THE DELTA REPORT
Since 2012, in line with its commitment to the G20 and Financial Stability Board ("FSB") reform objectives, the Monetary Authority of Singapore (the "MAS") has undertaken a comprehensive review of the Securities and Futures Act (the "SFA") and related subsidiary regulations to ensure that the domestic laws remain current in light of recent market and international developments. To date, the MAS has focused its reform policy on mitigating systemic risk, strengthening its enforcement regime and enhancing the transparency of over-the-counter ("OTC") derivatives activity in Singapore.
In the wake of the global financial crisis, the MAS announced in July 2011 its plans to make several legislative amendments to regulate OTC derivatives in Singapore reflecting its commitment to the G20 and FSB reform objectives to strengthen the international financial regulatory system. As part of its policy reform plan, the MAS proposed to expand the scope of the SFA by:
(a) mandating the central clearing and reporting of OTC derivatives;
(b) extending the current regulatory regimes for market operators, clearing facilities and capital market intermediaries to OTC derivatives; and
(c) introducing a new regulatory regime for trade repositories.60
The initial phase of the reform started with The Securities and Futures (Amendment) Act 2012 (the "SF(A) Act") which came into effect on 31 October 2013. After the SF(A) Act came into effect, the MAS published further Consultation Papers with regards to proposed legislative amendments that reflected the broad scope of the policy reform and to ensure that the SFA remains current in view of market and international developments.
This article (1) provides a review of the current reporting and clearing obligations under the SFA as amended by the SF(A) Act and (2) considers anticipated changes in relation to the reporting and clearing of OTC derivatives in Singapore.
The Current State of the Legislative Reform
The SF(A) Act:
(a) introduced a new regulatory regime for trade repositories;
(b) extended the regulatory regime for clearing facilities to OTC derivatives; and
(c) mandated the reporting and clearing of certain OTC derivatives transactions.
In relation to reporting and clearing obligations, the SF(A) Act added a new Part VIA (which sets out the mandatory reporting rules) and a new Part VIB (which regulates the clearing of derivatives contracts).
The mandatory reporting regime for OTC derivatives contracts commenced on 31 October 2013 in Singapore pursuant to the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013 (No. S 668/2013) ("SF(RDC)R") which give effect to the new Part VIA of the SFA.
Pursuant to Part VIA, the mandatory reporting requirement applies to each "specified person" who is a party to a "specified derivatives contract"61 unless such specified person is exempted.62 A "specified person"63 is defined as:
(a) any bank in Singapore licensed under the Banking Act;
(b) any subsidiary of a bank incorporated in Singapore;
(c) any merchant bank approved as a financial institution under the MAS Act (Cap. 186);
(d) any finance company licensed under the Finance Companies Act (Cap. 108);
(e) any insurer licensed under the Insurance Act (Cap. 142);
(f) any holder of a capital markets services licence;64
(g) any approved trustee referred to in section 289;65 or
(h) any "significant derivatives holder".66
The reporting obligations also apply to specified persons acting as agents in a specified derivatives contract.67
At present, a "specified derivatives contract" refers to any interest rate derivatives contract, credit derivatives contract or foreign exchange derivatives contract (excluding various spot transactions as specified in regulation 2 under "excluded currency contract"), that is traded or booked in Singapore.68 It is anticipated that the scope of "specified derivatives contract" may be expanded to include other asset classes such as equity and commodity derivatives contracts in the near future.
The current state of reform in relation to mandatory clearing has not yet been finalised as subsidiary regulations to give effect to the policies under the new Part VIB (Clearing of Derivatives Contracts) of the SFA have not yet been issued.
Part VIB of the SFA sets out the requirements of the clearing obligations of specified persons. A "specified person" who is a party to a specified derivatives contract shall cause the specified derivatives contract to be cleared through an approved clearing house or a recognised clearing house.69 The MAS has not yet finalised which type of derivatives contracts shall come within the scope of "specified derivatives contract" for the purposes of Part VIB of the SFA.
