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Singapore – Draft Regulations To Enhance The Regulatory Framework For Unlisted Margined Derivatives Offered To Retail Investors Issued.

20 May, 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

Following a consultation carried out in May 2012 , the Monetary Authority of Singapore (“MAS”) has proposed draft subsidiary legislation to implement its proposed policy enhancements to the regulatory framework for unlisted margined derivatives offered to retail investors.


The new regulatory framework will apply to unlisted derivatives in respect of debentures, stocks, or shares, and debentures of real estate investment trusts; and contracts or arrangements for leveraged foreign exchange trading. It distinguishes between retail customers on the one hand and accredited, institutional, and expert investors on the other. To ensure that investors do not engage in regulatory arbitrage, the enhanced framework will apply to both holders of capital market services licences (“CMS Licensees”) as well as exempt financial institutions such as banks and merchant banks (collectively, “Exempt Financial Institutions”).


Margin Requirements For Leveraged Foreign Exchange Trading


CMS Licensees that carry out leveraged foreign exchange trading for any customer must observe the following enhanced margin requirements:

 

  • For contracts entered into with a customer who is an accredited investor, an expert investor, or an institutional investor, they will need to obtain a minimum margin of at least 2%; and
  • For contracts entered into with a customer who is not an accredited investor, an expert investor, or an institutional investor, they will need to obtain a minimum margin of at least 5%.

Exempt Financial Institutions will need to obtain a minimum margin of at least 5% for contracts entered into with a customer who is not an accredited investor, an expert investor, or an institutional investor.


In its response to feedback, the MAS has noted that:

 

  • Provisions in the current Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations that allow a derivative dealer to set lower minimum margin rates where he has risk management tools such as stop loss features in its trading system will apply to the proposed margin requirements for leveraged foreign exchange trading; and 
  • Derivative dealers are required to make margin calls within two business days of when the market value of the collateral deposited in a customer’s margin account falls below the prescribed minimum margin rate.

In its response, the MAS also stated that it would not proceed with the proposal to extend the minimum margin requirements that are currently applicable to CMS Licensees dealing in contracts for differences on a referenced asset to the margin trading of all other unlisted derivatives on the same referenced asset by retail investors. It will monitor international developments and may revisit the issue at a later stage.


Capital Requirements In Respect Of Unlisted Derivatives


CMS Licensees that carry out leveraged foreign exchange trading for any customer must observe the following base capital requirements:

 

  • Where they enter into such contracts with customers who are accredited investors, expert investors, and/or institutional investors, they will need a minimum base capital of SGD 1m; and
  • Where they enter into such contracts with retail customers, they will need a minimum base capital of SGD 5m.

A CMS Licensee that is not a member of securities exchange and deals in unlisted derivatives with any retail customer must have a minimum base capital of SGD 5m.


The MAS has noted in its response to feedback that it will be proceeding with its proposal for CMS Licensees dealing in unlisted derivatives with retail customers to have a minimum group shareholders’ funds requirement of SGD 200m. This will be set out as an admission guideline, rather than as a hard and fast requirement.


Other Obligations In Respect Of Unlisted Derivatives


In respect of transactions in unlisted derivatives for retail customers, CMS Licensees and Exempt Financial Institutions will need to:

 

  • maintain customer moneys in trust accounts with a bank in Singapore;
  • maintain separate trust accounts for customers’ transactions in listed and unlisted products; and
  • not use customer moneys/assets in trust/custody accounts for meeting other obligations incurred by the derivative dealer in connection with the customer’s unlisted derivative transactions.

These requirements will not apply to customers’ assets denominated in a foreign currency pledged by customers as collateral as originally proposed.

 

The MAS has explained in its response to feedback that this is in consideration of the fact that assets such as securities that are traded in foreign markets are generally required to be custodised in the relevant jurisdiction in accounts maintained by the Singapore broker with the foreign central depository or foreign authorised custodian. It further explained that, in this regard, the existing segregation safeguards with respect to non-cash collateral under the Securities and Futures Act will continue to apply.


The draft Securities and Futures (Licensing and Conduct of Business) (Amendment) Regulations 2014 also require CMS Licensees and Exempt Financial Institutions to:

 

  • perform daily computation of all retail and non-retail customer money/assets which are deposited in a trust/custody account; and
  • act as a principal to the trade when dealing in a transaction for a sale or purchase of contracts for difference or a transaction connected with leveraged foreign exchange trading.

Disclosure Of Information


The MAS has indicated in its response to feedback that it will be proceeding with its proposal that derivative dealers provide their customers with an Additional Risk Fact Sheet containing information on various prescribed matters. It has agreed to allow the following:

 

  • Derivative dealers may obtain customers’ acknowledgement that they have reviewed and understood the Additional Risk Fact Sheet in electronic form, subject to proper audit trail and record keeping; and

  • The Additional Risk Fact Sheet may be posted on the website of the derivative dealer.

The MAS has clarified that the Additional Risk Fact Sheet may apply to a class of products, to the extent that they have similar risk and pay-off characteristics. However, where a particular unlisted margined derivative product is assessed to have risks that are specific and unique, the derivative dealer should disclose them in a separate Additional Risk Fact Sheet.


A proposed Additional Risk Fact Sheet is currently under consideration and the MAS will engage the industry and consumer associations in coming up with a proposed format.

 

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For further information, please contact:

 

Elaine Chan, Partner, WongPartnership

elaine.chan@wongpartnership.com

 

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