On June 3 2015, the Monetary Authority of Singapore (MAS) published a consultation paper entitled “Policy Consultation on Regulatory Framework for Intermediaries Dealing in OTC Derivative Contracts, Execution-Related Advice, and Marketing of Collective Investment Scheme”
(the Consultation Paper), which proposes:
- a regulatory framework for capital markets intermediaries dealing in over-the-counter (OTC) derivative contracts; and
- refinements to rules governing financial advisory services.
This follows the earlier consultation paper entitled “Consultation Paper on Proposed Amendments to the Securities and Futures Act” which was published by the MAS in February 2015, to complete the expansion of the scope of the Securities and Futures Act, Chapter 289 of Singapore (SFA) to regulate derivative contracts, including the expansion of the Capital Markets Services (CMS) licensing requirement to intermediaries dealing in OTC derivative contracts (OTC Intermediaries). Our last briefing on the consultation paper can be found here.
Key amendments proposed in the Consultation Paper
A summary of the key amendments proposed in the Consultation Paper is set out below.
|REGULATORY FRAMEWORK FOR LICENSED OTC INTERMEDIARIES
|Admission Criteria for the Application for a CMS License
- Applicants for a CMS license for dealing in OTC derivatives contracts required to meet the admission criteria set out in the MAS’ Guidelines on Criteria for the Grant of a Capital Markets Services License other than for Fund Management (SFA04-G01).
- Minimum five-year track record only required for OTC Intermediaries that serve retail (i.e. non-accredited, institutional or expert) investors.
- Same criteria to apply to intermediaries dealing in exchange-traded derivative contracts.
|Business Conduct Requirements
- Risk Management and Controls. OTC Intermediaries required to have in place proper risk management systems and controls to manage their operations and activities as applicable to CMS licensees under the Securities and Futures (Licensing and Conduct of Business) Regulations (SF(LCB)R).
- Requirements relating to Advertisements. Advertising restrictions applicable to CMS licensees under the SF(LCB)R to apply to OTC Intermediaries.
- Risk Disclosure. OTC Intermediaries to provide a risk disclosure document to their customers (which must be acknowledged by the customer in writing) before account opening. The risk disclosure should cover: (i) the material risks (example: counterparty, market, liquidity, leverage risks) of the product, and (ii) whether they are acting as a principal or agent.
- Handling and Segregation of Customers’ Moneys and Assets. Requirements governing the treatment of moneys and assets received from customers as well as the requirements for lending, re-hypothecation and withdrawal of customers’ money and assets under Parts III and IV of the SF(LCB)R to extend to OTC Intermediaries that deal in centrally-cleared OTC derivatives contracts.
- OTC Intermediaries, when offering an individual client segregation model to customers, to disclose to customers the costs associated with and the level of protection accorded by individual client segregation vis-à-vis omnibus segregation.
- Record keeping requirements. OTC Intermediaries to maintain records in respect of their OTC derivatives transactions, including:
- Customer identification information;
- Information necessary to reconstruct the derivative transaction, including pre-execution, execution and post-trade information;
- Payments and interest received on the derivatives transaction;
- Daily value of each outstanding derivative transaction;
- Daily initial and variation margin payable or receivable;
- Daily value of all collateral held by or posted, including transfer of collateral; and
- All charges against and credits to each counterparty’s account.
|Risk Mitigating Requirements for Non-Centrally Cleared Derivatives
- Trading Relationship Documentation. OTC Intermediaries to have policies and procedures to execute written trading relationship documentation with their counterparties prior to or contemporaneously with executing a non-centrally cleared OTC derivative transaction.
- Trade Confirmation. OTC Intermediaries to execute trade confirmation for non-centrally cleared OTC derivative transactions within a specific timeframe, taking into account the status of the counterparty, as follows:
- Where the counterparty is licensed, OTC Intermediaries to execute a two-way confirmation by T+1 for trades that are executed before 4pm Singapore time; and
- For other counterparties, OTC Intermediaries to (i) provide an acknowledgement to counterparties by T+1; and (ii) have in place written policies and procedures that would facilitate, on a best effort basis, the execution of a two-way confirmation by T+2.
Trade confirmation requirements will be effected in phases.
