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Proposed Amendments to the Securities and
Futures Act for the Regulation of OTC
Three years on from its first consultation paper on reform of the over-thecounter
("OTC") derivatives market after committing to the G20 objectives in
July 2011, the Monetary Authority of Singapore (the "MAS") has issued a
Consultation Paper on Proposed Amendments to the Securities and Futures
Act ("SFA") (revised on 16 February 2015) ("Consultation Paper") to
complete the expansion of its regulatory oversight to include over-the-counter
("OTC") derivatives (including the transfer of regulatory oversight of OTC
commodity derivatives from International Enterprise Singapore ("IES") to
While addressing most of the outstanding issues from its first consultation
paper in 2012 in respect of reform in the OTC derivatives sphere, this
Consultation Paper signals more changes to the SFA to come, as the MAS
flags up several areas in which it will be conducting further consultations.
Notable proposals include:
A licence will be required for dealing in derivatives contracts (which have
been redefined), unless an exemption applies.
The market operators' regulatory regime will apply to OTC derivatives
trading platforms and their intermediaries.
Fund managers intending to manage collective investment schemes
("CIS") that invest solely in derivatives of physical assets will need to be
licensed for fund management activity if their CIS is offered to retail
Trade reporting requirements will be attracted for specified persons who
enter into any specified derivatives contract as an agent to a party (not
being a specified person) and that contract is booked in Singapore. (See
our earlier client alerts on the reporting regime, OTC Derivative Trade
Reporting Obligations Come into Force and MAS to Require Reporting of
Foreign Exchange Derivatives Contracts and Other Changes).
Banking confidentiality is lifted for compliance with trade reporting
Commodity derivatives will be regulated under the SFA, save for spot
commodity trading (which will remain under the Commodity Trading Act
("CTA") and physically settled commodity forward contracts. Certain
commodity contracts which contain a form of optionality may also be
excluded but these will be consulted on at a later stage. Transitional
arrangements for existing OTC commodity derivatives brokers licensed
under the CTA will be released at a later stage.
We outline some key proposals of the Consultation Paper on OTC derivatives
1. New Product Definitions
The "derivatives contract" definition (that was introduced in the 2012
amendments to the SFA) is to be refined to address overlaps in the current
Client Alert | Page 2
definitions of "securities" and "futures contracts" under the SFA. The MAS proposes the following "principles-based" key product definitions:
Derivative Contract. Two main elements must be satisfied:
o the discharge of obligations at some future time by a party to the contract; and
o the value of such obligations are determined with reference to an underlying asset (i.e. equity, interest rate, foreign exchange, credit or commodity).
Contracts transacted at the current spot price and intended for actual delivery of the underlying assets will be excluded.
Securities. The present definition will be simplified to equity instruments representing legal or beneficial ownership interests or debt instruments.
o There will be a new definition for securities-based derivative contract as a subset of the new "derivative contract" definition; and
o CIS will no longer fall under the securities definition but will be defined separately.
Capital Markets Products. This will be a catch-all term for all regulated products under the SFA, including derivative contracts.
Organised Market. This definition will describe a market by its underlying function of facilitating the exchange, sale or purchase of specified products regulated under the SFA (including derivative contracts), replacing existing definitions of "market", "securities market" and "futures market".
2. New Regulatory Framework for Capital Markets Intermediaries
Dealing in Capital Markets Products. Dealing in OTC derivatives is a new activity which will require a licence. This will be subsumed under the new regulated activity of “dealing in capital markets products”, which will also include: (1) dealing in securities; (2) trading in futures contracts; and (3) leveraged foreign exchange trading. The licensee would need to indicate the specific class of capital markets products that it or its representatives will be dealing with (e.g. CIS, exchange traded derivatives or OTC derivatives) and this will be published by the MAS.
Exemptions. Persons exempt from licensing for “dealing in capital markets products” in respect of OTC derivatives will be as follows:
o persons dealing for their own account in OTC derivatives with a regulated financial institution and do not receive or derive a commission, spread or remuneration in return (e.g. corporates using OTC derivatives for risk management); and
o interdealer brokers, i.e. persons who deal in OTC derivatives but do not take on any principal position in OTC derivatives, do not handle or hold any customer’s position, margin or account in their books, and which only deal with accredited or institutional investors. (These persons have to register with the MAS upon commencement of business and comply with certain requirements.)
