30 October, 2017
Introduction
The Securities and Futures (Amendment) Act (SF(A) Act)1 was passed by Parliament on 9 January 2017, introducing wide-ranging amendments to the Securities and Futures Act, Cap 289 (SFA) proposed by MAS over last five years over multiple series of consultation papers2. The SFA amendments will come into effect in 2018. Following the passing of the SF(A) Act, MAS had issued two series of consultation paper on draft regulations to implement the SFA amendments3.
In further preparation for the proposed SFA amendments, MAS has, on 6 October 2017, issued a consultation paper on draft notices and guidelines to implement some of the amendments that will be introduced under the SFA (Consultation Paper)4. MAS has indicated that this is the first of the two series of consultation on draft notices and guidelines to be issued in connection with the SFA amendments.
The proposals set out in the latest Consultation Paper are summarized below. MAS is seeking public feedback on the proposals. The consultation period will end on 3 November 2017.
(1) Risk disclosures for trading in contracts for differences
MAS had previously proposed to require capital markets services (CMS) licensees and exempt financial institutions (EFIs) to provide a risk fact sheet when dealing in contracts for differences (CFDs) with retail investors5.
MAS proposes a new Notice on Risk Fact Sheet for Contracts for Differences (CFD Notice) and Guidelines to Mas Notice on Risk Fact Sheet for Contracts for Differences (CFD Guidelines). Under the CFD Notice, CMS licence holders and EFIs are required to furnish retail customers with a risk fact sheet and obtain a written and signed acknowledgement from customers confirming that they have received and understood the nature of the risk fact sheet, before opening a trading account for customers to transact in over the counter CFDs. For existing trading accounts, CMS licence holders and EFIs must do the same before the customer's first transaction in a CFD on or after the prescribed date.
The risk fact sheet must adhere to the format and contain minimum information prescribed under the draft CFD Notice. The draft CFD Guidelines provide further guidance on the risk fact sheet, such as examples of responses to the questions included in the risk fact sheet.
The draft CFD Notice and CFD Guidelines are contained in Annex A and Annex B of the Consultation Paper respectively.
Currently, the SFA provides similar requirements for CMS licence holders before opening a futures trading or leveraged foreign exchange trading account for a customer, or entering into an agreement to manage such accounts.
(2) Insider trading – common investors guidelines
The SF(A) Act introduced amendments to the insider trading provisions under Division 3 of Part XII of the SFA. This includes new statutory definition for "persons who commonly invest" (Common Investors) in section 214 of the SFA. Additionally, the insider trading offences will be extended to apply to securities, securities based derivatives or units in collective investment scheme (CIS).
In summary, the new test for inside information is whether the information is: (a) information that is not generally available (i.e. non-public); and (b) if it were generally available, whether the information would or would be likely to influence any Common Investor in deciding whether or not to buy the relevant product (materially price sensitive information).
The new statutory definition of Common Investor will essentially refer to the section of the public that is accustomed, or would be likely to deal in the relevant product.
In connection with the above proposed amendments, MAS proposes a new set of Guidelines on the Interpretation of "Persons Who Commonly Invest" in Division 3 of Part XII of the SFA (Common Investors Guidelines). The Common Investors Guidelines seek to provide guidance on the interpretation of the new definitions in Division 3, Part XII of the SFA and MAS' policy stance. In summary:
- the definition of Common Investor is intended to reflect the fact that there are different types of investors who invest in different classes of relevant products. The types of investors who are Common Investors may differ depending on the products in question, and the determination should be product-specific. For example, the Common Investors for listed equities will likely be retail, accredited, institutional and expert investors, whereas the Common Investors for futures contract on an equity index may be non-retail investors. This approach is modelled after the legislation in Hong Kong and therefore the approach taken by the Securities and Futures Commission or Hong Kong case law will likely bear greater weight in future;
- MAS has set out a list of knowledge descriptors and abilities that would apply to retail investors for the purpose of examining the effect of non-public information on retail investors. For example, they are expected to be rational and economically motivated investors with at least some experience and knowledge of investing in the relevant product, but may not be investment professionals, they are aware of the prevailing price of the product and have the knowledge or ability to obtain public information or have the ability to draw inferences from and assess the credibility of the information in question;
- information will be considered generally available (and therefore no longer non-public) if the information has been made known in a manner that would, or would be likely to bring it to the attention of all Common Investors in the relevant product, and not any classes of Common Investors. The SFA provides other limbs under which information will no longer be considered non-public (e.g. readily observable information); and
- conversely, information will be considered materially price sensitive as long as any class of Common Investors for the relevant product might be influenced by the information in deciding whether or not to deal in the product.
