MAS Issues July 2015 Consultation Paper on Draft Regulations for Mandatory Clearing of Derivative Contracts

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1 MAS Issues July 2015 Consultation Paper on Draft Regulations for Mandatory Clearing of Derivative Contracts Introduction The Monetary Authority of Singapore ( MAS ) issued a consultation paper on 1 July 2015 (the July 2015 Consultation Paper ) on the draft Securities and Futures (Clearing of Derivatives Contracts) Regulations ( SF(CDC)R ). The draft SF(CDC)R will effect Part VIB of the Securities and Futures Act ( SFA ) on the mandatory clearing of OTC derivative contracts. This is in line with the G20 objectives and the Financial Stability Board s recommendations on OTC derivatives reforms. The July 2015 Consultation Paper sets out the following key aspects of the mandatory clearing regime under the draft SF(CDC)R: (a) the type of OTC derivative contracts to be cleared; (b) the circumstances under which clearing is mandatory; (c) the persons and transactions subject to or exempt from clearing obligations; and (d) implementation details. Part A: Types of Derivatives Contracts to be Cleared In assessing which derivative contracts should be cleared, MAS has considered factors set out in section 129G(2) of the SFA including: (a) the level of systemic risks posed by the product; (b) the depth and liquidity of the product; and (c) the availability of Central Counterparties ( CCPs ) regulated by MAS as approved clearing houses ( ACHs ) or recognised clearing houses ( RCHs ). Interest Rate Swaps ( IRS ) MAS intends to commence mandatory clearing by asset class, beginning with IRS, which constitute about 50% of all derivatives booked in Singapore (by gross notional amount outstanding). MAS is seeking consultation on the types of IRS that should be subject to mandatory clearing obligations: Types of IRS SGD fixed-to-floating swaps based on the Swap Offer Rate USD fixed-to-floating swaps based on LIBOR Proposal and Rationale Subject to mandatory clearing obligations: They are the most liquid IRS traded in Singapore, and comprise about 50% of gross notional of IRS trades booked in Singapore. The Singapore Exchange Derivatives Clearing Limited ( SGX-DC ), an ACH, currently offers the clearing of SGD and USD IRS. MAS also expects to approve or recognise more CCPs as ACHs or RCHs that are able to clear IRS, before the commencement of the clearing obligations. 1

2 IRS denominated in Euro ( EUR ), Pound Sterling ( GBP ) and Japanese Yen ( JPY ) Still under consideration: EUR, GBP and JPY IRS booked in Singapore form a significant proportion relative to IRS in other currencies (excluding SGD and USD IRS). Major jurisdictions such as the US, Europe, and Australia have mandated or are proposing to subject EUR, GBP and JPY IRS to mandatory clearing. The proposed minimum contract specifications of the IRS described above are set out below: Table 1: Contract specifications for SGD and USD IRS Settlement Currency Reference Index Types Maturity Optionality Notional Type SGD SOR Fixed-tofloating Up to 30 years No Constant USD LIBOR Fixed-tofloating Up to 30 years No Constant Table 2: Contract specifications for EUR, GBP and JUP IRS Settlement Currency Reference Index Types Maturity Optionality Notional Type Euro EURIBOR Fixed-tofloating Up to 50 years No Constant GBP LIBOR Fixed-tofloating Up to 50 years No Constant JYP LIBOR Fixed-tofloating Up to 40 years No Constant MAS is also seeking feedback on whether subjecting more types of SGD, USD, EUR, GBP and JPY IRS (such as basis swaps, forward rate agreements or overnight index swap) to clearing obligations, would, on balance, allow market participants to achieve greater margin efficiencies. Part B: Circumstances under which Contracts are to be Cleared MAS is also seeking consultation on the circumstances under which IRS trades should be subject to mandatory clearing: Circumstances IRS trades in which both transacting counterparties have booked in their Singapore-based operations, (i.e. a Singapore-incorporated company or a Singapore branch of a foreign entity) Proposal and Rationale MAS proposes to mandate clearing for these IRS trades. Clearing obligations should primarily be imposed on risks that are booked and hence residing in the Singapore system. Not many jurisdictions other than US, Japan and EU have put in place mandatory clearing regimes at this stage. As such, foreign counterparties may not be obliged to and hence may not be ready to clear their OTC derivative trades. There will be no conflicts in respect of cross-border transactions with US or EU persons that may be subject to their respective clearing obligations. SGX-DC is registered as a Derivatives Clearing Organisation with the U.S. Commodity Futures Trading Commission and recognised as an equivalent third country CCP by the European Securities and Markets Authority. MAS expects more such CCPs to meet these requirements. 2

