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Singapore – MAS Issues Consultation Paper On Proposed Amendments To The Securities And Futures Act.

25 February, 2015

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

Introduction


Following the previous amendments to the Securities and Futures Act (“SFA”) in November 2012, the Monetary Authority of Singapore (“MAS”) has issued a consultation paper on 11 February 2015 (updated on 16 February 2015) which proposes further amendments to complete the expansion of its regulatory ambit to over-the-counter (“OTC”) derivatives, and to ensure that it remains current with market and international developments (“February 2015 Consultation Paper”).


The closing date for submission of comments and feedback is 24 March 2015.
The proposed amendments set out in the February 2015 Consultation Paper are:


(a) Part A: Amendments arising from OTC Reforms
(b) Part B: Transfer of Regulation of Commodity Derivatives from the Commodities Trading Act (“CTA”) to the SFA
(c) Part C: Other Amendments to the SFA


Part A: Amendments Arising From OTC Reforms


Simpler, Principles-Based Definitions


MAS is proposing to introduce simpler, principles-based definitions in the SFA which are more easily understood by the industry and general investing public.


Revised Definition Of “Derivative Contract”


Under the new proposed definition of “derivative contract”, the two main elements which constitute a derivative are – (a) the discharge of obligations at some future time by a party to the contract; and (b) the value of such obligations are determined with reference to an underlying thing. The current definitions of “swap contract”, “forward contract” and “option contract” in the SFA are proposed to be deleted. In addition, the following (among other things) are also expressly excluded from the new proposed definition of “derivative contract”: securities (as now proposed to be narrowly defined – see further discussion below), spot contracts (being contracts or arrangements for the sale or purchase of an underlying thing at its current spot price and where actual delivery of the underlying thing is intended), deposits with banks, merchant banks and finance companies, and contracts of insurance.


Notably, with the proposed expanded definition of “derivative contract”, all non-spot foreign exchange derivative contracts, whether or not transacted on a margin basis, now appear to fall within the ambit of “derivative contract” and the scope of the regulated activity of “dealing in capital markets products”. Spot foreign exchange derivative contracts however are not wholly excluded from regulation, as MAS also proposes to include spot foreign exchange contracts which are transacted on a margin basis within the meaning of “capital markets product” and thus within the scope of the regulated activity of “dealing in capital markets products”. These proposed definitions no longer contain a carve-out for foreign exchange contracts or arrangements arranged by banks and merchant banks from the scope of the regulated activity of “dealing in capital markets products”, with the result that the conduct of such business by banks and merchant banks appears now to be regulated under the SFA.


Further, as “futures contract” would fall within the broad scope of the revised definition of “derivative contract”, MAS proposes to replace references to “futures contract” with “derivative contract” throughout the SFA generally, and provide for a distinction for futures contracts or exchange-traded derivatives where specifically needed, such as in the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations where licensing exemptions for OTC derivatives and for exchange-trade derivatives are separately and distinctly set out.


Revised Definition Of “Securities”


MAS proposes to simplify the definition of “securities” to comprise solely of either equity instruments representing legal or beneficial ownership interests, or debt instruments. Derivatives in respect of securities are proposed to fall within the broadened scope of “derivative contract” and a new term, “securities-based derivative contract”, will be introduced as a sub-specie of “derivative contract”.


Units in collective investment schemes (“CIS”) are proposed to be excluded from the revised definition of “securities” and instead be introduced as a separate and distinct “capital markets product” alongside “securities”.


Revised Definition Of “Investment Product”


In parallel with the foregoing proposed changes to the scope of the existing definition of “capital markets products” in the SFA, the scope of “investment product” in the Financial Advisers Act (“FAA”) is also proposed to be expanded, with the result that the giving of any advice on foreign exchange trading (whether or not on a margin basis, and whether or not on a spot basis) or on other derivative contracts, will be regulated as a financial advisory service for the purposes of the FAA.


