9 May, 2018
On 2 May 2018, the Monetary Authority of Singapore ("MAS") published the Response to Feedback Received on Draft Regulations for Mandatory Clearing of Derivatives Contracts (the "MAS Response") as well as the final Securities and Futures (Clearing of Derivatives Contracts) Regulations 2018 (the "Clearing Regulations 2018").
The MAS also issued a press release indicating that the clearing obligation will commence from 1 October 2018.
We discuss below the key features of the Clearing Regulations 2018.
Who are caught? Only banks above the S$20 billion threshold.
Under Section 129C of the Securities and Futures Act (Chapter 289) (the "SFA"), every specified person who is a party to a specified derivatives contract is subject to the clearing obligation.
The term "specified person" is defined in Section 129B of the SFA to include banks, merchant banks, finance companies, insurers, approved trustees and holders of a capital markets services licence.
However, Regulation 5 of the Clearing Regulations 2018 exempts all specified persons except for banks above the S$20 billion threshold.
What is the S$20 billion threshold?
The S$20 billion threshold refers to the aggregate outstanding notional amount of all OTC derivative transactions entered into by the bank which are booked in Singapore, tested as at the last day of the most recently completed quarter and as at the last day of the 3 immediately preceding quarters.
MAS has indicated that it will not be publishing a list of entities that are subject to the clearing obligation. It is of the view that banks trading the relevant transactions should presume that such products are to be cleared and should voluntarily clear these products even if they fall below the threshold. If a bank does not intend to clear the product, it should confirm to its counterparty that it is not subject to the clearing obligation (i.e. below the S$20 billion threshold).
What needs to be cleared? Only SGD and USD fixed-floating IRS.
The "specified derivatives contracts" that are subject to the clearing obligation in Singapore are as follows:
- SGD fixed-floating interest rate swaps referencing SOR with a tenor of 28 days to 10 years, a constant notional and no optionality.
- USD fixed-floating interest rate swaps referencing LIBOR with a tenor of 28 days to 10 years, a constant notional and no optionality.
Consistent with the clearing commencement date, only transactions entered into on or after 1 October 2018will be considered "specified derivatives contracts". Accordingly, no backloading requirements will be imposed.
Other products such EUR, GBP and JPY interest rate swaps will be re-assessed by the MAS at a later stage.
Nexus requirement
The Singapore clearing rules also impose a nexus requirement – only transactions booked in Singapore by both parties are subject to the clearing obligation.
By when do I need to clear? T+1
The relevant transaction will have to be cleared within one business day after the day on which it was entered into.
Exemptions
The Clearing Regulations 2018 introduced a number of exemptions from the clearing obligation:
- intragroup transactions;
- public bodies (not being "specified persons" in the first place); and
- transactions entered into or amended as a result of a multilateral portfolio compression cycle, subject to certain prescribed conditions.
Packaged transactions are not exempt, i.e. if the individual transaction in the package is an interest rate swap subject to the clearing obligation, it will be subject to the clearing obligation.
On the other hand, a single complex transaction, whose economic components include an interest rate swap subject to the clearing obligation, will not be considered a "specified derivatives contract" subject to the clearing obligation.
Record keeping
The Clearing Regulations 2018 also impose certain record keeping obligations on specified persons. These record keeping obligations are similar to those contained in the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013.
They require every specified person to ensure that all relevant books, and all transaction information and other information are kept for at least 5 years after the expiry or termination of the relevant contract, agreement or transaction.
For further information, please contact:
Kai Loon Loh, Ashurst
kailoon.loh@ashurst-adtlaw.com
