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Asia Pacific OTC regulatory initiatives
James Atkinson
Of Counsel
Financial Services Team
Norton Rose (Asia) LLP
April 2013
Topics
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2
Key issues for Asia Pacific region
Regional implementation overview
Cross border case study
Singapore implementation process
IE Singapore briefing
Key issues for Asia Pacific Region
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Is global model for OTC regulatory reform a good fit with local
markets in Asia Pac regions? E.g. trading mandate
Volumes and liquidity small fraction of US and EU markets – are
implementation costs commensurate with risk?
Possible tension between interests of local and international
market participants
Objectives of local supervisors – mandatory clearing through
domestic CCPs (especially local currency products) or through
offshore CCPs?
Does market scale make local CCPs viable and secure?
Will local CCPs be IOSCO-compliant to achieve favourable capital
treatment for cleared trades?
Risk of netting fragmentation and market segmentation
Scope of extra-territorial effect of Dodd Frank/EMIR
IE Singapore briefing
Regional implementation overview
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Japan
– Japan Securities Clearing Corporation (JSCC)
– Mandatory clearing of JPY IRS by domestic banks already in force
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India
– Clearing Corporation of India Limited (CCIL)
– Mandatory clearing of FX transactions end-2013
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Singapore
– SGX Asia Clear
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Hong Kong
– Hong Kong Exchanges and Clearing (HKEx)
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Korea
– Korea Exchange (KRX)
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Australia
– Australian Securities Exchange (ASX)
4
IE Singapore briefing
Cross border case study
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Requirement in Japan for JPY CDS to be cleared with JSCC
cf JPY IRS – option to clear through JSCC or foreign CCP
For trades between US and Japanese CPs either JSCC needs to
register as DCO (application filed but no timeline for completion)
or CFTC needs to recognise Japanese regulatory framework
Are requirements for DCO registration compatible with needs of
local market?
Long process for recognition of foreign CCP under EMIR
– 15 July target for ESMA report of regulatory equivalence of Singapore regime
– ESMA agrees memorandum of understanding with MAS
– SGX submits application for recognition to ESMA
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5
Separate process for reciprocal recognition by MAS of EU regime
IE Singapore briefing
Singapore framework - timeline
13 February 2012
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MAS Consultation Paper on Proposed Regulation of OTC Derivatives
MAS Consultation Paper on Transfer of Regulatory Oversight of Commodity Derivatives
from IE to MA
23 May 2012
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Consultation Paper (1) on Proposed Amendments to the Securities and Futures Act on
Regulation of OTC Derivatives
Response to Consultation on Policy Reforms on Regulation of OTC Derivatives
3 August 2012
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Consultation Paper (2) on Proposed Amendments to the Securities and Futures Act on
Regulation of OTC Derivatives
Response to Consultation on Policy Reforms on Regulation of OTC Derivatives Part 2
15 November 2012
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Securities and Futures (Amendment) Bill passed by Parliament
10 January 2013
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Draft of first implementing regulations published with further regulations to follow
Mid-2014?
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Implementation of new OTC regime following conclusion of public consultation process
IE Singapore briefing
Singapore framework – amended SFA
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Securities and Futures (Amendment) Act passed 15 Nov 2013
Introduces new regulation for both wholesale and retail derivatives
markets in light of experience during GFC
New Part IIA - introduces new regulatory regime for trade
depositories
New Part III - extends current regime for clearing facilities to OTC
derivatives
New Part VIA - introduces mandatory reporting
New Part VIB - introduces mandatory clearing
IE Singapore briefing
Singapore framework – amended SFA
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Transfer of regulation of commodity derivatives from IE Singapore
Board (under Commodity Trading Act) to MAS (under amended
SFA)
– Feb 2012 Consultation Paper – MAS states “derivatives contracts” will
encompass OTC commodity derivatives (plus credit, equities, FX and rates)
– Feb 2012 Consultation Paper on Transfer – MAS proposes to retain the power
to bring intangible commodities into the ambit of SFA if necessary
– Feb 2012 Consultation Paper on Transfer – MAS proposes to exclude
physically settled commodity forward contracts from the scope of regulation
under SFA
– No specific wording in SFA but new definition in s.3 SFAA, once regulation
made under s.341 SFA
8
IE Singapore briefing
Singapore framework – amended SFA
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Part IIA – Trade Repositories
Under s.6 SFAA new Part IIA is inserted after s.46 SFA
Division 1 (ss.46C-46H) - licensing process for trade repositories
(TRs)
– Singapore TR may apply for a trade repository license (to become licensed
trade repository) (LTR)
– Foreign TR may apply for a foreign trade repository license (to become licensed
foreign trade repository) (LFTR)
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Division 2 (ss.46I-46ZA) – regulation of LTRs
– Outlines general obligations, business rules, matters requiring MAS approval –
further detail in implementing regulations
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Division 3 (ss.46ZB-46ZI) – regulation of LFTRs
Division 4 (ss.46ZJ-46ZL) – general powers of Authority (i.e. MAS)
– S. 46ZJ – power to make implementing regulations for purposes of Part IIA
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IE Singapore briefing
