On 1 July 2015, the Monetary Authority of Singapore (“MAS”) issued a Consultation Paper on Draft Regulations for Mandatory Clearing of Derivatives Contracts (“Consultation Paper”). This marks the next step in its implementation of a suite of regulatory reforms concerning over-the-counter (“OTC”) derivatives, a process that first began with the consultation paper on Proposed Regulation of OTC Derivatives issued by the MAS on 13 February 2012. According to the Consultation Paper, the MAS plans to issue the new Securities and Futures (Clearing of Derivatives Contracts) Regulations (“Clearing Regulations”) by the end of 2015, and will provide at least six months’ notice before the clearing obligations take effect.
This update looks at the persons and types of OTC derivative contracts that are subject to the proposed mandatory clearing requirements, as well as other criteria which would determine whether or not mandatory clearing requirements would apply to a specific derivative trade. The deadline for feedback on the Consultation Paper is 31 July 2015. We would be pleased to assist with any feedback that our clients would like to give the MAS in relation to the Consultation Paper.
Persons Subject to Mandatory Clearing Requirement
Banks proposed to be subject to clearing obligation
According to the proposed Clearing Regulations, banks licensed under the Banking Act whose aggregate outstanding gross notional amount of total derivative contracts booked in Singapore exceed the threshold of S$20 billion for each of the last four calendar quarters will be subject to clearing obligations. Merchant banks and other financial institutions who are “specified persons” under section 129B of the Securities and Futures Act do not appear to be subject to mandatory clearing obligations at this stage. According to the MAS, the proposed scope of persons to be subject to clearing obligations would address the largest counterparty credit risks in Singapore’s OTC derivatives market and takes into account the accessibility and operational feasibility of clearing arrangements at this stage.
Types of OTC Derivative Contracts Subject to Mandatory Clearing Requirement
Interest rate swaps proposed to be cleared
The MAS proposes to subject, at a minimum, Singapore dollar fixedto- floating SOR interest rate swaps (“IRS”) and US dollar fixed-tofloating LIBOR IRS to mandatory clearing given that these are the most liquid IRS traded in Singapore and comprise about 50% of gross notional amount of IRS booked in Singapore. They are also highly standardised, which means that they should pose minimal operational concerns for clearing. The proposed minimum contract specifications for the abovementioned IRS are as tabled below:
Click here to view table.
Other IRS under consideration
The MAS is also considering whether IRS denominated in Euro, Pound Sterling and Japanese Yen should also be subject to mandatory clearing. The proposed minimum contract specifications for such IRS are as tabled below:
Click here to view table.
Lastly, the MAS is seeking feedback on whether subjecting more types of IRS products denominated in the above-mentioned currencies (e.g., basis swaps, forward rate agreements or overnight index swaps) to mandatory clearing would result in greater margining efficiencies for market participants.
Trades booked in Singapore
The MAS proposes to require in-scope IRS trades which are booked in the Singapore-based operations of both transacting counterparties (i.e., either a Singapore-incorporated company or a Singapore branch of a foreign entity) to be subject to mandatory clearing. This approach addresses trades whose risks reside in Singapore, and also avoids potentially creating conflicting requirements with other jurisdictions that may implement mandatory clearing obligations down the road. The concern with conflict arises because, unlike derivatives trade reporting where the same trade can be reported to more than one trade repository, the clearing of a derivatives trade should only take place on one clearing facility. An anomalous scenario would arise if, in the case of a cross-border derivatives transaction, parties are required to clear the transaction in Singapore as well as in another jurisdiction due to conflicting regulations in both jurisdictions.