Definition Of “Organised Market”


MAS proposes to introduce a new definition of “organised market” to replace the existing definitions of “market”, “securities market” and futures market” under Part I and in the First Schedule to the SFA. The new definition proposed by the MAS will define a market by its underlying function of facilitating the exchange, sale or purchase of specified products regulated under the SFA, including derivative contracts.


Notably, the new definition of “organised market” no longer contains an exclusion for OTC derivatives trading platforms that is presently found in the definition of “futures market” in the First Schedule of the SFA. Consequently, such platforms ex facie appear to fall within the definition of “organised market” and subject to regulation as such under the SFA (see further discussion below).


Entities Intending To Establish Or Operate OTC Derivative Trading Facilities


The existing regulatory regime for market operators under Part II of the SFA will be extended to cover entities which intend to establish or operate facilities for the trading of OTC derivatives. Thus a corporation which seeks to operate a market in Singapore for the trading of “securities”, “derivative contract” or units in a CIS, if not otherwise exempted, may only lawfully do so if it is either approved as an approved exchange or recognised as a recognised market operator (“RMO”).


In addition to reviewing the RMO regime to ensure that internationally-aligned requirements continue to apply to RMOs, MAS is also proposing to introduce certain enhancements to the RMO regime, such as imposing governance arrangements. MAS will conduct further consultation on the detailed requirements for RMOs and the transition arrangements for market operators in due course.


MAS has also clarified that the facilitation of transactions in OTC derivatives through “voice or telephone-assisted means” is a form of broking service and such entities will thus be regulated as capital markets intermediaries, and not as market operators. MAS also indicated that the foregoing is not intended to extend to electronic trading facilities which will still be regulated under Part II of the SFA.


Reporting Of Derivative Contracts


MAS proposes to amend certain provisions in Part VIA of the SFA which concern the reporting of information on a specified derivative contract, by a specified person, who acts as an agent of a party to that contract (where that party is not a specified person). In particular, such specified persons will be subject to mandatory trade reporting requirements when they “execute or cause to be executed” a specified derivative contract as an agent for a party thereto. Under the proposed amendments, such mandatory trade reporting requirements will no longer be confined to the scenario where the specified person had “entered into” a specified derivative contract as an agent.


MAS also proposes to lift the banking secrecy obligations so as to permit financial institutions to report customers’ information under the SFA for the purposes of complying with MAS’ and specified foreign jurisdictions’ trade reporting obligations.


Trading Of Derivative Contracts


Although MAS has assessed that it is not necessary to mandate a trading regime for OTC derivatives for now, MAS is nevertheless proposing to introduce a new Part VIC in the SFA to put in place the necessary legislative framework to implement a trading mandate if it is ever deemed appropriate to do so in the future. MAS indicates that it will continue to monitor developments and conduct further analyses on the appropriate conditions to impose a trading mandate and will conduct further public consultations to identify relevant products for the trading mandate.


Amendments To The Definitions Of Regulated Activities


Definition Of “Dealing In Capital Market Products”


MAS proposes to collapse the current regulated activities of “dealing in securities”, “trading in futures contracts” and “leveraged foreign exchange trading”, as well as dealings in derivatives contracts under the new regulated activity of “dealing in capital markets products”. A capital markets services (“CMS”) licensee will be required to indicate the specific class of capital markets products that it or its representatives will be dealing in.


MAS also proposes to amend the definition of “fund management” and make other consequential amendments to the definitions of other regulated activities such as “securities financing” and “providing custodial services for securities”.