Singapore framework – amended SFA
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Part III – Clearing Facilities
Under s.7 SFAA previous Part III is repealed and new Part III
substituted (after s.46ZL SFA)
Division 1 (ss.49-56) – establishment of clearing facilities
– Singapore corporation may either apply for approval as approved clearing
house (ACH) or recognition as recognised clearing house (RCH)
– Foreign corporation may only apply for recognition as RCH
– Two-tier approach:
– systemically important Singapore clearing facilities (all CCPs) to be regulated
as ACHs under equally rigorous standards as designated clearing houses
under previous regime
– other Singapore clearing facilities and foreign clearing facilities (including
CCPs) to be regulated as RCHs
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Division 2 (ss.57-74) – regulation of ACHs
– Outlines general obligations, business rules, matters requiring MAS approval –
further detail in implementing regulations
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Division 3 (ss.75-81A) – regulation of RCH
10 IE Singapore briefing
Singapore framework – amended SFA
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Part III – Clearing Facilities
Division 4 (ss.81B-81O) – insolvency
– Key provision – for clearing, porting etc. to work proceedings of clearing house
must take precedence over law of insolvency:
– s.81C - list of contracts, transactions, proceedings and dispositions that will
survive insolvency
– s81L – Singapore court will not enforce order of a foreign court that Singapore
court would be prohibited from making under amended SFA
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Division 5 (ss.81P-81SB) – general powers of authority
– S. 81Q – power to make implementing regulations for purposes of Part III
11 IE Singapore briefing
Singapore framework – amended SFA
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Part VIA – Reporting of Derivatives Contracts
S.125 – the reporting mandate
– “Every specified person who is a party to a specified derivatives contract shall,
at such times and in such form or manner as the Authority may prescribe by
regulations made under section 129, report to a licensed trade repository or
licensed foreign trade repository:
– such information on the specified derivatives contract as the Authority may
prescribe by those regulations; and
– any amendment, modification, variation or change to the information referred
to in paragraph (a).”
12 IE Singapore briefing
Singapore framework – amended SFA
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Part VIA – Reporting of Derivatives Contracts
Specified derivatives contract – scope of product
– To be prescribed by regulations under s.129
– Feb 2012 Consultation Paper – MAS states derivatives across all asset classes
eventually to become reportable but priority to be given based on: (1)
significance of product/asset class in Singapore OTC markets; (2) significance
of Singapore trading of product/asset class in global OTC markets; and (3)
international developments in OTC derivatives reporting
– Plan to initially prioritise interest rate derivatives, FX derivatives and oil
derivatives but MAS notes in Aug 2012 Response to Feedback Received that
requests received for oil derivatives to be excluded from 1st phase – many
participants in market are commodity firms unfamiliar with reporting
requirements and lacking necessary infrastructure. MAS response that it would
provide for transition period and take into account particular factors cited by
participants
13 IE Singapore briefing
Singapore framework – amended SFA
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Part VIA – Reporting of Derivatives Contracts
Specified derivatives contract – scope of contract
– To be prescribed by regulations under s.129
– Feb 2012 Consultation Paper – MAS proposes all contracts subject to reporting
mandate booked or traded in Singapore will be reportable to eligible TR
– MAS will obtain data from TRs in collaboration with other regulators on other
relevant trades e.g. SGD denominated trades or trades referencing Singapore
entity
– Aug 2012 Response to Feedback Received – MAS notes comments that trades
could be reportable twice – in jurisdiction where they are booked and
jurisdiction where they are traded – not necessarily a problem (c.f. clearing) –
MAS will align reporting obligations with other jurisdictions where applicable
14 IE Singapore briefing
Singapore framework – amended SFA
• Part VIA – Reporting of Derivatives Contracts
• Specified person – scope of entity
– To be clarified by regulations under s.129 in relation to non-FIs
– All FIs (e.g. banks, insurers etc.) will be specified persons
– Feb 2012 Consultation Paper – MAS proposes all non-FIs (persons resident or
with presence in Singapore not regulated by MAS) above a certain threshold (to
be prescribed) based on asset size will be specified persons
– Aug 2012 Response to Feedback Received – MAS confirmed that trades
between FI and non-FI below reporting threshold would be reportable but only
by FI
– No exemption for intra-group trades or trades conducted for hedging purposes
15 IE Singapore briefing
Singapore framework – amended SFA
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Part VIA – Reporting of Derivatives Contracts
S.126 - power of authority to obtain information
S.127 - alternative reporting arrangements
S.128 – compliance with laws and practices of relevant reporting
jurisdiction
– Substituted compliance possible where MAS recognises reporting rules of
“relevant reporting jurisdiction”
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S.129 – power of authority to make regulations
16 IE Singapore briefing
Singapore framework – amended SFA
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Part VIB – Clearing of Derivatives Contracts
S.129C(1) – the clearing mandate
– “Every specified person who is a party to a specified derivatives contract shall,
within such times as the Authority may prescribe by regulations made under
section 129G, cause the specified derivatives contract to undergo clearing, by a
clearing facility operated by an approved clearing house or recognised clearing
house as the case may be.”
