Consultation Paper on removing the DBU-ACU divide: implementation issues

Corporate & Securities Singapore Client Alert September 2015 Consultation Paper on Removing the DBU-ACU Divide: Implementation Issues On 31 August 2015, the Monetary Authority of Singapore ("MAS") issued a Consultation Paper proposing consequential amendments to regulatory requirements following the removal of the DBU-ACU divide ("Consultation Paper"), announced in June 2015 by Mr Tharman Shanmugaratnam, the Deputy Prime Minister and Chairman of the MAS. Background Banks in Singapore have hitherto been required to segregate their domestic and offshore operations into domestic banking units ("DBU") and Asian Currency Units ("ACU"), as separate accounting entities. The DBU of a bank holds its domestically-focused operations, which are predominantly denominated in Singapore dollars. The ACU of a bank holds its offshore operations, which are (entirely) denominated in foreign currency. Though the DBU-ACU divide served Singapore well for decades, it has been losing its relevance. There are a number of reasons for this development: i. First, since 2004, Singapore's developmental incentives have no longer been based on the domestic vs offshore distinction. ii. Second, the divide between domestic and offshore banking has in practice become increasingly porous. iii. Third, there have been major global regulatory developments in the last five years that have resulted in banks’ offshore activities being subject to rules that are broadly similar to those governing the domestic banking business in Singapore. These have reduced the relevance of MAS rules that distinguish between offshore and domestic banking activities of foreign banks. iv. Fourth, there have been significant changes in MAS’s own banking regulations, aimed at reducing systemic risks. Together, the enhanced global and domestic regulatory standards mean that the DBU-ACU divide is no longer useful, and may impose undue administrative burden on banks without materially enhancing prudential soundness or systemic stability. We highlight the notable proposals to implement the removal of the DBU-ACU divide in the Consultation Paper below. The MAS is inviting feedback by 30 September 2015. Please note that all feedback received will be published and attributed to the respective respondents unless they expressly request MAS not to do so. Please see this link for further details: Consultation Paper. For further information please contact Stephanie Magnus +65 6434 2672 [email protected] Selwyn Lim +65 6434 2653 [email protected] Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com Regulatory / Compliance Firm of the Year (Singapore) 2010 - 2014 Asian-MENA Counsel 2 Client Alert September 2015 A summary of the key proposals are as follows: 1. Priority of specified liabilities in insolvency Proposal. Section 62(1) of the Banking Act ("BA") specifies the priority ranking of certain liabilities (amongst themselves) of a bank in Singapore, in the event of a winding up of a bank. MAS proposes to amend the BA to rank uninsured non-bank deposits in insolvency by the currency denomination of the deposits instead. This approach would be a natural replacement of the current priority ranking since the DBU and ACU are broadly differentiated by currency. The proposed priority ranking is as follows: i. Premium contributions due and payable by the bank under the Deposit Insurance and Policy Owners’ Protection Schemes Act; ii. Liabilities incurred by the bank in respect of insured deposits; iii. Uninsured Singapore dollar non-bank deposits; and iv. Uninsured foreign currency non-bank deposits. 2. Asset Maintenance (“AM”) Requirements Proposal. The AM requirements, currently set out in MAS Notice 640 (“Minimum AM Requirements”), are applied based on the amount of DBU non-bank deposits held by a bank. MAS proposes to apply the Minimum AM requirements by currency denomination instead. This means that the current asset maintenance ratios applied on DBU non-bank deposits will henceforth be applied on Singapore dollar non-bank deposits instead. There will be no change to the list of eligible assets. Eligible assets are selected on the basis of their quality and recoverability, independently of the DBU-ACU divide. 3. Anti-commingling Limits Proposal. Regulations 23F and 23G of the Banking Regulations specify the anticommingling limits applicable to banks (see Table 1 below). The anti-commingling policy remains relevant – it aims to limit the reputational risks arising from banks engaging in non-financial businesses and ensure that bank management focuses its attention on core banking business. Therefore, MAS will continue to apply the anti-commingling limits to all banks. However, the computation of the limit will need to be revised, as the concept of capital funds will no longer apply for banks incorporated outside Singapore with the removal of the DBU-ACU divide. MAS proposes to revise the methodology for computing the limits for all banks to be based on total assets instead of capital funds. The proposed revised limits, as set out in Table 1, are calibrated at lower absolute levels than the current limits, as banks’ total assets are significantly larger than their capital funds. 