In 2018, changes to Singapore legislation came into force to empower the Monetary Authority of Singapore "MAS" to mandate the trading of over-the-counter derivatives contracts on organised markets. This was followed by a consultation paper issued by MAS, consulting on proposed draft regulations to operationalise the mandatory trading obligations "Consultation Paper". On 13 March 2019, the finalised rules were published in the new Securities and Futures Trading of Derivatives Contracts Regulations 2019 "Regulations" and MAS also issued its response to feedback received on the Consultation Paper.

In this alert, we provide a summary of the Regulations and their practical implications. We also highlight key points arising from the Consultation Paper and recent related developments between MAS and its counterparts in the EU and US.

Trading obligations

The mandatory trading obligations are prescribed in Part VIC of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”). In essence, a “specified person” who executes a “specified derivatives contract” must do so on an organised market operated by an approved exchange or a recognised market operator, or on or through a prescribed facility, and in the form and manner prescribed by regulations (the “Trading Obligations”).

Effective date

The Regulations came into effect on 14 March 2019 but only apply to specified derivatives contracts that are executed on or after 1 April 2020. This is intended to provide market participants with sufficient time to make arrangements to access organised markets or prescribed facilities to satisfy the Trading Obligations.

Who is in-scope?

  • The Trading Obligations apply directly to “specified persons”, which refers to licensed banks, merchant banks, finance companies, insurers and holders of capital markets services licences in Singapore and other persons as may be prescribed (“Specified Persons”). Public bodies fall outside the scope of Specified Persons.
  • As a result of various exemptions4 , the Trading Obligations currently only apply to a licensed bank in Singapore5 whose aggregate notional amounts of outstanding OTC derivatives contracts booked in Singapore exceeds S$20 billion for the last day of each of the last four quarters (the “Trading Threshold”).
  • The MAS Response clarifies that:
    • a. The Trading Threshold includes derivatives contracts between intra-group legal entities, but not inter-branch trades within the same legal entity.
    • b. MAS will not publish a list of banks that exceed the Trading Threshold. Instead, all Specified Persons are encouraged to trade on organised markets even if they do not exceed the Trading Threshold or are exempt from the Trading Obligations.
    • c. Specified Persons who do not intend to trade on organised markets should, upon request by their counterparties, provide confirmation to such counterparties that they are exempt from or not subject to the Trading Obligations.

Which products are in-scope?

  • The Trading Obligations apply where a Specified Person executes a specified derivatives contract. This refers to any interest rate swap (“IRS”) executed on or after 1 April 2020 that meets all of the following criteria:
    • a. it is a fixed-to-floating IRS denominated in US Dollar, Euro or Pound Sterling, with the contract specifications set out in the Schedule to the Regulations. Broadly speaking, the contract specifications capture these types of IRS:
      • i. US Dollar fixed-floating IRS, tenor of 2/3/5/7/10 years, no optionality, constant notional amount;
      • ii. EUR fixed-floating IRS, tenor of 2/3/5/7/10 years, no optionality, constant notional amount;
      • iii. GBP fixed-floating IRS, tenor of 2/3/5/7/10 years, no optionality, constant notional amount;
    • b. it is non-exchange traded;
    • c. the parties are not related corporations;
    • d. each party executes the derivatives contract through that party’s office located in Singapore (whether a head office or branch office) (the “Revised Trading Nexus”); and
    • e. the parties are Specified Persons that are not exempt from the Trading Obligations.
  • Revised Trading Nexus In the MAS Response, MAS clarified that the Trading Obligations are intended to address derivatives trading activity within Singapore. Hence, the “booked in Singapore”6 test which applies to the Singapore mandatory clearing and trade reporting obligations is not appropriate. Instead, the Revised Trading Nexus test is used and this is based on the office where the trade is being executed. This is also different from the “traded in Singapore”7 test which applies to Singapore trade reporting obligations. The MAS encourages each Specified Person to determine an appropriate policy to ensure that trades within the Revised Trading Nexus are executed on organised markets8.

Are there any exemptions? 

  • Package transactions are generally exempt, except where they comprise only:
    • a. derivatives contracts which are subject to the Trading Obligations; or
    • b. derivatives contracts which are subject to the Trading Obligations and government bonds denominated in the same currency as the underlying floating rate of the derivatives contracts.
  • A derivatives contract entered into as a result of a portfolio compression cycle with a party to one or more of the compressed derivatives contracts is generally exempt as well.
  • The MAS Response further clarifies the following:
    • a. The Trading Obligations only apply where a Specified Person executes the trade as principal, not as an agent.
    • b. MAS does not intend to impose Trading Obligations on derivatives contracts or events that do not contribute to price discovery9.
    • c. Block trades are not exempted. 

How can in-scope entities satisfy the Trading Obligations? 

  • To satisfy the Trading Obligations, a Specified Person must execute specified derivatives contracts:
    • a. on an organised market operated by an approved exchange (“AE”) or a recognised market operator (“RMO”); or
    • b. on or through a prescribed facility.
  • AEs and RMOs: These are entities that hold licenses issued by MAS to establish or operate organised markets under the SFA10.
  • Prescribed Facilities On 13 March 2019, MAS and the US Commodity Futures Trading Commission (“CFTC”) jointly announced the mutual recognition of certain derivatives trading venues in the US and Singapore11. In conjunction with this, MAS issued the Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations (the “US Trading Venues Regulations”), which prescribes certain swap execution facilities (“SEFs”) that are regulated by the CFTC as facilities on or through which a Specified Person may execute trades to satisfy the Trading Obligations (“Prescribed SEFs”)12. Each Prescribed SEF will be exempt from Singapore licensing requirements for market operators (provided that there is no offer or invitation to exchange, sell or purchase certain products made by or to retail investors in Singapore).

What are the other developments?

The EU-SIN Common Approach

On 20 February 2019, the European Commission (“EC”) and MAS jointly announced their intention to implement a common approach for certain EU and Singapore derivatives trading venues13 (the “EU-SIN Common Approach”). The proposals are not yet implemented but if so, may result in the following:

a. Specified Persons may also be able to satisfy the Trading Obligations by executing specified derivatives contracts on certain EU multilateral trading facilities (“MTFs”) or organised trading facilities (“OTFs”).

b. Such EU MTFs and OTFs may also be exempt from Singapore licensing requirements for market operators that provide trading facilities for specified derivatives contracts.

Closing comments

The release of the Regulations completes Singapore’s implementation of the G20 OTC derivatives reform. In this connection, the move by MAS towards mutual recognition of derivatives trading venues with its counterparts in the US and the EU has been well received as it serves to deepen liquidity pools and prevent fragmentation of markets, which are key concerns arising from the implementation of trading obligations across jurisdictions.