A similar licensing exemption will be introduced for persons who deal with futures contracts, and do not take any principal position, customer’s position, margin or account, and which only deal with institutional or corporate accredited investors (subject to registration with MAS and meeting certain conditions and requirements).
“Fund management” will cover all capital markets products and CIS managers. Managers of CIS that invest solely in derivatives of physical
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assets will fall under the regulated activity of "fund management". However, the MAS intends to license and regulate managers of CIS that invest in physical assets only if the CIS is offered to retail investors. An exemption is proposed for managers of CIS that are offered only to accredited and institutional investors. Affected CIS managers can continue to manage their CIS for existing investors but need to be licensed before offering additional units of their existing CIS or new CIS.
Additional requirements where CIS managers use unregulated custodians. Where CIS managers custodise the physical assets of the CIS with unregulated service providers, the MAS is proposing additional requirements, such as minimum financial or capital requirements; insurance coverage for the custodised assets and segregation of assets under custody. The MAS is seeking feedback on additional or alternative measures to be imposed.
3. New Regulatory Framework for Market Operators
The SFA regulatory regime for market operators will be extended to entities which intend to establish or operate facilities for the trading of OTC derivatives, e.g. OTC derivatives trading platforms and their intermediaries. Locally incorporated corporations operating organised markets that are systemically important will be regulated by the MAS as Approved Exchanges. Other corporations (including foreign-incorporated corporations) will be regulated as Recognised Market Operators ("RMOs"). The MAS plans to introduce enhancements to the RMO regime, such as appropriate governance arrangements, but will consult on these at a later stage.
4. Clarifications on Derivatives Reporting Requirements
The MAS proposes the following clarifications:
All specified derivatives contracts booked in Singapore. Where a specified person acts as an agent of a party to that contract (where that party is not a specified person), and that contract is booked in Singapore, the contract will have to be reported under the trade reporting framework, even if the contract is not traded in Singapore.
Banking confidentiality. Banking confidentiality will be lifted to allow financial institutions to report customers' information for compliance with MAS' and specified foreign jurisdictions' trade reporting obligations. This is to prevent counterparties from citing confidentiality laws as reasons for not disclosing the requisite data in reporting OTC derivatives trades.
5. Transfer of regulatory oversight of commodity derivatives from the CTA to the SFA
Regulatory oversight of commodity derivatives will be transferred from the CTA (administered by IES) to the SFA (under MAS' purview) in line with the definition of derivatives contracts under the SFA. The relevant licensing exemptions, e.g. for persons dealing with accredited investors and the Global Trading Company (as defined in the Income Tax Act) exemption, will be migrated as well. However, spot commodity trading will still be under the CTA and IES' purview. Physically settled commodity forward contracts will be excluded from the scope of regulation under the SFA.
The MAS also referred to the exclusion of certain commodity contracts which may contain some form of optionality, e.g. where such contracts are for commercial purposes and there are options for non-delivery but these would be set out in regulations which will be consulted on at a later stage.
Transitional arrangements for persons currently licensed to deal in OTC derivatives under the CTA will also be set out in those regulations.
Client Alert | Page 4
6. Trading Mandate
The MAS does not find it necessary to mandate a trading regime for OTC derivatives for now (as it did in its February 2012 consultation paper) but has, nonetheless, proposed putting in place empowering legislation for MAS to identify derivatives contracts to be subject to the trading mandate as well as powers to request for information from relevant persons to facilitate the process of identifying such derivatives contracts.
Separately, the MAS took the opportunity to propose amendments aimed at strengthening the securities market with the following proposals:
Market Conduct Offences. To strengthen the MAS' enforcement regime by clarifying and supplementing the market conduct provisions in the SFA;
Short Selling. To provide a regulatory framework for marking of short sell orders and short position reporting. Aggregate net short position reporting to be introduced in 2016. Detailed requirements will be consulted on at a later date but the MAS did provide that a seller will be regarded as having a short position if his interest in a capital market product is less than what he sold and "interest" in a specified capital markets product means the person has ownership over or authority to dispose of the specified capital markets product; and
Recognition of Foreign CIS. Amendments to the criteria for recognising foreign CIS for offer to retail investors to allow the MAS flexibility to consider other factors, such as whether its legally constitutive documents or investment mandate provide necessary investor safeguards, and not only if the laws and practices of the jurisdiction that the CIS is constituted and regulated in provide the retail investors with an equivalent level of protection.
The consultation period ends on 24 March 2015.
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