3 Client Alert  September 2015 Table 1: Proposed anti-commingling limits under regulations 23F and 23G of the Banking Regulations Current Proposed Regulation 23F (Prescribed private equity or venture capital (“PEVC”) business): Bank incorporated in Singapore: Total net book value of PEVC business cannot exceed 10% of the bank’s capital funds. Bank incorporated outside Singapore: Total net book value of PEVC business (in the DBU) cannot exceed 10% of the bank’s capital funds. Total net book value of a bank's PEVC business cannot exceed 2% of its total assets i.e. Total net book asset value Total assets of the bank in ≤ 2% Singapore Regulation 23G (Prescribed related or complementary business): Aggregate Size of related or complementary business cannot exceed 15% of a bank’s capital funds. If a bank carries on businesses under both regulations 23F and 23G, the bank is required to limit the Aggregate Size of all such businesses to 20% of its capital funds. Aggregate Size of related or complementary business cannot exceed 2% of a bank’s total assets i.e. Aggregate Size Total assets of the bank in ≤ 2% Singapore If a bank carries on businesses under both regulations 23F and 23G, the bank is required to limit the Aggregate Size of all such businesses to 4% of its total assets. 4. Equity Investments and Immovable Property Limits Proposal. Banks are currently subject to limits on equity investments and immovable property under sections 31 and 33 of the BA respectively. The limits under sections 31 and 33 apply only to the DBU of a bank incorporated outside Singapore. As the concept of capital funds will no longer apply for banks incorporated outside Singapore, MAS proposes not to apply general limits on equity investments and immovable property to banks incorporated outside Singapore. Nonetheless, where appropriate, MAS may impose limits on investments in equity and/or immovable property for an individual bank or a class of banks incorporated outside Singapore for supervisory or prudential reasons. 5. Concentration Limits Proposal. MAS Notice 639 (Exposures to Single Counterparty Groups) applies various concentration limits on banks. As the concept of capital funds will no longer apply for banks incorporated outside Singapore, MAS proposes not to apply certain concentration limits in MAS Notice 639 to banks incorporated outside Singapore. MAS also proposes to remove the limits on unsecured credit facilities to director groups for all banks. The risks of conflicts of interest would be better managed through sound processes and risk management controls. Table 2 provides a summary of the proposals for the application of existing limits under MAS Notice 639. 4 Client Alert September 2015 Table 2: Summary of Proposals for the Application of Limits under MAS Notice 639 Limit (relevant paragraphs under MAS Notice 639) Proposal Large Exposures Limit (paragraphs 6(a) and 7(a)): A bank’s aggregate exposure to a single counterparty group cannot exceed 25% of its eligible capital (for a bank incorporated in Singapore) or capital funds (for a bank incorporated outside Singapore). Applicable to banks incorporated in Singapore Substantial Exposures Limit (paragraphs 6(b) and 7(b)): The aggregate of the exposures of a bank exceeding 10% of its eligible total capital or capital funds (as the case may be) cannot exceed 50% of the bank’s total exposures. Limits for Investments in Index or Investment Fund (paragraph 16): The aggregate of a bank’s exposures arising from investments in any index or investment fund cannot exceed 2% of the bank’s eligible total capital or capital funds (as the case may be). Limits on Unsecured Credit Facilities to Director Groups (paragraphs 14(a) and (b)):  Aggregate unsecured credit facilities granted to any director group (other than persons in limb (d)(i) of the definition of “director group”) cannot exceed $5,000.  Aggregate unsecured credit facilities to all persons defined in limb (d)(i) of the definition of “director group” cannot exceed $5,000, unless the giving of the additional unsecured credit facilities over the limit has been approved by the board of directors of the bank. In such a case, aggregate unsecured credit facilities to the director group cannot exceed 2% of the bank’s eligible total capital or capital funds (as the case may be). Not applicable to all banks Implementation Timeline MAS proposes to give banks two years from the time MAS issues the revised regulatory requirements to implement these changes. During this transitional period, banks will be required to comply with the prevailing rules and guidelines in force. The consultation period ends on 30 September 2015. Please contact us if you have any comments or queries. 5 Client Alert  September 2015 Our Financial Services Regulatory Team Stephanie Magnus Principal Stephanie.Magnus @bakermckenzie.com Eunice Tan Senior Associate Eunice.Tan @bakermckenzie.com Selwyn Lim Associate Selwyn.Lim @bakermckenzie.com Liew Ying Yi Associate Yingyi.Liew @bakermckenzie.com Serene Chew Associate Serene.Chew @bakermckenzie.com ©2015 Baker & McKenzie. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.