At present, a "specified person" under Part VIB (Clearing of Derivatives Contracts) of the SFA differs from a specified person under Part VIA (Reporting of Derivatives Contracts) of the SFA. Under Part VIB of the SFA, a "specified person" includes all the specified persons under Part VIA of the SFA except for subsidiaries of banks incorporated in Singapore and significant derivatives holders.70 As with the definition under section 124 of the SFA, the composition of "specified persons" under Part VIB of the SFA is subject to change as the MAS has authority to prescribe additional specified persons or amend the relevant specified persons by subsidiary regulations.
Further Reform Expected
On 18 January 2016, the MAS published a Consultation Paper on Proposed Amendments to the Securities and Futures (Reporting of Derivatives Contracts) Regulations to complete the implementation of the OTC derivatives reporting regime in Singapore. In this Consultation Paper, the MAS proposed to make further amendments to the SF(RDC)R to:
(a) implement the reporting of commodity and equity derivative contracts (in addition to interest rate, credit and the relevant foreign exchange derivatives contracts) to licensed trade repositories or licensed foreign trade repositories;
(b) include additional data fields for collateral, booking location and trading desk location for all specified derivatives contracts;
(c) include reporting obligations for active non-bank financial institutions ("NBFIs") in OTC derivatives;
(d) exempt all approved trustees and licensed trust companies from reporting obligations;
(e) exclude the reporting of derivatives contracts transacted with retail investors; and
(f) require NBFIs to keep proper records of OTC derivatives activities and to submit the required information to the MAS on a periodic basis.
These amendments are expected to be phased in between 1 July 2016 and 1 November 2018.
Commodity Derivatives Contracts
In relation to commodity derivatives contracts, the MAS proposed that all forwards, swaps and options related to commodities or commodity indices, or contracts with cash flows determined by reference to one or more commodities be subject to the reporting obligations under the SFA. However, physically-settled commodity derivatives contracts entered into for commercial purposes and certain commodity sale and purchase agreements (which contain some form of optionality) entered into for commercial purposes and intended for physical settlement, may be excluded.
Equity Derivatives Contracts
In relation to equity derivatives contracts, the MAS has proposed to subject securities-based derivatives (such as equity derivatives contracts) to reporting requirements but exclude exchange-traded equity derivatives contracts in line with the current approach to exclude exchange-traded products. For the purposes of the reporting regulations, the MAS also proposed that "equity derivatives contracts" be defined as: (i) rights, options or derivatives related to stocks or shares issued or proposed to be issued by a corporation or body unincorporated, (ii) contracts related to equities or equity indices, or (iii) derivatives of a unit in a business trust. It is not clear whether this definition would capture other certificates or structured notes linked to securities.
NBFIs with OTC derivatives activity (based on annual aggregate notional amounts) exceeding S$5 billion
After a survey was conducted, the MAS considered that the aggregate gross notional amount of OTC derivatives transactions offered a better measure of the potential systemic risk posed by financial institutions to the market as compared with the amount of managed assets. As a result, the MAS proposed that NBFIs (including subsidiaries of banks incorporated in Singapore, insurers and holders of CMS licenses) whose annual aggregate notional amount of OTC derivatives activity exceeds a threshold of S$5 billion be subjected to the reporting requirements.
However even if an NBFI may be exempted from reporting, it should still continue to ensure proper record keeping of its OTC derivatives activities as the MAS may periodically require a NBFI to submit requested information in relation to such NBFI's derivatives trading activity.
Exemptions and Exclusions
As approved trustees ("ATs") and licensed trust companies ("LTCs") largely perform administrative roles and do not make investment decisions, the MAS has proposed to exempt both ATs and LTCs from the reporting requirements irrespective of the value of managed assets held.
After its review, the MAS considered that derivatives contracts transacted with retail investors are unlike to pose significant risk to the overall financial system as the exposure of all such transactions are relatively low. Accordingly, the MAS has proposed to exclude derivatives transactions where counterparties are retail investors (i.e. non-accredited or non-institutional investors) from being subject to the reporting obligations under the SFA.
On 1 July 2015, the MAS published a Consultation Paper on Draft Regulations for Mandatory Clearing of Derivatives Contracts and invited interested parties to provide comments on the proposed draft regulations.
