Singapore commodity trading quarterly Q1 I 2017

Transcription

1 Singapore commodity trading quarterly Q1 I 2017

2 Q1 2017: the volatility continues Q has been a quarter of mixed fortunes for the commodities markets. Crude has declined 6-7% since the start of the year, despite the OPEC production cut, on the back of increases in US supply. Steel has continued its rally for the most part, although Chinese steel and iron ore prices dropped significantly in March. Agri commodities have generally trended downwards due to expectations of favorable weather during the northern hemisphere growing and harvesting season. The Singapore Budget for 2017 was announced in February, and amongst other things, it introduced simplifying changes to the Global Trader Program tax incentive. In general, this should ease the compliance burden on Singapore commodity traders who have been granted this incentive. The timeline for Brexit was confirmed by the UK triggering Article 50 in March The EU published its draft negotiating guidelines soon after, which specified that the EU-UK post-brexit trade relationship would only be discussed once the terms of the exit have been agreed upon. Commodity traders are likely to continue to face uncertainty for some time regarding the post-brexit trade and regulatory environment. As we published this, the UK government announced a snap election, with the hope of obtaining a strengthened mandate for Brexit. On a related note, the EU s revised Markets in Financial Instruments Directive (MiFID II) will be effective from 3 January This could affect Singapore based commodity traders who trade products in EU markets or trade with EU counterparties, and it is important for companies to assess the potential impact as soon as possible. In the US, the Trump administration is starting to make its mark on a wide range of policy areas. Major revisions to trade agreements were a key election pledge made by President Trump, and on his first day in office, he withdrew the US from the Trans-Pacific Partnership (TPP). The TPP was expected to bring significant benefits to the commodities industries, in particular agri-commodities, through the removal of tariffs, which would have provided more opportunities for physical agri-traders. It remains to be seen whether the other signatories will continue with the TPP in the absence of the US.

3 MiFID II: Key considerations for commodity traders Is your organization ready for MiFID II? The revised European Union s Markets in Financial Instruments Directive, which will be applicable from 3rd January 2018, represents a fundamental change for companies trading in the European financial markets, including commodity derivatives. Not only do financial organizations need to deal with the new regulations, but commodity trading firms are also affected by these changes. Until now, commodity firms have largely escaped full regulation under MiFID as a result of broad exemptions made available to commodity trading firms. The changes under MiFID II are significant in that they remove or limit the exemptions available to commodity trading. The European Commission has taken important steps in December 2016 to strengthen the regulation of commodities markets. Detailed exemption rules and thresholds for market footprint have now been published in the Regulatory Technical Standards (RTS), specifically for: Ancillary activity thresholds (RTS 20), which set the maximum amount of trading in commodity derivatives that non-financial firms can engage in before they must seek a MIFID authorization Commodity position limits (RTS 21) which establish a baseline and maximum bands of deviation on either side of the baseline to be set by the competent regulators. We recommend that commodity trading firms undertake an immediate high-level impact assessment to determine, at a minimum, the applicable scope boundaries, legal entity structure and business model impacts. These new rules will affect Singapore commodity traders to the extent that they are trading on EU markets such as LME, or trading with an EU counterparty. Exemptions are available based on size of trading activities and whether the trades are entered into for hedging purposes, and commodity companies will need to assess whether they meet the conditions for the exemption. Companies that are not exempt will need to establish a regulated EU entity to conduct the activities. How we can help EY has the skills and experience to help you confront these regulatory changes while reducing costs and risks. Specifically, our commodity regulations professionals can help you assess the business, compliance and organizational impacts. We can also help you to establish and implement a roadmap to adjust your organization or processes where required.

4 Application of the FRS 109 expected credit loss model All Singapore companies will be required to adopt FRS 109 for accounting periods beginning on or after 1 January This has the potential to require organizations to make significant changes to their internal processes and estimations, and is likely to affect the financial results for many companies. The expected loss model (ELM) is a concept in FRS 109 which is used to determine the level of impairment of financial assets that are not carried at fair value through profit or loss. This includes loans, receivables, debt securities and guarantees. ELM is forward-looking, unlike the current model under FRS 39 (an incurred loss model), which means that the required level of judgment is likely to be greater than at present. For commodity traders with a mix of receivables, loans, pre-payments, tolling arrangements and extended credit term supply contracts, the application of FRS 109 is likely to be complex, and may require system changes or manual workarounds. This part of FRS 109 will be relevant to some extent to all commodity traders because it affects how receivables are assessed for impairment. In most circumstances, short-term receivables are unlikely to be significantly affected, but significant additional impairment may arise on longer-term receivables, loans and other credit exposures. How we can help The adoption of FRS 109 has multiple complexities, including the application of the expected loss model. Our professionals work with clients to perform impact assessments, develop accounting change programs, and advise on accounting judgments. We also assist clients with practical implementation matters such as system and control changes.

5 Global Trader Program The Global Trader Program (GTP) is a tax incentive scheme in Singapore targeted at international commodity traders whereby companies can enjoy a 5% or 10% corporate tax rate on qualifying activities, subject to meeting various criteria. GTP is administered by International Enterprise Singapore (IES), who is responsible for conferring GTP status and monitoring companies compliance with their conditions. From 2015, IES implemented a compliance program whereby selected GTP recipients were required to engage an audit firm to review their compliance with the terms of their GTP award. As a result of the extended commodities downturn from 2014 to 2016, many companies have been unable to meet the conditions of their award. Companies have been cutting back on expenditure, meaning that local business spending has not reached the required thresholds. With lower prices, revenue has also been significantly lower, even for those companies that have been able to maintain volumes. It is important for companies to monitor the conditions of their GTP award closely and to enter into discussions with IES early. In the Singapore Budget 2017, the government announced various enhancements to the GTP scheme to expand its scope and to remove restrictions that were causing practical difficulties for companies. The substantive requirements to qualify for the GTP will also be increased, and this will apply to both new and renewal applications. Transactions in qualifying products no-longer have to be carried out with qualifying counterparties. This requirement previously caused companies significant practical difficulty, as it was challenging to identify whether the counterparty was qualifying on a transaction by transaction basis, in particular where trade volumes are high. Other enhancements include an expansion of qualifying activities to include supply of fuel to vessels in Singapore, and a broadening of the qualifying activities to include income derived from physical storage or value-adding activity in Singapore. IES has announced that it will release further details of these changes by May How we can help Our teams assist clients with GTP compliance audits, GTP applications, and monitoring of the adherence to the award conditions. We also advise clients on setting up internal controls and processes in order to assess which transactions qualify for the incentive tax rate.

6 Select thought leadership US Energy Policy in the Trump Administration and 115 th Congress President Trump s An America First Energy Plan. Click here EU Referendum: Brexit What the UK s decision to the leave the European Union means for businesses. Click here Singapore Budget 2017 EY analysis of the Singapore Budget Click here Contact us Winston Ngan Partner, Financial Services Assurance Ernst & Young LLP Tel: winston.ngan@sg.ey.com Adam Gerrard Senior Manager, Financial Services Assurance Ernst & Young LLP Tel: adam.gerrard@sg.ey.com

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