17 IE Singapore briefing
Singapore framework – amended SFA
• Part VIB – Clearing of Derivatives Contracts
• Specified derivatives contract – scope of product
– To be prescribed by regulations under s.129G
– Feb 2012 Consultation Paper – MAS recognises that not all products will be
suitable for mandatory clearing e.g. if insufficiently standardised or liquid
– MAS proposes to adopt both bottom-up (CCP decides which products to clear
and applies for regulatory approval) and top-down (regulator decides which
products should be cleared) approaches and apply similar criteria to US and
EU
– MAS propose to exempt deliverable FX forwards and swaps (again in line with
US and EU) – no proposal to exempt NDFs
18 IE Singapore briefing
Singapore framework – amended SFA
• Part VIB – Reporting of Derivatives Contracts
• Specified derivatives contract – scope of contract
– To be prescribed by regulations under s.129G
– Feb 2012 Consultation Paper – MAS proposes all contracts subject to clearing
mandate where at least one leg of contract is booked in Singapore and either:
– Both parties to contract are resident or have Singapore presence and are
subject to clearing mandate (i.e. are specified persons); or
– One party to contract is resident or has Singapore presence and is subject to
clearing mandate and other party would have been subject if resident or had
Singapore presence
– Proposed anti-avoidance provision may catch trades between parties where
neither is resident or has Singapore presence
– Aug 2012 Response to Feedback Received – MAS notes concerns over
possible overlapping/conflicting obligations across different jurisdictions for
cross border trades and proposes equivalency approach in response.
Singapore counterparty entering derivatives contract with foreign counterparty
located in jurisdiction MAS considers to have equivalent safeguards deemed to
satisfy Singapore clearing mandate if satisfies foreign clearing mandate
19 IE Singapore briefing
Singapore framework – amended SFA
• Part VIB – Reporting of Derivatives Contracts
• Specified person – scope of entity
– To be clarified by regulations under s.129G in relation to both FIs and non-FIs
– All FIs and non-FIs above a certain threshold (to be prescribed) will be
specified persons:
– Threshold for FIs calculated based on minimal derivatives exposure in
aggregate and by asset class
– Threshold for non-FIs calculated based on: (1) size of total assets; and (2)
size of derivatives exposure in aggregate and by asset class – excluding
hedging transactions qualifying for hedging treatment under Singapore
Financial Reporting Standards (or other internationally accepted standards)
– Proposed clearing exemptions for public bodies (e.g. central banks and
governments) and intra-group trades (but subject to collateralisation
requirement)
– Aug 2012 Response to Feedback Received – MAS noted comments that
thresholds should be reviewed periodically and highlighted operational
challenges in computing exposures. MAS said it would consult further on the
proposed clearing thresholds.
20 IE Singapore briefing
Singapore framework – amended SFA
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Licensing – requirement for “intermediaries” in derivatives market
to hold capital markets services licence set out in Feb 2012
Consultation Paper
Intended to cover non-bank intermediaries dealing in derivatives
contracts where underlying is equity, interest rate, FX, credit or
commodity
No implementing provisions in SFAA so currently unclear as to:
– Scope of “dealing”
– Scope of proposed End-user exemption – indicates parties not in business of
market making or providing intermediating function (e.g. clearing or broking
trades for client
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Regulations awaited in order to clarify position
21 IE Singapore briefing
Singapore implementation
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Summary of key issues for end users in Singapore
– Which derivatives will be included in 1st phase of implementation of clearing
and reporting mandates (i.e. be prescribed as “specified contracts”?)
– Where will thresholds be set for determining whether trader is specified person
for purposes of clearing and reporting mandates?
– How will anti-avoidance provisions work in practice re contracts not otherwise
caught by clearing mandate?
– Will trader fall within or outside scope of regulations applicable to capital
markets intermediaries (requiring non-bank intermediaries dealing in derivatives
contracts to hold capital markets services licence under SFA) – end-user
exemption for persons involved in markets only as price-takers, not pricemakers and not performing intermediating function
22 IE Singapore briefing
Disclaimer
The purpose of this presentation is to provide information as to
developments in the law. It does not contain a full analysis of the law nor
does it constitute an opinion of Norton Rose LLP on the points of law
discussed.
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consultant of, in or to any constituent part of Norton Rose Group (whether
or not such individual is described as a “partner”) accepts or assumes
responsibility, or has any liability, to any person in respect of this
presentation. Any reference to a partner or director is to a member,
employee or consultant with equivalent standing and qualifications of, as
the case may be, Norton Rose LLP or Norton Rose Australia or Norton
Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys
Reitz Inc) or of one of their respective affiliates.
23 IE Singapore briefing