The proposed draft Securities and Futures (Clearing of Derivatives Contracts) Regulations ("SF(CDC)R") sets out the initial implementation details of Part VIB of the SFA including the type of OTC derivatives contracts to be cleared, the circumstances under which clearing is mandatory, persons who are subject to or exempt from clearing obligations and other implementation details. The SF(CDC)R was initially anticipated to be issued by the end of 2015.71
In determining the scope of the "specified derivatives contracts" to be cleared, a key consideration for the MAS is the level of systemic risk that any particular class of contract poses to the financial system.72 Other relevant considerations that the MAS may have regard to include the characteristics and level of standardisation of the contractual terms and operational processes of that class of derivatives contracts and the depth and liquidity of the market for that class of derivatives contracts.73
Interest Rate Swaps
Given that approximately 50% of derivatives transactions booked in Singapore are interest rate derivatives contracts with 90% of interest rate derivatives contracts being standardised interest rate swaps ("IRS"), the MAS has proposed to commence mandatory clearing with interest rate derivatives contracts. It is anticipated that at a minimum, Singapore Dollar fixed-to-floating swaps based on the Swap Offer Rate and US Dollar fixed-to-floating swaps based on the London Interbank Offered Rate will be subject to clearing obligations from commencement. The MAS is still considering whether IRS denominated in Euro, Pound Sterling and Japanese Yen should also be subjected to the same clearing obligations from commencement as these transactions comprise a significant portion of trades booked in Singapore.
Banks With OTC Derivatives Exposures exceeding S$20 billion
To address the largest counterparty credit risks in the OTC derivatives markets, the MAS proposed to subject only banks with exposures in OTC derivatives contracts that exceed the threshold of S$20 billion (gross notional outstanding of contracts booked in Singapore in the last four quarters) to the clearing obligations. Therefore, it is anticipated that at commencement, a "specified person" for the purposes of the mandatory clearing obligations will only be limited to banks that exceed the relevant threshold with exemptions applying to public bodies such as central banks, governments and international multilateral organisations (e.g. Bank for International Settlements, the International Monetary Fund and the World Bank). The MAS has also proposed that intra-group transactions be exempted from the scope of clearing obligations as such transactions do not transfer risks in or out of a corporate group. These issues have been posed to the public for comment.
60 MAS, Consultation Paper on Proposed Regulation of OTC Derivatives (Feb 2012).
61 Section 125(1) of the SFA.
62 Section 129A of the SFA. The Fourth Schedule of the SF(RDC)R provides that such exempted persons include the Government, any statutory board, any central bank, any central government, any non-commercial agency of a central government and any of the listed multilateral agencies, organisations or entities in the Fourth Schedule. The Securities and Futures (Reporting of Derivatives Contracts) (Exemption) Regulations 2014 ("SF(RDC)(E)R") also provides for additional persons to be exempted from section 125.
63 Section 124 of the SFA.
64 Pursuant to the SF(RDC)(E)R, a holder of a capital markets services licence in fund management or real estate investment trust management (collectively, the "Asset Managers") with managed assets of less than S$8 billion, is exempted from having to comply with the reporting obligations under section 125 of the SFA.
65 Pursuant to the SF(RDC)(E)R, approved trustees in respect of collective investment schemes managed by Asset Managers who qualify for the relief or other fund management companies are not subject to reporting obligations under section 125 of the SFA.
66 See regulation 6 of the SF(RDC)R. A specified person is a "significant derivatives holder" if he is not a specified person that falls within paragraphs (a) to (g) of the definition of "specified person" in section 124 of the SFA, is resident in Singapore and is a party to a specified derivatives contract booked or traded in Singapore which aggregate gross notional amount exceeds S$8 billion (current reporting threshold amount).
67 Section 125(2) of the SFA.
68 Regulation 5 of the SF(RDC)R.
69 Section 129C(1) of the SFA.
70 Section 129B of the SFA.
71 MAS, Consultation Paper on Draft Regulations for Mandatory Clearing of Derivatives Contracts (1 July 2015), p 8.
72 Section 129G(2) sets out the various factors that the MAS may have regard to in determining whether to prescribe that a particular class of derivatives contracts be subject to clearing.
73 Section 129G(2) of the SFA.
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