The draft Common Investors Guidelines is set out in Annex F of the Consultation Paper.
(3) Amendments to MAS Notice 757 and Equivalent Notices
MAS limits the lending of SGD to non-resident financial institutions. This policy is articulated in MAS Notice 757 (for banks), MAS Notice 1105 (for merchant banks), MAS Notice 109 (for insurers), MAS Notice 816 (for finance companies) and MAS SFA 04-N04 (for CMS licencees that conduct dealing in securities).
Currently, non-resident financial institutions in the various notices include foreign "securities" dealers. MAS proposes to replace "securities dealing" with "dealing in capital markets products" so as to broaden the reference to financial services.
SFA 04-N04 applies to CMS licensees that conduct dealing in securities. The SF(A)Act will introduce a new definition of "securities" which will comprise solely of either equity instruments representing legal or beneficial ownership interest or debt instruments, and excludes units in collective investment schemes and securities based derivative contracts.
Consequently, MAS proposes to amend SFA 04-N04 such that it will apply to CMS licensees who deal in securities, units in collective investment scheme or securities-based derivative contracts.
The proposed amendments to the notices are set out in Annex E to the Consultation Paper.
(4) Amendments to the Notice for Risk-Based Capital Adequacy Requirements for Holders of Capital Markets Services Licences (RBC Notice)
MAS will be introducing consequential amendments to the RBC Notice to effect the SFA amendments, including changes to the product definitions under the SFA, and extending the risk based capital adequacy requirements to CMS licence holders who deal in OTC derivative contracts. The proposed amendments to the RBC Notice are set out in Annex D to the Consultation Paper.
Summary of the SFA Amendments
By way of quick recap, the wide ranging amendments in the SFA include : (a) regulating OTC derivatives market operators and capital markets intermediaries; (b) enhancing regulatory safeguards for retail investors (e.g updating the definitions of accredited and institutional investors and introducing the accredited investors opt-in/opt-out regime); (c) changing the definitions of capital markets products under the SFA to a principles-based one, updating the list of regulated activities; (d) enhancing the credibility and transparency of the capital markets; and (e) strengthening MAS' ability to take enforcement action against market misconduct.
The amendments will be operationalized in 2018.
1A copy of the SF(A) Act may be found here.
2Please refer to the end of this consultation paper for a summary of the proposed amendments to the SFA.
3Please refer to the MAS' Consultation Paper I on Draft Regulations Pursuant to the Securities and Futures Act dated 28 April 2017and the MAS' Consultation Paper II on Draft Regulations Pursuant to the Securities and Futures Act dated 26 May 2017. MAS has not issued its response to public feedback received on the two consultation papers.
4A copy of the Consultation Paper can be found here.
5Please refer to the MAS' Consultation Paper dated 28 May 2012 on the Review of Regulatory Framework for Unlisted Margined Derivatives Offered to Retail Investors, and MAS' Response dated 14 March 2014 on Review of Regulatory Framework for Unlisted Margined Derivatives Offered to Retail Investors.
For further information, please contact:
Stephanie Magnus, Principal, Baker McKenzie.Wong & Leow
stephanie.magnus@bakermckenzie.com
