MAS approves third derivatives exchange
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Read other articles in this issue. Download full PDF of this issue. Search for more Derivatives Insights. Sincein line with its commitment to the G20 and Financial Stability Board " FSB " reform objectives, the Monetary Authority of Singapore the " MAS " has undertaken a comprehensive review of the Securities and Futures Act the " SFA " and related subsidiary regulations to ensure that the domestic laws remain current in light of recent market and international developments.
To date, the MAS has focused its reform policy on mitigating systemic risk, strengthening its enforcement regime and enhancing the transparency of over-the-counter " OTC " derivatives activity in Singapore. In the wake of the global financial crisis, the MAS announced in July its plans to make several legislative amendments to regulate OTC derivatives in Singapore reflecting its commitment to the G20 and FSB reform objectives to strengthen trading futures and options contracts mas international financial regulatory system.
After the SF A Act came into effect, the MAS published further Consultation Papers with regards to proposed legislative amendments that reflected the broad scope of the policy reform and to ensure that the SFA remains current in view of market and international developments.
This article 1 provides a review of the current reporting and clearing obligations under trading futures and options contracts mas SFA as amended by the SF A Act and 2 considers anticipated changes in relation to the reporting and trading futures and options contracts mas of OTC derivatives in Singapore. Pursuant to Part VIA, the mandatory reporting requirement trading futures and options contracts mas to each "specified person" trading futures and options contracts mas is a party to a "specified derivatives contract"61 unless such specified person is exempted.
The reporting obligations also apply to specified persons acting as agents in a specified derivatives contract. At present, a "specified derivatives contract" refers to any interest rate derivatives contract, credit derivatives contract or foreign exchange derivatives contract excluding various spot transactions as specified in regulation 2 under "excluded currency contract"that is traded or booked in Trading futures and options contracts mas.
The current state of reform in relation to mandatory clearing has not yet been finalised as subsidiary regulations to give effect to the policies under the new Part VIB Clearing of Derivatives Contracts of the SFA have not yet been issued. A "specified person" who is a party to a specified derivatives contract shall cause the specified derivatives contract to be cleared through an approved clearing trading futures and options contracts mas or a recognised clearing house.
In relation to commodity derivatives contracts, the MAS proposed that all forwards, swaps and options related to commodities or commodity indices, or contracts with cash flows determined by reference to one or more commodities be subject to the reporting obligations under the SFA. However, physically-settled commodity derivatives contracts entered into for commercial purposes and certain commodity sale and purchase agreements which contain some form of optionality entered into for commercial purposes and intended for physical settlement, may be excluded.
In relation to equity derivatives contracts, the MAS has proposed to subject securities-based derivatives such as equity derivatives contracts to reporting requirements but exclude exchange-traded equity derivatives contracts in line with the current approach to exclude exchange-traded products.
For the purposes of the reporting regulations, the MAS also proposed that "equity derivatives contracts" be defined as: It is not clear whether this definition would capture other certificates or structured notes linked to securities. After a survey was conducted, the MAS considered that the aggregate gross notional amount of OTC derivatives transactions offered a better measure of the potential systemic risk posed by financial institutions to the market as compared with the amount of managed assets.
As approved trustees " ATs " and licensed trust companies " LTCs " largely perform administrative roles and do not make investment decisions, the MAS has proposed to exempt both ATs and LTCs from the reporting requirements irrespective of the value of managed assets held.
After its review, the MAS considered that derivatives contracts transacted with retail investors are unlike to pose significant risk to the overall financial system as the exposure of all such transactions are relatively low. Accordingly, the MAS has proposed to exclude derivatives transactions where counterparties are retail investors i. In determining the trading futures and options contracts mas of the "specified derivatives contracts" to be cleared, a key consideration for trading futures and options contracts mas MAS is the level of systemic risk that any particular class of contract poses to the financial system.
It is anticipated that at a minimum, Singapore Dollar fixed-to-floating swaps based on the Swap Offer Rate and US Dollar fixed-to-floating swaps based on the London Interbank Offered Rate will be trading futures and options contracts mas to clearing obligations from commencement.
The MAS is still considering whether IRS denominated in Euro, Pound Sterling and Japanese Yen should also be subjected to the same clearing obligations from commencement as these transactions comprise a significant portion of trades booked in Singapore. Therefore, it is anticipated that at commencement, a "specified person" for the purposes of the mandatory clearing obligations will only be limited to banks that exceed the relevant threshold with exemptions applying to public bodies such as central banks, governments and international multilateral organisations e.
The MAS has also proposed that intra-group transactions be exempted from the scope of clearing obligations as such transactions do not transfer risks in or out of a corporate group. These issues have been posed to the public for comment. The Fourth Schedule of the SF RDC R provides that such exempted persons include the Government, any statutory board, any central bank, any central government, any non-commercial agency of a central government and any of the listed multilateral agencies, organisations or entities in the Fourth Schedule.
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