- Portfolio Reconciliation and Dispute Reporting. OTC Intermediaries to undertake portfolio reconciliation of non-centrally cleared OTC derivative contracts with their counterparties. Reconciliation to be carried out according to prescribed frequencies (which differ depending on volume of outstanding OTC derivative contracts and type of counterparty). OTC Intermediaries to report promptly to MAS material disputes i.e. those exceeding S$25 million that remain unresolved beyond 15 business days.
- Portfolio Compression. OTC Intermediaries dealing in non-centrally cleared OTC derivative contracts to undertake portfolio compression, where appropriate.
|Capital and Financial Requirements
- OTC Intermediary to maintain a base capital of S$5 million where it is a member of a designated clearing house and S$1 million where it is not a member of a designated clearing house.
- OTC Intermediary (other than those dealing only with non-retail investors) to comply with the risk-based capital requirements under the Securities and Futures (Financial and Margin Requirements) Regulations.
|Representative Notification Framework
- Representative notification requirement to apply to persons who act as representatives for OTC Intermediaries in respect of dealing in or advising on OTC derivatives contracts.
- MAS to grandfather two groups of existing representatives:
- Persons who are currently dealing in or advising on OTC derivative contracts1 and intend to continue doing so will need to be appointed as representatives of their principal companies. Given that such representatives should have the necessary knowledge and experience, MAS will grandfather them in relation to the minimum academic qualifications and Capital Markets and Financial Advisory Services examination (CMFAS) requirements.
- Persons who are existing appointed representatives of their principal companies in respect of the current regulated activities under the SFA or Financial Advisers Act, Chapter 110 of Singapore (FAA) will not be required to comply with additional CMFAS examination requirements if there is no change to the scope of their activities (though the names of their current regulated activities may be changed to reflect the proposed new regulated activities).
|OTHER PROPOSED AMENDMENTS FOR FINANCIAL ADVISORY SERVICES
- MAS to exempt the provision of execution-related advice (ERA) in respect of listed Excluded Investment Products2 from the FAA, subject to appropriate safeguards. The dealer, when providing ERA:
- to provide the customer with a written warning at account opening that the ERA does not take into account the customer’s investment objectives, financial situation and particular needs, and highlight to the customer that it is his responsibility to ensure the suitability of the product recommended; and
- ensure that it states the rationale for the ERA provided to the customer.
|Marketing of Collective Investment Schemes
- MAS to remove the regulated activity of marketing of collective investment schemes (CIS) under the FAA and to regulate marketing of CIS as part of the regulated activity of dealing in securities under the SFA.
- MAS to expand the SFA dealing exemption for financial advisers3 to allow them to help customers transact in both listed and unlisted CIS if such dealing is incidental to their advisory activities.
- Financial advisers and their representatives relying on the SFA dealing exemption will not be required to hold a CMS license or be appointed representatives under the SFA but will be required to comply with the relevant SFA business conduct requirements for dealing in CIS (where applicable to their business model).
- Licensed fund managers (LFMCs) and registered fund management companies (RFMCs) which market CIS will be deemed to be dealing in securities under the SFA. Exemption for LFMCs from holding a CMS license for dealing in securities where such dealing is incidental to their fund management activity to be retained.
- MAS to exempt both LFMCs and RFMCs from holding a CMS license for dealing in securities when marketing CIS which are managed by the FMCs themselves or their related corporations.
For entities and their representatives already dealing in or advising on OTC derivative contracts, the MAS has proposed a one-year transitional period, from the date of effect of the new regime, for such entities to submit the relevant applications or notifications. Entities which submit the requisite applications or notifications with MAS within the transitional period will be allowed to continue with their OTC derivative activities until such time that MAS decides on the application or notification.
Please refer to the Consultation Paper for the complete set of proposals. The deadline for comments and feedback to be submitted to the MAS is July 3, 2015.
Excluding persons who are already caught under the existing regime and are currently appointed representatives, for example: for dealing in securities due to trading in equity derivatives.
These refer to Excluded Investment Products as defined in the Notice on Recommendations on Investment Products (FAA-N16), which are listed for quotation or quoted on a securities exchange, overseas securities exchange or recognized market operator. These will include listed collective investment schemes such as exchange-traded funds that meet the EIP definition.
Financial advisers refer to licensed financial advisers and exempt financial advisers under section 23(1)(a), (b), (c), (d) or (e) of the FAA.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
Investment Funds, Advisers and Derivatives
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