FEBRUARY 2012 1 MAS PROPOSES NEW REGULATORY FRAMEWORK FOR OTC DERIVATIVES On 13 February 2012, the Mnetary Authrity f Singapre ( MAS ) issued tw cnsultatin papers: Cnsultatin Paper n Transfer f Regulatry Oversight f Cmmdity Derivatives frm IE t MAS and Cnsultatin Paper n Prpsed Regulatin f OTC Derivatives. The tw cnsultatin papers prpse a new framewrk fr the regulatin f ver-thecunter ( OTC ) derivatives. The framewrk is a respnse t the events f the glbal financial crisis, and the cmmitment f the G20 cuntries t imprve the regulatin and supervisin f OTC derivatives markets as part f effrts t strengthen the internatinal financial regulatry system. The framewrk prpses t implement the recmmendatins f the Financial Stability Bard and falls int the fllwing brad areas: The transfer f the regulatin f cmmdity derivatives frm Internatinal Enterprise Singapre t the MAS with the cnsequence that the regulatry prvisins n cmmdity derivatives will be migrated frm the Cmmdities Trading Act t the Securities and Futures Act ( SFA ); The mandated central clearing f certain derivative prducts, with mandated clearing f the fllwing derivative prducts prpsed as a first step in this measure: Singapre Dllar interest rate swaps; US Dllar interest rate swaps; and Nn-deliverable frwards denminated in selected Asian currencies. The mandated reprting f all derivative cntracts, with reprting t be made initially bligatry fr the fllwing prducts/asset classes: Interest rate derivatives; Freign exchange derivatives; and Oil derivatives; and The implementatin f a licensing framewrk fr industry players dealing with derivative cntracts. This Update takes a lk at the prpsed regulatry framewrk. The clsing date fr feedback is 26 March 2012, while the prpsed transfer f regulatry versight f cmmdity derivatives frm Internatinal Enterprise Singapre t the MAS is targeted fr the last quarter f 2012. Trading and Markets Regulatin f cmmdity derivatives t cme under the SFA While the regulatin f cmmdity derivatives will be migrated frm the Cmmdity Trading Act t the SFA, the MAS prpses maintaining the current regulatry scpe f the Cmmdity Trading Act in relatin t spt cmmdity trading. Accrdingly, the prpsed framewrk under the SFA will regulate derivative cntracts in respect f tangible cmmdities, and will exclude spt cmmdity It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre
FEBRUARY 2012 2 trading. Als excluded frm the prpsed framewrk are: Derivative cntracts in respect f intangible cmmdities; and Physically-settled cmmdity frward cntracts. N requirement fr trading t be dne n a platfrm The MAS is nt prpsing t require derivatives t be traded n an rganised trading platfrm, nting that ther than the US and Eurpe, n ther jurisdictins have such a requirement. Hwever, where private trading platfrms r markets are established, it has prpsed requiring such markets t be regulated t ensure that they are respnsibly perated. This regulatry regime is prpsed t cver trading platfrms fr derivative cntracts with the fllwing characteristics: Systematic and recurring transactins are made n it. Bids and ffers interact n the platfrm, allwing fr the cmparisn and cmpetitin f bids and ffers. Buyers and sellers have reasnable expectatins f transacting based n the infrmatin n the platfrm. It allws fr the cnclusin f transactins based n prices prvided n it, regardless f whether the final negtiatin r executin f transactins is dne n r utside the platfrm. Derivative markets t be regulated As with the current regulatry framewrk fr securities and futures markets, derivative markets may be regulated as an apprved market (if established in Singapre) r as a recgnised market (if established utside Singapre). Licensing f derivatives intermediaries In additin, nn-bank intermediaries dealing with derivative cntracts in respect f equities, interest rates, freign exchange, credit, r cmmdities will need t hld a Capital Markets Services licence under the SFA. Hwever, an exemptin frm licensing is prpsed fr brkers that: D nt take n any principal psitin; D nt hld any custmer s psitin, margin r accunt in their bks; and Deal nly with institutinal investrs. End-users will nt be required t be licensed. Central Cunterparty Clearing Regulatin f derivatives clearing huses The MAS is prpsing that certai n derivatives must be cleared thrugh a central cunterparty. This requirement will be engaged if the derivative and the cunterparties t the derivative cntract are thse that have been specified by the MAS. Any central cunterparty established t prvide clearing functins must be either ne that has apprved by the MAS (if established in It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre
FEBRUARY 2012 3 Singapre) r ne that is recgnised by it (if established utside Singapre). If there is n clearing huse t prvide clearing f the prduct, the MAS will lk int the issue and, if necessary, it may issue a request fr a persn t prvide the service in Singapre. Central clearing fr specified prducts As regards the types f derivatives that will need t be centrally cleared, as nted abve, three prducts have been initially prpsed. In additin, freign exchange frwards and swaps are prpsed t be exempted frm the central clearing bligatin. The MAS has als prpsed that ther derivatives may be added t the list f prducts t be mandatrily cleared thrugh a central cunterparty, and their inclusin may be either at the request f the central cunterparty r by the MAS. If the inclusin is initiated by the MAS, it will issue a cnsultatin paper seeking views n the matter befre prceeding. As the MAS has als stated that ther freign exchange derivatives such as currency ptins, nn - deliverable frwards, and currency swaps are nt exempted frm mandatry central clearing, it may be that these prducts (ther than the three already listed) will be included later after review and public cnsultatin. Criteria fr determining prducts t be centrally cleared In deciding whether t require a prduct t be centrally cleared, the MAS has prpsed that it cnsider the fllwing criteria: The level f systemic risk psed by the prduct; Its characteristics and level f standardisatin f cntractual terms and peratinal prcesses; The depth and liquidity f the market fr the prduct; The availability f fair, reliable and generally accepted pricing surces; The rbustness f the prpsed clearing huse s risk management systems; and The internatinal regulatry apprach twards the prduct and anti-cmpetitive cnsideratins. Central clearing fr certain entities nly A derivative cntract that falls under the class f derivatives specified t be subject t the mandatry central clearing regime will nly need t be centrally cleared if the cunterparties t the cntract are specified entities. The MAS has prpsed that nly entities exceeding a relevant threshld ( specified entity ) will be required t cmply with the central clearing bligatin. The apprpriate clearing threshld will be determined fllwing public cnsultatin. It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre
FEBRUARY 2012 4 Criteria fr specifying entities Fr financial entities, the size f their expsures will be determined in aggregate and by prduct class. Fr nn -financial entities, the MAS will cnsider the size f their ttal assets, as well as the size f their derivative expsures in aggregate and by prduct class (but excluding derivative cntracts entered int fr hedging purpses). Derivative cntracts that are t be centrally cleared A derivatives cntract which is bked r traded in different jurisdictins may still be subject t mandatry central clearing under the prpsed Singapre regime if at least ne leg f the cntract is bked in Singapre and if the cunterparties t the cntract meet either f the fllwing requirements: Bth parties t the cntract are resident r have presence in Singapre and are a specified entity; r One party t the cntract is resident r has presence in Singapre and is a specified entity, while the ther party wuld have been a specified entity if it were resident r were t have presence in Singapre. Exemptin frm central clearing Ntwithstanding the abve, the fllwing entities and transactins are prpsed t be excluded frm mandatry central clearing: Central banks and central gvernments; Supra-natinal rganisatins such as the Bank fr Internatinal Settlements, the Internatinal Mnetary Fund, the Wrld Bank and multilateral develpment banks; and Intra-grup transactins (save that these are prpsed t be subject t apprpriate cllateralisatin requirements instead). Unlike the US and Eurpe, pensin funds