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Singapore – OTC Derivatives Reporting And Clearing Legislation Takes Effect.

28 November, 2013

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

Introduction

 

The following legislation has taken effect from 31 October 2013, ushering in a new regulatory regime for the reporting and clearing of over-the-counter (“OTC“) derivatives contracts in Singapore:

 

1. Section 27 of the Securities and Futures (Amendment) Act 2012 (“SFAA“); and

2. Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013 (“SF(RDC)R“).

 

Section 27 of the SFAA introduces the new Parts VIA and VIB into the Securities and Futures Act (“SFA“). Part VIA (sections 124 to 129A of the SFA) relates to the reporting of derivatives contracts, whereas Part VIB (sections 129B to 129H) relates to the clearing of derivatives contracts.

 

The SF(RDC)R contains the operational details which flesh out Part VIA of the SFA.

This update highlights how the current requirements differ from the draft Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013 (“Draft SF(RDC)R”), which MAS previously put up for public consultation in June 2013. It also outlines the regulatory regime on the mandatory clearing of OTC derivatives contracts.

 

Reporting Of OTC Derivatives (Part VIA of SFA And The SF(RDC)R)

 

Who Needs To Report

 

As outlined in our previous update, a “specified person” who is a party to a “specified derivatives contract” must report certain prescribed information to either a licensed trade repository or a licensed foreign trade repository.

 

“Specified persons” include banks, subsidiaries of banks, merchant banks, finance companies, insurers, approved trustees, and holders of capital markets services licenses.

In addition, MAS has prescribed “significant derivatives holders” (“SDHs”) (previously referred to as “non-financial specified persons” during the public consultation stage) as “specified persons”. These SDHs will be required to report certain prescribed information about specified derivatives contracts if they are party to the specified derivatives contract.

SDHs are persons who fulfil the following requirements on the last day of any quarter in a year:

 

  • They are resident in Singapore; and
  • The aggregate gross notional amount of specified derivatives contracts traded in Singapore or the aggregate gross notional amount of specified derivatives contracts booked in Singapore exceeds $8 billion.
 

During the consultation, MAS had proposed that SDHs would be required to report any changes to any derivatives contracts they had earlier reported (i.e. ongoing reporting), despite the fact that they had already ceased to be SDHs by then. MAS has since removed the ongoing reporting requirement for SDHs, as it could be perceived to be more onerous than the reporting requirements for other specified persons.

 

MAS has also extended the notification period for SDHs from one month from the end of the relevant quarter, to two months from the end of the relevant quarter. This is to allow SDHs more time to finalise their quarter-end results, as they may not have access to sophisticated accounting systems.

 

Which Derivatives Contracts Need To Be Reported

 

At this initial Phase I stage (see Diagram A below), only interest rate derivatives contracts and credit derivatives contracts are prescribed as “specified derivatives contracts” required to be reported. Other asset derivatives classes, such as foreign exchange, equity and commodity derivatives contracts, will be introduced for reporting later in Phase II (see Diagram A below).

 

Definitions Of “Booked In Singapore” And “Traded In Singapore”

 

Only specified derivatives contracts which are traded in Singapore and booked in Singapore will be subject to the reporting regime.

 

The definition of “booked” in the Draft SF(RDC)R, which previously referred to the entry of the derivatives contract on the balance sheet of the party only, has been revised to include the entry of the derivatives contract on the profit and loss accounts of a person whose place of business is in Singapore.

 

Further, the original definition of “traded in Singapore”, which only referred to the execution of specified derivatives contracts by a trading desk physically located in Singapore, has been revised to also include the execution of specified derivatives contracts by a trader physically located in Singapore. MAS indicated that it will provide further guidance in this regard.

 

What Information Needs To Be Reported

 

The information which needs to be reported is set out in the First Schedule of the SF(RDC)R, and includes information on the contract, the counterparty, clearing, and other transactional data. Feedback to MAS indicated that there are difficulties in reporting the data required in several of the proposed information fields, especially those relating to valuation and collateral information. MAS has accordingly narrowed its required scope of data fields set out in the SF(RDC)R, with a view to stepping up the number of data fields in the later part of 2014, in line with industry readiness and international developments.

 

Reporting Timeframe

 

During the public consultation, MAS had proposed that newly-executed specified derivatives contracts be reported by the close of the next business day. In response to feedback from industry players, MAS has extended the reporting timeframe to two business days from the date of execution (i.e. T+2).

