While financial benchmarks have been widely used and referenced for an extensive range of financial instruments and transactions, the setting of such benchmarks and their administration has previously been left primarily to self-regulation by the industry. The recent scandals on and investigations into attempted manipulation of inter-bank offered rates have turned regulatory focus globally on the area.
In Singapore, culminating from a year-long review into the Singapore benchmark interest rates setting scandal and consistent with international developments led by regulators worldwide, the Monetary Authority of Singapore has on 14 June 2013 introduced the consultation paper for the Proposed Regulatory Framework for Financial Benchmarks (P007 – 2013) (the Proposed Framework).
KEY ELEMENTS OF THE PROPOSED FRAMEWORK
The Proposed Framework will be effected via amendments to the Securities and Futures Act (Chapter 289) of Singapore (SFA) and involves the following key elements:
- introduction of criminal and civil sanctions for manipulation of any financial benchmark;
- providing legal powers to designate key financial benchmarks and subject their Administrators and Submitters to regulation;
- issuing best practice guidelines for other benchmarks consistent with the principles set by the International Organisation of Securities Commissions (IOSCO, and the Principles for Financial Benchmarks Consultation Report (CR04/2013, issued in April 2013), the IOSCO Principles1); and
- providing legal powers to compel entities to be Submitters to designated benchmarks.
The key elements of the Proposed Framework are discussed in more detail below.
PROPOSED DEFINITION OF FINANCIAL BENCHMARKS
Under the Proposed Framework, financial benchmarks will refer to:
any price, estimate, rate, index or value that is –
- calculated periodically using a formula or other methodology; and
used for reference to determine –
- the interest payable or other sums due on deposits or loan agreements;
- the price, value or performance of any capital markets product as defined under the SFA or investment product as defined under the Financial Advisers Act; or
- the price, value or performance of any product offered by any entities regulated by MAS; or
- such other price, estimate, index or value as the MAS may prescribe.
The above proposed definition is largely in line with the proposed IOSCO Principles. Although the definition of financial benchmarks has been crafted in a broad manner, MAS proposes to introduce powers to regulate only certain designated key financial benchmarks (the designated benchmark(s)). Under the Proposed Framework, the designated benchmarks are the Singapore Interbank Offered Rate (SIBOR), the Swap Offered Rate (SOR) and the foreign exchange spot benchmarks (FX Benchmarks).
In respect of non-designated financial benchmarks, MAS proposes to issue best practices guidelines to regulated financial institutions to only use a financial benchmark if they are satisfied that the Administrator of the benchmark has effectively implemented the IOSCO Principles.
INTRODUCTION OF CRIMINAL AND CIVIL SANCTIONS FOR MANIPULATION OF FINANCIAL BENCHMARKS
A further proposal is for market conduct provisions under Part XII of the SFA to be expanded to include a new division which specifically prohibits the manipulation of any financial benchmarks and allowing for criminal or civil penalties to be imposed on persons who manipulate any financial benchmarks. The provisions are intended to have an extraterritorial reach, such that they will cover: (a) manipulation of any financial benchmark administered in Singapore, regardless of whether the offender is in Singapore or overseas; and (b) manipulation by any person in Singapore of any financial benchmark administered in Singapore or overseas.
REGULATORY REGIME FOR ADMINSTRATORS OF DESIGNATED BENCHMARKS
To maintain the credibility and reliability of designated benchmarks, MAS also proposes to impose a licensing requirement for all entities which are involved in administering a designated benchmark (Administrators).
To be admitted as an Administrator, the person must satisfy the following criteria:
- Legal Person: it must be a corporation with a permanent physical office in Singapore;
- Fit and Proper: itself, its directors and senior managements must be fit and proper to carry out the activities of administering a designated benchmark; and
- Financial Resources: it must at all times have sufficient financial resources to cover operating costs of administering its benchmarks for no less than six months.
Additionally, an Administrator will also be subject to other ongoing requirements relating to, amongst others: (i) its governance, including the establishment of an oversight committee; (ii) putting in place appropriate policies and procedures for effective oversight of outsourcing arrangements to third parties; (iii) external audit requirements; and (iv) putting in place clear policies and procedures to address transition issues arising if a benchmark or a tenor of a benchmark is terminated due to changes in underlying market conditions.
REGULATORY REGIME FOR SUBMITTERS TO DESIGNATED BENCHMARKS
Any entity that carries out the activity of providing or transmitting information or expressions of opinion to an Administrator, or to another entity which transmits such information to the Administrator in connection with a designated benchmark (Submitters) will be required to obtain a licence from MAS or be exempted from the requirement to apply for a licence.
To be admitted as a Submitter, the person must satisfy the following criteria:
- Legal Person: it must be a corporation with a permanent physical office in Singapore; and
- Fit and Proper: itself, its directors and senior managements must be fit and proper to carry out the activities of administering a designated benchmark.
The Submitter is also subject to other ongoing requirements relating to, amongst others: (i) its governance; (ii) record keeping requirements; and (iii) external audit requirements.
POWERS TO COMPEL ENTITIES TO BE SUBMITTERS TO DESIGNATED BENCHMARKS
To prevent situations whereby market participants free-ride on publicly available benchmarks constructed without bearing responsibility for its construction, and to ensure the continued publication and reliability of designated benchmarks, MAS proposes to enhance its powers to compel entities to be Submitters to designated benchmarks should the need arise in order to ensure the reliability of the benchmark construction.
FURTHER INITIATIVES BY THE ABS AND SFEMC
Concurrent with the release of MAS’ Proposed Framework, the Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee (SFEMC) have also announced on 14 June 2013 an intention to move the calculation of a majority of the benchmarks from the current surveyed methodology to a traded methodology relying on a formula applied directly to trading information on electronic platforms, making Singapore one of the first countries in the world to implement a change to the way benchmarks are calculated. The use of a traded approach will ensure a direct and automated link between market trading activity and benchmark computation.
The Singapore Dollar SIBOR, which the majority of mortgages in Singapore are pegged to, will continue to be calculated by reference to surveys from banks.
The scope and the development of the new Proposed Framework and the industry initiative to tighten regulatory control over financial benchmarks should not come as a complete surprise given the international regulatory trend and the need to improve the credibility of the financial benchmarks system. Given the interconnectedness of the international financial markets, it is unavoidable that both the regulators and the industry (in self-regulating) must from time to time look towards the continued evolution of an international consensus.