will nt be excluded. The MAS als prpses requiring utstanding cntracts f specified derivatives with a remaining maturity f mre than ne year t be subject t mandatry central clearing. Reprting f Derivative Cntracts Trade repsitries fr infrmatin cllectin The MAS prpses mandating the reprting f derivative cntracts t a trade repsitry. These are entities which cllect and/r disseminate data n derivative cntracts fr the purpses f facilitating market participants cmpliance with the prpsed reprting requirement. Such an entity will be regulated and licensed by the MAS under the SFA. As with the current framewrk in the SFA, a trade repsitry will be regulated as either an apprved trade repsitry (if established in Singapre) r a recgnised trade depsitry (if established utside Singapre). It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre
FEBRUARY 2012 5 Reprting applies t all derivatives The reprting requirement is prpsed t apply t all derivatives, and nt simply thse that must be centrally cleared. Implementatin will be gradual, hwever, with the three types f derivatives nted abve t be the first t be targeted. Other derivatives will be brught under the reprting framewrk ver time, based n: The significance f the prduct/asset class in Singapre s OTC derivative market; The significance f Singapre-based trading f the prduct/asset class in the glbal OTC derivative markets; and Internatinal develpments in OTC derivatives reprting. Reprting requirement applies t specified entities The entities that will need t cmply with the reprting requirements will be thse specified entities under the mandatry central clearing framewrk. Fr Singapre-incrprated banks, reprting must be dne n a grup-wide basis fr effective cnslidated supervisin. Infrmatin t be reprted The infrmatin t be reprted is prpsed t include transactin - level data such as transactin ecnmics, cunterparty infrmatin, infrmatin n the underlying entity, peratinal data, and event data. The infrmatin must be made kept updated n an nging basis. The level f data and the manner f reprting will fllw internatinal standards used by the CPSS (Cmmittee n Payment Systems and Settlements) and IOSCO (Internatinal Organisatin f Securities Cmmissins) and set ut in their jint reprt, Reprt n OTC Derivatives Data Reprting and Aggregatin Requirements. Internatinal develpments such as the legal entity identifier which wuld be used fr identifying parties in a derivative cntract, and the develpment f a standard prduct classificatin system t facilitate the aggregatin f derivatives data will be fllwed clsely by the MAS. It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre
FEBRUARY 2012 6 If yu wuld like infrmatin n this r any ther area f law, yu may wish t cntact the partner at WngPartnership that yu nrmally deal with r cntact any f the fllwing partners: Hui Chn Yuen Head Capital Markets Practice; Jint Head Financial Services Regulatry Practice DID: +65 6416 8204 Email: chnyuen.hui @wngpartnership.cm Elaine Chan Jint Head Financial Services Regulatry Practice DID: +65 6416 8010 Email: elaine.chan @wngpartnership.cm Rsabel Ng Head Derivatives & Structured Prducts DID: +65 6416 8269 Email: rsabel.ng @wngpartnership.cm CONTACT DETAILS Singapre WngPartnership LLP One Gerge Street #20-01 Singapre 049145 Tel: +65 6416 8000 Fax: +65 6532 5711 China WngPartnership LLP Beijing Representative Office Unit 3111 China Wrld Office 2 1 Jiangumenwai Avenue, Chayang District Beijing 100004, PRC Tel: +86 10 6505 6900 Fax: +86 10 6505 6902 Middle East WngPartnership LLP Abu Dhabi Branch Al Bateen Twers Building C3 Office 11-01 (P1) P.O. Bx N. 37883 Abu Dhabi, UAE Tel: +971 2 651 0800 Fax: +971 2 635 9706 cntactus@wngpartnership.cm WngPartnership LLP 63 Market Street #02-01 Singapre 048942 Tel: +65 6416 8000 Fax: +65 6532 5722 WngPartnership LLP Shanghai Representative Office Unit 5006 Raffles City Office Twer 268 Xizang Rad Central Shanghai 200001, PRC Tel: +86 21 6340 3131 Fax: +86 21 6340 3315 WngPartnership LLP Licensed by the QFCA Office 12-20 Amwal Twer, West Bay P.O. Bx N. 15397 Dha, Qatar Tel: +974 4491 2332 Fax: +974 4491 2339 wngpartnership.cm It is nt intended t be nr shuld it be regarded as legal advice. WngPartnership LLP (UEN: partnership registered in Singapre