 

Backloading

 

In relation to the requirement for backloading, MAS has modified its original proposal for backloading of all specified derivatives contracts booked or traded in Singapore with maturity of not less than one year, to require backloading for all such contracts which are booked in Singapore only. This is because reporting entities are sometimes unable to trace whether outstanding trades were “traded in Singapore”, as such information was not required to be recorded previously.

 

Implementation Timetable

 

Implementation of the reporting regime will be carried out in phases. Phase I is for reporting of information on interest rate derivatives contracts and credit derivatives contracts. Phase II will be for reporting of information on other asset derivatives classes.

 

Within Phase I, there is a further breakdown of reporting stages depending on the type of reporting entity. Phase 1A starts on 3 February 2014 for certain selected banks. Phase 1B starts on 1 April 2014, in which all banks will have to comply with the reporting requirements. Phase 1C, starting on 1 July 2014, will require all other financial entities to comply with the reporting requirements. Finally, Phase 1D, beginning 1 October 2014, will require all SDHs to comply with the reporting requirements. (Refer to Diagram A below.)

 

Diagram A

 

chartotc

 

Confidentiality

 

One of the most important differences between the enacted SF(RDC)R and the Draft SF(RDC)R is Regulation 11 of the SF(RDC)R. Regulation 11 introduces a “masking exemption”, allowing specified persons to mask counterparty information in certain circumstances. This exemption applies in situations where such disclosure is considered a breach of legal restrictions under the laws of a foreign counterparty’s jurisdiction, or under domestic laws (for example, the confidentiality restrictions under the Banking Act).

 

MAS however stressed that the “masking exemption” is only an interim working solution before legislative changes are eventually put into place to enable counterparties’ information to be disclosed legally. MAS further indicated that when the exemption expires on 31 October 2014, specified persons would be required to “unmask” counterparty information within two months thereafter. Specified persons will not be required to unmask transactions which have expired or are terminated prior to the expiry date.

 

Clearing Of OTC Derivatives Contracts (Part VIB of SFA)

Section 129C of the SFA requires every “specified person” who is a party to a “specified derivatives contract” to cause the “specified derivatives contract” to undergo clearing by an approved clearing house or a recognised clearing house.

 

“Specified Person” And “Specified Derivatives Contract”

 

Although the terms “specified person” and “specified derivatives contract” are also used in Part VIB, the definitions of these terms are kept distinct from those in Part VIA above, hence allowing MAS the flexibility to prescribe different types of “specified persons” and “specified derivatives contract” for the two Parts independently.

 

“Specified persons” in Part VIB include banks, merchant banks, finance companies, insurers, approved trustees, and holders of capital markets services licenses. MAS has not prescribed any other person or class of persons as “specified persons”, although MAS had mentioned during public consultation and its response to feedback that non-financial entities would also be subject to the mandatory clearing requirements. It also seems likely that MAS is still conducting further study with a view to proposing suitable clearing thresholds that would apply to “specified persons”.

 

MAS has not prescribed the types of contracts that would be “specified derivatives contracts” for Part VIB. MAS will seek public feedback before prescribing any specific products for central clearing (the “top-down approach”). MAS will also allow central counterparties to submit applications to include products for central clearing under the “bottom-up approach”, and allow interested parties to provide their input during public consultation.

 

Cross-Border Trades

 

Section 129F SFA provides that a specified person who is required to clear its specified derivatives contract with an approved or recognised clearing house can meet this requirement by showing that all the parties to the specified derivatives contract have submitted the said contract to be cleared under the laws of a “relevant clearing jurisdiction” in another country. MAS has yet to prescribe any “relevant clearing jurisdiction”, but it is contemplated that such jurisdictions would have established regulatory frameworks for the clearing of OTC derivatives.

 

References

 

1. Securities and Futures (Amendment) Act 2012

2. Securities and Futures (Amendment) Act 2012 (Commencement) (No.3) Notification 2013

3. Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013

4. MAS Consultation Paper on Draft Regulations for Reporting of Derivatives Contracts

5. MAS Response to Feedback Received – Draft Regulations Pursuant to the Securities and Futures Act for the Reporting of Derivatives Contracts

6. MAS Consultation Paper on Proposed Regulation of OTC Derivatives

7. MAS Response to Feedback Received on Consultation on Policy Reforms on Regulation of OTC Derivatives

 

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

 

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