18 May, 2017
The Monetary Authority of Singapore (“MAS”) has issued a consultation paper inviting comments on proposed new regulations that implement some of the key changes to the regulatory framework of the Securities and Futures Act (“SFA”), following the passage of the Securities and Futures (Amendment) Act 2017 (“SFAA”) on 9 January 2017.
The proposals in the present consultation paper (which will likely be the first in a series) cover the following:
- revised regulations in relation to MAS regulation of markets under Part II of the SFA, which will be re-enacted pursuant to the SFAA;
- new regulations to implement the new framework for regulation of financial benchmarks under the new Part VIAA (to be introduced via the SFAA) of the SFA; and
- amendments to the existing Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (“SFCISR”)
Revised Regulations under the re-anacted Part II of the SFA
The SFAA will repeal and re-enact Part II of the SFA to impose certain new obligations and to modify certain existing obligations of approved exchanges and recognised market operators.
The revised regulations now released for public comments (to be found at Annex B to the consultation paper) feature the following:
(a) Embedding admission requirements into regulations
The revised regulations will stipulate the minimal base capital requirements for entities seeking admission as an approved exchange (“AE”) or as a recognised market operator (“RMO”) at S$10 million and S$500,000 respectively. These requirements are already existing but are presently imposed administratively through conditions on approval or recognition.
In the interest of transparency, the revised regulations will also set out the key admission criteria against which applications for AE or RMO status would be assessed by MAS. This would include consideration of:
- whether the applicant has an established track record of at least 5 years;
- whether the key officers and directors of the applicant have sufficient relevant experience; and
- how the applicant intends to comply with its statutory obligations (for instance, by assessing the applicant’s risk management policies and procedures and the sufficiency of its financial, human and system resources).
(b) Ongoing compliance obligations of AEs and RMOs
As is presently the case, the revised regulations will set out, in Parts III and IV respectively, various ongoing compliance obligations for AEs and for RMOs, including requirements to submit periodic reports, to have in place an appropriate business continuity plan, to maintain the security and integrity of user information, etc.
MAS is also proposing to formalise, within the revised regulations, requirements for market operators (AEs or RMOs) to have in place measures that ensure that:
- bids and offers are handled on a fair and objective basis that take into account the interest of market participants; and
- the execution, by its members, of customer orders are in the interest of the customer (for example, in the form of disclosure of post-trade data on executed transactions so as to enable customers and other intermediaries to assess matching outcomes).
With the extension of Part II of the SFA to include organised markets for the trading of OTC derivatives, MAS has also taken the opportunity to reiterate, within the present consultation paper, that a distinction must be drawn between a market intermediary and a market operator, and that the re-enacted Part II of the SFA will only apply to the latter.
In determining whether the operator of a facility in relation to OTC derivatives is acting as an intermediary or as a market operator, MAS said it would take into account the manner in which buyers and sellers are brought together. In particular, MAS noted that operators can provide different forms of voice-assisted trading facilities, such as (a) an electronic screen that aids voice-assisted functions, (b) a voice-assisted facility that brokers transactions in derivatives that can already be traded on a traditional exchange, and (c) a facility that operates as the only available platform for the trading of certain types of OTC derivatives.
MAS stated that it would not consider an entity that engages with customers to broker “block futures” or “negotiated large trades” (for the purposes of registering such trades on an established organised market operated by an AE or RMO) to be a market operator for the trading of OTC derivatives. This would be so whether the brokering activity is done by voice or by electronic means. By contrast, where an entity operates a facility that matches trades in derivatives that are not traded on a traditional exchange, it will be regarded as operating an organised market and thus be within the scope of Part II of the SFA. Again, this would be so whether or not the facility operates by voice, or by electronic, means. In this regard, MAS specifically gave the example of non- deliverable currency forwards that are not traded on any AE or RMO.
In relation to transitional arrangements, MAS has proposed within the present consultation paper that from the time the changes to Part II of the SFA takes effect (“T”), an entity will be given until T+3 months to assess whether it comes under the scope of the re-enacted Part II as a market operator and to decide whether to apply to MAS for AE or RMO status. Upon deciding to apply, it must notify MAS within the same period of T+3 months, although it will be given a further 9 months to prepare and submit its application to MAS. Thus, the application to MAS must be received by T+12 months. Pending a decision on the application, the entity will be permitted to carry on its business as usual. An entity within the scope of the re-enacted Part II of the SFA, but which decides against applying for AE or RMO status, will have to cease operations within T+12 months.
New Securities and Futures (Financial Benchmarks) Regulations
The regulations proposed to be issued under the new Part VIAA of the SFA will supplement the basic regulatory framework for MAS regulation of the benchmark setting function.
