6 June, 2018
The Monetary Authority of Singapore (“MAS”) has issued a consultation paper on 22 May 2018, inviting comments on a proposed new Notice on Listing, De-listing or Trading of Relevant Products on an Organised Market of an Approved Exchange or a Recognised Market Operator Incorporated in Singapore (“Notice”). The Notice sets out the notification regime for the launch of new derivatives products by market operators on exchanges or centralised trading facilities (the “product notification regime”). The product notification regime would replace the existing approval regime, following the enactment of the Securities and Futures (Amendment) Act 2017 (“SF(A) Act”) on 9 January 2017. This update outlines the key proposals and the policy rationale behind the product notification regime.
Replacement of Approval Requirements for Listing and De-listing Derivatives Products
Currently, under the Securities and Futures Act (“SFA”), approved exchanges and locally-incorporated recognised market operators (collectively, “Relevant Entities”) are obliged to obtain MAS’s approval whenever they list or de-list derivatives products. Approval may be granted by MAS on a product-by-product basis, subject to any conditions or restrictions imposed by MAS.
Having recognised the need for a more flexible approach to the regulation of position limits and products offered by market operators, MAS is proposing to replace the existing approval requirements with a notification framework. MAS noted that the shift to a product notification regime is in line with international norms, and that similar product notification regimes have been implemented by regulators in jurisdictions such as the United States, Australia and Japan.
Obligations of Market Operators under the Product Notification Regime
I. Product Listing Requirements
Under the new notification framework, MAS has proposed that Relevant Entities may list new derivatives products provided that they have self-certified that: (i) the derivatives products to be traded meet the criteria and requirements set out by MAS; and (ii) all relevant risks have been adequately addressed. As part of the self- certification process, MAS is proposing that Relevant Entities address the following key risks:
(a) disorderly trading that may be brought about by a sharp change in prices;
(b) persons acquiring significant amounts of the product which facilitates the ability of those persons to gain from market manipulation;
(c) daily settlement prices and final settlement prices that will be subject to manipulation;
(d) final settlement price of the product will not converge to its underlying;
(e) underlying products with physical delivery will not be delivered in a safe, reliable and timely manner;
(f) legal risks surrounding the listing of the product;
(g) operational risks surrounding the listing of the product; and
(h) reputational risks associated with the listing of the product.
As an ongoing obligation, Relevant Entities are also required to regularly assess the product risks and mitigation measures taken throughout the lifetime of the product. In relation to this, MAS has proposed that Relevant Entities be required to carry out an annual self-certification that they continue to have the appropriate controls and governance procedures to manage and control risks pertaining to its listed products.
II. Prior Notification of Intended Listing
MAS has proposed that Relevant Entities provide notification to MAS of an intended listing, at least one week prior to the product launch announcement, and the intended date of listing, to the public or to their members, whichever is earlier. Such notification should be accompanied by a self-certification (signed by the CEO of the Relevant Entity or any appropriate member of senior management that the CEO delegates his authority to), that all the key risks abovementioned have been addressed.
To ensure that the Relevant Entity’s assessment of the product remains current, MAS has proposed that the notification shall lapse in the event the Relevant Entity fails to launch the product within 12 weeks from the date of notification. In such an event, the Relevant Entity will be required to submit to MAS a fresh notification accompanied by an updated self-certification for the product launch.
MAS has also proposed a requirement for Relevant Entities to consult their members prior to the launch of any new products. In addition, Relevant Entities are also encouraged to engage MAS early, to clarify any doubts regarding the self-certification required, if the product they are intending to list has innovative or novel features.
III. Governance Procedures and Controls
MAS has emphasised that the shift from an approval regime to a notification regime will not compromise MAS’s regulatory standards. MAS has said that it will maintain supervision of Relevant Entities by:
(a) exercising its powers to take supervisory actions if it has concerns with the Relevant Entities’ ability to self- certify to the standards expected by MAS, including imposing higher supervisory capital, requiring independent audit on specific processes, prohibiting the listing of new products and disallowing the product from trading;
(b) assessing whether Relevant Entities have the appropriate controls and governance procedures to manage and control risks pertaining to new product launches and ongoing trading of listed products; and
(c) performing ex-post periodic reviews of selected products, particularly those that are deemed to be more novel or innovative to ensure that self-certification is performed properly.
MAS is also empowered to take supervisory and regulatory actions (such as warnings, and in severe cases, prosecution for furnishing false information), where a Relevant Entity is found to have misrepresented its self- certification as part of the notification process.
IV. Prior Notification of Intended De-listing
MAS has proposed that Relevant Entities be required to notify MAS prior to the de-listing of certain products. Relevant Entities will be allowed to de-list such products, subject to the following criteria being met:
(a) there is no open interest or outstanding investor positions remaining in the product;
(b) the de-listing will not cause any disruption to any other market; and
(c) the de-listing does not cause a breach of any legal obligations.
Conclusion
The product notification regime places frontline responsibility on Relevant Entities, which are closer to the market, to ensure that the risks relating to the listing, de-listing or trading of products listed on their markets are well-managed. The product notification regime, when implemented, will also benefit the industry by reducing the time-to-market for new launches, allowing market operators better control in managing their product pipelines, as well as greater flexibility to choose between different business models with regulatory requirements and compliance costs that are commensurate with their investor reach.
The consultation runs until 22 June 2018. MAS has yet to provide an implementation timeline for the product notification regime. A copy of the consultation paper is available here.
