The Monetary Authority of Singapore (MAS) has issued draft Securities and Futures (Licensing and Conduct of Business) Regulations (LCB Regulations) for consultation (Consultation Paper II on Draft Regulations Pursuant to the Securities and Futures Act). The changes to be made by the draft LCB Regulations are to deal with over-the-counter (OTC) derivative transactions being brought under the licensing and regulatory framework of the Securities and Futures Act (SFA). In addition, the requirements of the LCB Regulations that apply generally to holders of a capital markets services licence and exempt financial institutions (capital markets intermediaries) have been enhanced in various respects.
The MAS has stated that it intends for the amendments to the SFA to come into force in 2018. Capital markets intermediaries will have two years from the in-force date to comply with the new requirements. This is to give them sufficient time to get their systems and processes ready.
In general, the most stringent requirements apply where the customer is a retail customer and the transaction is an OTC derivatives transaction. Where the customer is an accredited investor, institutional investor or expert investor, greater flexibility is given as such customers are in a better position to protect their own interests. The table below sets out one example: how the obligation to deposit moneys received on account of a customer into a trust account differs depending on the type of customer and the type of transaction:
|The customer is a retail customer and the transaction is not an OTC derivatives transaction||
|The customer is a retail customer and the transaction is an OTC derivatives transaction||
|The customer is an accredited investor, expert investor, or financial institution||
The draft LCB Regulations consolidate changes proposed over the following consultation papers:
- Consultation Paper on Draft Regulations to Enhance the Regulatory Framework for Unlisted Margined Derivatives Offered to Retail Investors issued on 14 March 2014;
- Consultation Paper on Regulatory Framework for Intermediaries Dealing in OTC Derivative Contracts, Execution-Related Advice, and Marketing of Collective Investment Scheme issued on 3 June 2015; and
- Consultation Paper on Enhancements to Regulatory Requirements on Protection of Customer’s Money and Assets issued on 19 July 2016.
The MAS’s responses to feedback received for each of these consultation papers were also issued on 26 May 2017. It amended some of its original proposals pursuant to the feedback given and the changes include those set out below.
Proposed: The MAS had proposed expanding the definition of “customer moneys” to cover contractual rights arising from transactions entered into by capital markets intermediaries on behalf of a customer (e.g. futures contracts) or with a customer (e.g. contract for differences). Modification: It will not be proceeding with this proposal.
Proposed: A capital markets intermediary must conduct due diligence on the suitability of the deposit-taking financial institutions with whom they intend to open a trust account for depositing client moneys. Modifications:
- The capital markets intermediary need not carry out due diligence where it is a clearing house that receives customers’ moneys as part of its clearing and trade settlement process.
- Due diligence is also not required if the customer is an institutional investor, accredited investor or expert investor and the account is a deposit account established and maintained by the customer in its own name.
Proposed: Where a capital markets intermediary places clients’ moneys and assets with an overseas financial institution, it should obtain an acknowledgement from the institution that, among other things, it holds the moneys/assets on trust. Modification: The intermediary should obtain an acknowledgement instead that the account is designated as a customer’s account and is distinguished and maintained separately from any other account in which the intermediary deposits his own moneys/assets.
Proposed: A capital markets intermediary must obtain consent from a customer prior to using his assets. This includes when it intends to use those assets as security for its own obligations. Modification: Consent is not required if the customer is an institutional investor, expert investor or accredited investor. Nor is it required if the customer is a related entity of a capital markets intermediary.
Proposed: A capital markets intermediary should provide a customer with his statement of accounts if so asked by the customer. Modification: Where the customer is an institutional investor, the intermediary may instead perform periodic reconciliations in lieu of furnishing statements of accounts.
Proposed: A capital markets intermediary will be required to disclose to its customers the material risks of a product and whether it is acting as principal or agent in the transaction. Disclosure will not have to be made if the customer is an institutional investor or the intermediary is dealing with its own related entities. Modification:
- In addition to not requiring disclosure where the intermediary’s customer is an institutional investor or the intermediary is dealing with its own related entities, disclosure will also not be required where the customer is an accredited investor or an expert investor.
- The requirement for the acknowledgement by customers to be witnessed has been dropped.