Financial benchmarks that come within Part VIAA of the SFA will be designated by MAS by order in the Gazette and the financial benchmarks that will initially come under the new framework will be the Singapore Interbank Offer Rate (“SIBOR”) and the Singapore Swap Offer Rate (“SOR”).
Under Part VIAA of the SFA, a person who carries on the business of administering a designated benchmark will be required to be authorised by MAS (unless the person qualifies for exemption).
Part VIAA of the SFA also regulates the provision of information in relation to a designated benchmark. Thus, a person is not permitted to engage in the business or activity of providing information in relation to a designated benchmark unless the person is authorised or designated as a benchmark submitter. The authorisation process is for persons who seek to take on the role of providing information in relation to a designated benchmark, while the designation process enables MAS to impose the role on certain persons.
The proposed regulations now released for public comments (to be found in Annex C of the present consultation paper) will set out:
- the criteria for a person to qualify for authorisation as a benchmark administrator; and
- the ongoing compliance obligations of authorised and exempt benchmark administrators.
In relation to ongoing compliance obligations, the proposed regulations will notably require every benchmark administrator to establish an Oversight Committee that will be responsible for the maintenance and governance of each designated benchmark which it administers, including the overall design of the designated benchmark, and the adequacy of the code on that designated benchmark (required under the new section 123O of the SFA).
The proposal in the present consultation paper is that one-third of the membership of the Oversight Committee should comprise of individuals who are independent of the benchmark administrator and of the benchmark submitters in respect of that designated benchmark, and MAS approval is required for the appointment of an individual to the Oversight Committee. All members of the Oversight Committee will also need to meet the MAS Fit and Proper Criteria.
The proposed regulations will also require that the submission and administration processes for a designated benchmark shall be subject to independent external audit. An audit will be required to be conducted annually and the external auditor appointed to carry out such an audit will have to be approved by the Oversight Committee.
In relation to transitional arrangements, MAS has indicated that in order to avoid disruption to the existing processes for the setting of the SIBOR and SOR benchmarks, a period of up to 6 months from the commencement of the regulatory regime will be given to benchmark administrators and submitters to put in applications to MAS, and that they will be permitted to continue with operations until such time as a decision is made on their applications.
Amendments to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005
MAS is also consulting on various changes proposed to the SFCISR, some arising from changes to the SFA made by the SFAA.
MAS is proposing to include, within the SFCISR, additional factors which it may take into account when deciding whether to recognise a foreign fund which is looking to offer units to retail investors here. These factors are:
- the investment policy of the fund;
- the fund’s constituent documents;
- the oversight of the fund provided by the trustee or other equivalent oversight body; and
- whether the above factors (taken individually or collectively) would accord to investors a level of protection that is equivalent to that accorded by authorised schemes.
In relation to physical asset funds that are only offered to accredited investors and institutional investors, in February 2015, MAS had consulted on a proposed class exemption for such funds.
In the present consultation paper, MAS is not consulting on the conditions to be satisfied by such a fund before it would be exempt from the fund authorisation and prospectus requirements of the SFA.
Drawing a parallel with the current requirements for restricted schemes, MAS is proposing that a physical asset fund that is offered only to accredited investors should lodge with MAS a copy of its information memorandum and to make an annual declaration on the CISNet Portal. However, physical asset funds will not be required to be entered into the list of Restricted Schemes maintained by MAS on CISNet. The information memorandum for such a fund must however include a disclosure statement that (a) the fund is exempt and has not been entered into the list of Restricted Schemes maintained by MAS; and (b) that MAS has not approved the fund or its manager in respect of the management of the fund.
MAS is also consulting on a few proposed amendments to the SFCISR that do not arise from changes to the SFA.
Responding to requests for clarifications coming from the industry, MAS is proposing to amend regulation 25(7) and paragraph 51 of the Third Schedule of the SFCISR to clarify that the rule against inclusion of past performance information based on simulated results of a hypothetical fund does not prevent the publication of pro forma past financial information.
Currently, in order for a collective investment scheme to qualify for notification as a restricted scheme, paragraph 3(1)(a)(i) of the Sixth Schedule to the SFCISR requires the manager to be licensed or regulated as a fund manager in its principal place of business. However, in Singapore, a manager of a REIT would not strictly meet this criteria since a REIT management licence is distinct from a fund management licence under the SFA. So far, MAS has been allowing restricted schemes that are in the form of REITS to be notified on a case-by-case basis, but it is now proposing to amend the SFCISR to clarify and reflect its true policy intent of ensuring that a restricted scheme’s manager is competent and properly regulated.
Further Consultations Expected in Relation to Other Parts of the SFAA
In the present consultation paper, MAS has also indicated that the amendments to the SFA effected by the SFAA will be operationalised in 2018. A second phase of consultations can be expected to address the other aspects of the SFAA.
Consultation Period
The consultation for the present consultation paper closes on 2 June 2017. A copy of the consultation paper can be assessed here.