Licensing Exemptions


MAS proposes to exempt certain persons from the requirement to hold a CMS license for “dealing in capital markets products” in respect of OTC derivatives. These exemptions include:


(i) persons who carry on the business of dealing in capital markets products in respect of OTC derivatives for their own/or their related corporations’ account, with another related corporation;


(ii) persons who carry on the business of dealing in capital markets products in respect of OTC commodity derivatives with accredited investors or institutional investors;


(iii) persons who carry on the business of dealing in capital markets products in respect of OTC derivatives for their own/or their related corporations’ account, with certain financial institutions, and do not receive or derive a spread or other remuneration in return for such dealing;


(iv) persons who carry on the business of dealing in capital markets products in respect of OTC derivatives, where such dealing is solely incidental to their carrying on business in fund management;


(v) persons who carry on the business of dealing in capital markets products in respect of OTC commodity derivatives who are approved global trading companies under the Singapore Income Tax Act;


(vi) where such dealing is among corporate accredited investors and institutional investors only and such persons carrying on such business are not members of an approved exchange or approved clearing house, do not become a party to those OTC derivatives transactions, do not handle or hold any customer’s position, margin or account in their books, do not accept money or assets from any customer as settlement or margin or to guarantee any OTC derivative entered into by that customer. It is proposed that such persons will still be required to register with the MAS as “Registered OTC Derivatives Brokers” upon commencement of business and be subject to certain requirements.


MAS also proposes to make consequential amendments to licensing exemptions which currently exist for “dealing in securities”, “trading in futures contracts”, “leveraged foreign exchange” and other regulated activities. MAS intends to maintain as far as practicable the scope of the existing licensing exemptions. These amendments will be separately consulted on a later date.


Definition Of “Fund Management”


MAS proposes to amend the definition of fund management. In line with the revised definition of “derivative contract”, persons managing CIS that invest solely in derivatives of physical assets will now be subject to the provisions of the SFA for carrying on the regulated activity of fund management.


However, MAS intends to license and regulate managers of CIS that invest in physical assets only if the CIS is offered to retail investors. MAS proposes to grant a class exemption to managers of CIS that are offered only to accredited or institutional investors. Affected CIS managers can continue to manage their CIS for existing investors, but will need to be licensed before they can offer additional units of their existing CIS to existing or new investors, or offer any new CIS.


Additional safeguards will also be imposed on managers of CIS in their appointment of unregulated custodians for custody of physical assets, including minimum financial or capital requirements, insurance coverage for the custodised assets and segregation of custodised assets.


Consequential Amendments To The SFA


The February 2015 Consultation Paper also sets out other key consequential amendments that would need to made throughout the SFA.


Part II Of The SFA


With the proposed general substitution of “derivative contract” for “futures contract” throughout the SFA, existing requirements which apply to futures contracts will also generally apply to all derivative contracts. Where the requirements need to be applied differentially to distinct classes of derivative contracts, MAS proposes to move those requirements to subsidiary legislation. The specific examples highlighted by the MAS in this regard are the requirements to seek MAS’ approval on position limits (sections 16A and 59 of the SFA), and the listing, delisting, or trading of products (sections 29 and 42 of the SFA). MAS will consult on the appropriate amendments to the subsidiary legislation at a later date.


Part IX And Part XII Of The SFA


The consequential amendments to Part IX and Part XII of the SFA will involve (i) the inclusion of the terms “securities-based derivative contract” and “any unit in a collective investment scheme” alongside the term “securities”; and (ii) the use of the term “derivative contract” in place of the terms “futures contracts” and “leveraged foreign exchange trading”.
MAS also proposes to rationalise certain provisions relating to its supervisory powers under Part IX and to market conduct under Part XII. MAS proposes to merge sections 143 and 144 so that there is a single provision setting out the MAS’ supervisory powers in relation to “capital markets products” generally. Further, MAS intends to rationalise Division 1 and 2 of Part XII of the SFA, thereby consolidating the market conduct provisions to cover “capital markets products” in general.

Part XIII Of The SFA


In order to maintain a consistent definition of “securities” throughout the SFA, MAS proposes to (i) delete the definition of “securities” in section 239; (ii) replace references to “securities” in Part XIII with “investments”, which comprise “securities”, “securities-based derivative contracts” and certain promissory notes; and (iii) collapse the prospectus requirements for “securities” and units of business trusts in Division 1 and Division 1A of Part XIII into Division 1 of Part XIII.