3 Transactions which were traded in Singapore but booked elsewhere such as foreign subsidiaries or foreign branches of local banks MAS will assess the risk based on trade data reported to licensed trade repositories. MAS maintains oversight of such operations through its consolidated supervision of local banking groups. MAS engages banks regularly on their policies regarding booking of OTC derivative contracts and appropriate risk controls as part of banking supervision. Part C: Persons to be subject to and exempt from Clearing Obligations Under section 129B of the SFA, all banks and other financial institutions such as insurers and capital markets services licence holders are specified persons subject to clearing obligations upon commencement of the mandatory clearing regime. However, MAS recognises that it may not be appropriate at this stage to impose clearing obligations on all specified persons. Persons and Transactions Banks which exceed a threshold of S$20 billion gross notional outstanding derivatives contracts booked in Singapore for each of the last four calendar quarters Other banks that do not exceed the thereshold and other specified persons that are not banks Subject to Clearing Obligations? Rationale Yes Subjecting these banks to clearing obligations will address the largest counterparty credit risks in our OTC derivative markets. The threshold is calibrated to subject the most active major global banks, regional or domestic banks trading OTC derivatives, to clearing obligations. No Few members of OTC derivatives CCPs offer client clearing arrangements. Smaller financial institutions like banks with low levels of OTC derivatives activities may not find it commercially feasible to take up direct clearing membership. Intra-group transactions No Such transactions do not transfer risks in or out of a corporate group and are best left to such groups to manage their group-wide risks in a manner most appropriate for their corporate structure. Public bodies (including all central banks and governments, as well as international multilateral organisations such as the Bank for International Settlements, the International Monetary Fund and the World Bank) No The policy functions of public bodies may require them to maintain flexibility to respond to a variety of circumstances, which may be constrained if they are subject to clearing obligations. 3

4 Part D: Implementation Details After the commencement of clearing obligations, MAS will continue to review when it may be appropriate to expand the scope of the mandatory clearing regime, depending on industry readiness as well as international developments. MAS will consider, amongst others, the following options: Option Increase the range of products subject to clearing obligations Lower the maximum threshold for exemption from clearing obligations Widen the nexus for OTC derivative contracts subject to clearing obligations Example of those subjected to clearing obligations The most liquid products in the next largest asset class i.e. foreign exchange OTC derivatives The more active non-banks financial institutions trading OTC derivatives Cross-border transactions with transacting counterparties that do not book their trades in Singapore-based operations Concluding Words The mandatory clearing regime is taking shape with the publishing of the July 2015 Consultation Paper on the draft SF(CDC)R. Financial institutions should start identifying whether they are subject to clearing obligations, and whether their OTC derivatives are subject to clearing obligations. If necessary, they should start preparing for these requirements. Most importantly, they must keep abreast of upcoming developments. A copy of the July 2015 Consultation Paper is available at: Publications/Consultation-Paper/2015/Consultation-Paper-on-Draft-Regulations-for-Mandatory- Clearing-of-Derivatives-Contracts.aspx 4

5 Parties should feel free to send their feedback on the July 2015 Consultation Paper by 31 July 2015 to: Capital Markets Policy Division Markets Policy & Infrastructure Department Monetary Authority of Singapore 10 Shenton Way MAS Building Singapore Fax: (65) For further consultation on the proposed regulatory changes, or on potential feedback, please contact our Financial Institutions Group below. Please feel free to also contact the Knowledge and Risk Management Group at References 1. Consultation Paper on Draft Regulations for Mandatory Clearing of Derivatives Contracts 2. Draft Securities And Futures (Clearing Of Derivatives Contracts) Regulations

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