Aa by Moody’s or AA by Standard and Poor’s (including such sub-categories or gradations therein). 2 MAS has received feedback from the industry that the sole reliance on the above minimum Sovereign Rating requirements would prevent the creation of country-specific government bond funds which may have a relatively lower risk profile when other metrics are considered. 1 Paragraph 2.1 of Appendix 1 of the Code provides that investments in transferable securities or money market instruments issued by a single entity should not exceed 10% of the scheme’s NAV; and aggregate investments in a group of entities should not exceed 20% of the scheme’s NAV.

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3 MAS has conducted a review of these requirements. In line with our objective of reducing mechanistic reliance on credit ratings, MAS will lower the minimum Sovereign Rating requirements under Paragraph 2.6(a) of Appendix 1 to investment-grade, i.e., BBB by Fitch, Baa by Moody’s or BBB by Standard and Poor’s (including such sub-categories or gradations therein), provided all of the following criteria are met:
(a) the country or jurisdiction of the government or government agency has a country risk classification of 1 or 2 by the Organisation for Economic Co￾operation and Development (the “OECD”) 2 , or is unrated by the OECD for the sole reason that it is classified by the OECD as high-income; (b) the Public Debt Instruments are constituents of a well-recognised international index3 ; and (c) the fund will invest in at least six different issuances of Public Debt Instruments, each not exceeding 30% of the fund’s net asset value. 4 Country-specific government bond funds which can meet the above conditions need not apply for a waiver of the single entity limit under the Code. Where applicable, these funds will also be deemed to have met Paragraph 4(e) of Appendix 5 of the Code4 . 5 If you have any queries on this matter, please contact your MAS officer-in-charge. Yours faithfully ABIGAIL NG EXECUTIVE DIRECTOR CORPORATE FINANCE AND CONSUMER DEPARTMENT 2 See prevailing country risk classification (as of 25 June 2020) at https://www.oecd.org/trade/topics/export￾credits/documents/cre-crc-current-english.pdf 3 The index should track the performance of Public Debt Instruments of multiple countries or jurisdictions. 4 Paragraph 4(e) of Appendix 5 of the Code requires the underlying index of an index fund to be sufficiently diversified such that (i) the maximum weighting per constituent does not exceed 20%, or (ii) where an index is composed solely of constituents which are non-entities, the maximum weighting of a single constituent does not exceed 35% with the remaining constituents each not exceeding 20%.