Consequent to the inclusion of the term “securities-based derivative contract”, the prospectus requirements in the SFA will extend to cash-settled derivative contracts with securities as the underlying, such as cash-settled structured warrants, extended settlement securities contracts and securities-based contracts-for-differences. MAS indicated that appropriate exemptions will be provided to exclude such contracts from prospectus requirements, including where the instruments or the underlying are listed and where disclosure requirements already apply to these contracts, such as contracts-for-differences.


Part B: Transfer Of Regulation Of Commodity Derivatives From CTA To SFA

 

Three main areas relating to the regulation of commodity derivatives under the CTA will be transferred to the SFA, namely (a) regulation of markets; (b) regulation of clearing facilities; and (c) regulation of intermediaries. Certain existing licensing exemptions under the CTA are also proposed to be migrated to the SFA. (See discussion on licensing exemptions above.)


However, as set out in the February 2012 consultation paper, spot commodity trading will remain under the regulatory oversight of the CTA and continue to be administered by IE Singapore. MAS also proposed to exclude physically-settled commodity forward contracts from the scope of the SFA. Certain commodity contracts which are executed for commercial purposes and containing contain some form of optionality will also be excluded, for example contracts for the regular purchase of raw material which contains options for non-delivery. The exclusion of such contracts will be set out in the subsidiary legislation, on which comments will be sought at a later date.


The transitional arrangements will introduced in subsidiary legislation for persons currently licensed to deal in OTC commodity derivatives under the CTA. MAS indicated that it will seek comments thereon at a later date.


Part C: Other Amendments To The SFA


New Business Venture Of A Regulated Entity


Currently, approved exchanges, approved clearing houses, licensed trade repositories and approved holding companies (collectively “Regulated Entities”) are only required to notify the MAS when operating a business or when acquiring a substantial shareholding in a corporation that is not a market, clearing facility, trade repository or holding company respectively, or that is not operating a business incidental to their current operations. In line with current practices and for the purposes of formalising such existing practice, MAS proposes to amend sections 16, 46K, 58 and 81ZA to require notification to the MAS whenever a Regulated Entity operates or acquires any proscribed business, or acquires a substantial shareholding in a proscribed corporation, so as to provide the MAS with a holistic view of the types of risks Regulated Entities would be exposed to, and their adequacy of resources to support all their businesses.


Strengthening The Deterrence Of Market Misconduct


MAS also proposes to make the following amendments to Part XII of the SFA to strengthen the effectiveness of the enforcement regime in deterring market misconduct. Not all of the following amendments are set out in the annexes to the February 2015 Consultation Paper.


Revision Of Provision Prohibiting False & Misleading Statements


Section 199 of the SFA prohibits the making of certain statements and the dissemination of certain information that are false or misleading in a material particular. In Madhavan v Peter v PP [2012] 4 SLR 613, the High Court stated that the false or misleading particular must “be of sufficient importance to significantly affect the price or value of securities”. MAS seeks to make clear that section 199 protects against “any false or misleading disclosures that is likely to affect the market, regardless of whether that price effect is significant. The term “material” in section 199 is attached to the word “particular” and describes the false and misleading particular vis-à-vis the rest of the statement, i.e. an important or significant aspect of the statement must be false or misleading; it does not refer to the price impact of the disclosure.”


