RETAIL INVESTORS IN UNLISTED MARGINED DERIVATIVES TO RECEIVE GREATER PROTECTIONS

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1 JUNE RETAIL INVESTORS IN UNLISTED MARGINED DERIVATIVES TO RECEIVE GREATER PROTECTIONS The Monetary Authority of Singapore ( MAS ) issued a Consultation Paper on Review of Regulatory Framework for Unlisted Margined Derivatives Offered to Retail Investors ( Consultation Paper ) on 28 May It proposes enhancing the regulatory requirements applicable to holders of a capital markets services licence and other financial institutions which offer unlisted margined derivatives to retail investors. The measures will affect, in particular, financial institutions that deal in the following products: contracts for differences ( CFDs ) referenced to underlying shares or debentures; and leveraged foreign exchange trading (i.e., CFDs referenced to underlying currency exchange rates, or foreign exchange traded on a margin basis) ( LFX ). The measures proposed increase protections for retail investors as they may not fully appreciate the risks associated with trading in unlisted margined derivatives. The proposals are to: Enhance margin requirements; Increase capital and shareholder funds requirements; Impose further limits and requirements in respect of customer trust accounts; and Require the issuance of an Additional Risk Fact Sheet. The closing date for feedback is 2 July An overview of the proposals is set out in this Update. Changes to Margin Requirements Margin for CPDs on FX increased from 2% to 5% To enhance credit risk management by derivative dealers, and ensure retail investors have sufficient financial buffer to cope with unexpected losses, the MAS has proposed to increase the minimum margin requirement for CFDs of foreign exchange entered into with retail investors from 2% to 5% of notional transaction value. To ensure that there is no incentive to engage in regulatory arbitrage, the MAS also proposes introducing a minimum margin requirement of 5% for all other LFX contracts entered into with retail investors Other margin requirements extended to all derivatives The current margin requirements for CFDs on other underlying referenced assets imposed under the Securities and Futures (Financial and Margin Requirements) Regulations will be retained, as the margin levels for these CFDs are adequate. However, these minimum margin requirements will be extended to the margin trading of all other unlisted derivatives on the same referenced asset by retail investors. (UEN:

2 JUNE The minimum margin requirements for all CFDs, currently only applicable to holders of a capital markets services licence ( CMS Licensee s ), will be extended to exempt financial institutions in respect of their dealing in such products. Increasing Capital and Shareholder Funds Requirements To reduce the risk exposure of retail investors to their derivatives dealers, the MAS proposes increasing their capital and shareholder funds requirements. Accordingly, the Consultation Paper proposes to require: a CMS Licensee dealing in unlisted derivatives with retail investors to have a base capital of S$5 million; and an applicant for a CMS licence to deal in unlisted derivatives to have minimum group shareholders funds of S$200 million. Enhancements to Protection of Customer Trust Accounts Restrictions imposed on use of moneys in trust accounts To enhance the protection of retail investors moneys and assets in respect of their trading in unlisted margined derivatives, and the recovery of their moneys and assets in the event of insolvency of their derivative dealer, the MAS proposes to: prohibit the dealer from using retail customer moneys and assets in trust accounts for the dealer s margining purposes with hedging counterparties, or for meeting other obligations incurred by the dealer in connection with the customer s unlisted margined derivative transactions; prohibit the dealer from maintaining retail customer moneys and assets in trust accounts with custodians outside Singapore; allow the dealer to trade only as principal (as opposed to an agent) to retail customers; and extend the requirement for daily computation and record keeping of customer moneys in trust accounts to all regulated activities. MAS s preferred options for trust accounts The MAS has also proposed modifying the arrangements under which derivative dealers maintain trust accounts. To that end, it has suggested four possible options for consideration and feedback. The two options that it prefers are as follows: The derivative dealer maintains an omnibus segregated trust account for customer funds, which includes margins for both unlisted and listed products. The trust moneys for unlisted derivatives are segregated (accounting-wise) from trust (UEN:

3 JUNE moneys for listed products at the customer level, i.e., a particular customer who trades both unlisted and listed products would have to put up the margins for each separately, as though they were for two separate trust accounts. At all times, the trust moneys for unlisted margined trades would be accounted for and maintained in Singapore. The derivative dealer maintains separate trust accounts for unlisted and listed products. This provides enhanced operational segregation and reduces the risk of undersegregation by allowing separate reconciliation checks for the trust accounts. Alternative options for trust accounts Two other options have also been set out in the Consultation Paper but are seen by the MAS as being less desirable in the balance achieved between the interests of the derivatives dealer and the retail customer: The derivative dealer maintains an omnibus trust account for all customers in all investment products (e.g., funds for all customers trades in futures contracts listed on exchange and unlisted margined derivatives are kept in one single/consolidated account), but has an effective system to monitor and account for customers positions and entitlement to their moneys and assets at all times. The derivative dealer maintains separate trust accounts for unlisted and listed products, for each individual customer. Disclosure of Information Additional Risk Fact Sheet In order to ensure that retail customers are made more aware of the kinds of risks involved in trading such derivative products, the MAS proposes requiring that derivative dealers provide their customers with an Additional Risk Fact Sheet containing information on various prescribed matters. A Question & Answer format must be adopted, and the MAS has proposed the following questions: How does leverage affect my losses? When will a margin call be issued, and what can the company do if I fail to meet a margin call? Where are my margins and deposits kept and maintained? Are they kept in trust accounts? What will happen to my margins and deposits if the company becomes insolvent? Will I be able to get back my margins and deposits? Under what circumstances can the company close my position? (UEN:

4 JUNE What happens when trading in the underlying asset is suspended or halted? How can I exit my position and will I suffer losses? Does the derivative contract have an expiry period? What is the impact on my account on expiry? What are the commissions, fees and other charges that I have or may have to pay? How is the derivative contract quoted? Can the trade be executed at a price that is different from my order price? If I place a stop-loss order, am I assured of the price that I set the stop-loss at? If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the followi ng partners: Hui Choon Yuen Head Capital Markets Practice; Joint Head Financial Services Regulatory Practice DID: choonyuen.hui Elaine Chan Joint Head Financial Services Regulatory Practice DID: elaine.chan Rosabel Ng Head Derivatives & Structured Products DID: rosabel.ng (UEN:

5 JUNE CONTACT DETAILS Singapore One George Street #20-01 Singapore Tel: Fax: China Beijing Representative Office Unit 3111 China World Office 2 1 Jianguomenwai Avenue, Chaoyang District Beijing , PRC Tel: Fax: Middle East Abu Dhabi Branch Al Bateen Towers Building C3 Office (P1) P.O. Box No Abu Dhabi, UAE Tel: Fax: contactus 63 Market Street #02-01 Singapore Tel: Fax: Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai , PRC Tel: Fax: Licensed by the QFCA Office Amwal Tower, West Bay P.O. Box No Doha, Qatar Tel: Fax: wongpartnership.com (UEN: