The Monetary Authority of Singapore (MAS) continues to develop and strengthen its regulation of derivatives markets, most recently focusing its attention on the formulation and completion of a comprehensive reporting regime. In January 2016, MAS consulted on proposed amendments to the Securities and Futures Regulation relating to MAS’ derivatives reporting regime (Consultation) that could extend reporting requirements to previously exempt fund managers. The amendments would complete the implementation of Singapore’s OTC derivatives reporting regime that came into force in October 2013.
Scope of Reporting Requirements
Currently, the only derivatives instruments subject to the reporting requirement are interest rate, credit rate and foreign exchange derivatives contracts. As part of the Consultation, MAS proposes to expand the product scope of derivatives reporting to include:
- Commodity Derivatives Contracts – all forwards, swaps and options that are related to commodities or commodity indices, or contracts with cash flows determined by reference to one or more commodities; and
- Equity Derivatives Contracts – rights, options or derivatives related to stocks or shares issued or proposed to be issued by a corporation or an unincorporated entity, as well as contracts related to equities or equity indices, or derivatives of a unit in a business trust.
The addition of these product categories would bring Singapore’s derivatives reporting regime closer to the scope of other major jurisdictions’ reporting regimes (e.g., EMIR). In expanding the scope of reporting coverage, the Consultation provides certain reporting exemptions for various categories of derivative instruments, including: (i) physically-settled commodity derivatives contracts that are entered into for commercial purposes (e.g., contracts for purchase of raw material containing options for non-delivery); and (ii) exchange-traded equity derivatives contracts (e.g., structured warrants).
In addition, the Consultation would continue Singapore’s two-sided approach to reporting, under which fund managers may potentially be responsible for reporting derivatives contracts in addition to any reporting by their counterparties. This element of Singapore’s reporting regime diverges from the single-sided reporting regimes adopted in the United States and certain other jurisdictions. For fund managers, this OTC reporting requirement may represent a significant burden, because – unlike under other two-sided regimes (e.g., EMIR) or one-sided regimes – fund counterparties may not be directly subject to Singapore’s OTC reporting obligations. As a result, fund managers may not always be able to rely on the reporting responsibilities of their counterparties to fulfill regulatory reporting obligations.
Prior to the Consultation, on July 1, 2014 MAS issued time-limited exemptive relief for holders of a capital markets services (CMS) license in fund management with managed assets of less than S$8 billion. This relief is set to expire on October 31, 2017, at which time (and absent its renewal or the availability of a separate exemption), the holders of a CMS license in fund management will be subject to reporting requirements.
In the Consultation, however, MAS proposes a shift in the metric used for determining the applicability of certain reporting exemptions related to fund managers. Rather than continue to utilize the assets-under-management approach contained in the time-limited exemptive relief MAS proposes to apply a threshold of S$5 billion annual aggregate gross notional amount of OTC derivatives transactions which, according to the Consultation, represents a “better measure of the potential systemic risk posed by [financial institutions] to the OTC derivatives market.” In proposing this methodology, MAS intends that the regime’s reporting requirements capture information only for active non-bank financial institutions, which may include certain fund managers.
The proposed thresholds in the Consultation are, in effect, much higher than some other major jurisdictions, including the reporting thresholds of the U.S. approach (which measures only uncollaterized OTC exposure of non-dealers). However, the Consultation does not provide an exclusion for specified derivatives contracts that are entered into purely for hedging purposes, unlike the approach taken in certain other jurisdictions (e.g., the U.S. definition of “swap dealer”).
Reporting Exemptions for Fund Managers
As part of its reporting regime, MAS proposes exclusions for the following entities:
- Non-bank financial institutions (including subsidiaries of banks incorporated in Singapore, insurers, and holders of CMS licenses) with an annual aggregate notional amount of less than S$5 billion in OTC derivatives transactions;
- All MAS-approved trustees and MAS-licensed trust companies; and
- Brokers1 and banks whose counterparties to derivatives contracts are retail investors (i.e., non-accredited or non-institutional investors).
Although MAS provides a reporting exclusion for certain non-bank financial institutions, the Consultation indicates that MAS still intends that these entities maintain “proper recordkeeping” of their derivatives contracts. Thus, even exempt fund managers would still be subject to certain reporting obligations regarding these contracts on a “periodic basis,” with the format and frequency of submissions to be determined by MAS “in due course.” As such, it is unclear just how onerous the reporting requirements will ultimately be for exempt non-bank financial institutions.
In anticipation of expanded derivatives regulation in Singapore, fund managers should prepare for the possibility of greater reporting obligations and determine whether the funds they oversee will be able to rely on the proposed reporting exemptions. This may require fund managers to reevaluate their funds’ use of derivatives in order to keep their funds annual aggregate gross notional amount in derivative transactions below the proposed reporting thresholds.