Definition Of “Persons Who Commonly Invest In Securities”


In Lew Chee Fai Kevin v MAS [2012] 2 SLR 913, the Court of Appeal interpreted the phrase “persons who commonly invest in securities” under sections 215 and 216 of the SFA to be equivalent to the “reasonable investor” as set out in the Sarawak High Court decision of Public Prosecutor v Chua Seng Huat [1999] 3 MLJ 305 where it was held that such investors “possesses general professional knowledge as opposed to the said daily retailer or a person who has made specific researches”. The elements of professional knowledge attributed to a “reasonable investor” in the Chua Seng Huat case, which include the ability to determine the quality and the prospect of shares as well as the ability to do technical and fundamental analysis on information, are thought to be of too high a standard, and the MAS proposes to (a) introduce a definition for “persons who commonly invest in securities” under section 214 of the SFA which better reflects the realities of the Singapore market; and (b) issue guidelines to provide MAS’ policy intent and guidance as to the interpretation of that definition.


Revision Of Ceiling For Civil Penalty Quantum


Section 232 of the SFA provides that the maximum amount of civil penalty payable for a contravention of the market conduct provisions is dependent on whether the contravening person’s conduct resulted in him gaining a profit or avoiding a loss (collectively, obtaining a “Benefit”) or not obtaining a Benefit at all. In cases where a Benefit is obtained, the maximum amount of the civil penalty is presently capped at the higher of 3 times the amount of Benefit obtained or $50,000. If no Benefit is obtained, the amount is presently capped at SGD 2m. MAS proposes to amend section 232 of the SFA to provide that the civil penalty would be between SGD 50k and the higher of SGD 2m or 3 times the amount of Benefit obtained, regardless of whether a Benefit was obtained.


Priority Of MAS’ Civil Penalty Claims


MAS proposes to confer priority on its civil penalty claims in the same way as government claims under  the Government Proceedings Act. It is clarified that such priority is important in cases where it is against the public interest to allow a freezing order obtained by the MAS under section 324 of the SFA to be readily varied or discharged, such as by a third party for the purposes of discharging private debts.


Short Selling


MAS proposes to introduce a new Part VIIA on short selling in the SFA. The new Part VIIA will set out the regulatory framework for (i) marking of short sell orders and (ii) short position reporting. Under the new regime, a seller will be regarded as having a short position if his interest in a capital markets products is less than what he has sold. Detailed requirements will be provided in the subsidiary legislation, which will be separately consulted on at a later date.


Marking Of Short Sell Orders


Currently, the requirement to mark short sell orders for SGX-listed securities are implemented on members via business rules of SGX-ST. MAS proposes to amend the SFA to give regulatory certainty to the current practice and clarify that the onus to mark short sell orders lies with the market participant. There is no change to the policy intent and the operational aspect of short sell order marking. SGX will continue to administer the requirement to mark short sell orders.

 

Reporting Of Net Short Position Value


As announced previously, MAS will introduce aggregate net short position reporting in 2016. MAS proposes to amend the SFA to define a net short position, as well as set out reporting requirements for participants whose net short position exceeds a threshold prescribed by MAS. Detailed requirements on the calculation of net short positions, reporting thresholds and exemptions will be set out in the subsidiary legislation, for which MAS will seek comments at a later date.


Criteria For Recognising Foreign CIS


The SFA currently only allows the recognition of foreign CIS for offer to retail investors in Singapore if the laws and practices of the jurisdiction in which the foreign CIS is constituted and regulated under provide retail investors with an equivalent level of protection as that of a Singapore constituted CIS. However, the MAS is recognises that it is possible for alternative safeguards to be put in place (e.g. in the constitutive documents or the investment mandate of the CIS) even where a jurisdiction’s laws and practices do not impose or provide those safeguards. The MAS proposes to provide flexibility for factors other than the laws and practices under which a foreign CIS is governed to be taken into account, when considering whether to recognise the CIS.

 

Rajah & Tann

 

For further information, please contact:

 

Regina Liew, Partner, Rajah & Tann
regina.liew@rajahtann.com

 

Larry Lim, Partner, Rajah & Tann
larry.lim@rajahtann.com


Ruth Lin, Partner, Rajah & Tann
ruth.lin@rajahtann.com

 

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