15 May, 2018
On 2 May 2018, the Monetary Authority of Singapore (“MAS”) issued its response to feedback received during the public consultation on proposed regulations for the mandatory clearing of over-the-counter (“OTC”) derivatives. The draft Securities and Futures (Clearing of Derivatives Contracts) Regulations was first proposed by MAS in a consultation paper published on 1 July 2015 (the “Consultation Paper”), which we had reported on earlier here.
To recap, in July 2015, MAS had proposed to require OTC derivatives to be cleared on central counterparties (“CCPs”) to reduce systemic risk in Singapore’s OTC derivatives markets, in line with the G20 objectives and recommendations of the Financial Stability Board on OTC derivatives reforms.
MAS’s Response to Feedback
Some of the key issues raised from the feedback received on the Consultation Paper and MAS’s response to them are as follows:
(a) Specified OTC derivatives to be cleared
In the Consultation Paper, MAS had proposed to subject Singapore-Dollar (“SGD”) and US-Dollar (“USD”) fixed- to-floating interest rate swaps (“IRS”), with maturity up to 30 years, to the central clearing obligations, as these are the most widely traded interest rate derivatives in Singapore. In addition, MAS had also sought views on whether it would be appropriate to subject IRS denominated in Euro (“EUR”), Pound Sterling (“GBP”) and Japanese Yen (“JPY”), and other types of interest rate derivatives to the central clearing obligations.
Taking on board feedback that long-dated positions might not be suitable for mandatory clearing due to the lack of liquidity, MAS would limit the clearing requirement to SGD and USD IRS with tenors between 28 days and 10 years (inclusive).
Respondents were also generally in favour of having IRS denominated in EUR, GBP and JPY subject to mandatory clearing, given the potential for margin efficiencies. However, some respondents highlighted potential conflicts between complying with the clearing obligations imposed by MAS and the clearing obligations under the law of their home jurisdictions. In response, MAS referenced the Consultation Paper on Draft Regulations for Mandatory Trading of Derivatives Contracts issued on 21 February 2018 (the “21 February 2018 Consultation Paper”), which can be accessed here, wherein MAS had proposed to implement clearing obligations in respect of EUR and GBP IRS, in view of its proposals to also subject such derivatives to trading obligations.
Respondents were split on whether other types of interest rate derivatives should be subject to the clearing obligations, particularly given that certain products (for example, JPY forward rate agreements) have not been mandated for clearing in other jurisdictions. In light of this, MAS said that it would re-assess new products to be subject to the clearing obligations at a later stage.
One respondent sought guidance as to the treatment of structured or packaged trades which include an IRS that is subject to mandatory clearing, and expressed concern that breaking up such trades into their component parts for mandatory clearing of the relevant transaction may have impact on the efficiency and the cost structure of the trade.
To this, MAS clarified that it would adopt an approach similar to that of other jurisdictions, such as Australia and Hong Kong, whereby individual transactions within a packaged transaction that is subject to mandatory clearing would remain subject to the clearing obligations. On the other hand, a SGD or USD IRS that is a component of a single complex transaction would not be subject to the clearing obligations.
(b) Circumstances under which OTC derivatives are to be cleared
With regard to MAS’s proposal to apply the clearing obligations to IRS trades that are booked in the Singapore- based operations of both transacting counterparties (i.e. a Singapore-incorporated company or a Singapore branch of a foreign entity), some respondents, in noting that varying approaches have been adopted in other jurisdictions, suggested that substituted compliance or mutual recognition frameworks ought to be available for contracts that might be subject to overlapping rules. In addition, some respondents requested that the timeframe for the clearing of such contracts be extended on account of time-zone differences, when locally executed trades are cleared through an overseas CCP. In this regard, one respondent pointed out that a reasonable timeframe ought to be also provided as a trade might fail to clear within the same business day for technical or operational reasons.
In response, MAS said that while it was conscious of the difficulties arising from potentially overlapping rules across different jurisdictions, it had not received any specific feedback as to potential conflict that would arise as a result of MAS’s new clearing obligations for SGD and USD IRS. However, MAS emphasised that it would nevertheless, continue to engage with regulators globally to ensure the effective implementation of the rules and avoid potentially conflicting or duplicative requirements. MAS also said it accepted the feedback regarding the timeframe for clearing, and would extend the timeframe by one business day, i.e. T+1.
(c) Specified persons to be subject to clearing obligations
Respondents were generally supportive of MAS’s proposal to exempt all banks from the clearing obligations, provided that they do not exceed a maximum threshold of S$20 billion gross notional outstanding derivatives contracts booked in Singapore (“clearing threshold”) for each of the last four calendar quarters.
Some respondents have suggested that MAS also consider:
(i) Excluding from the clearing threshold computation, trades which are not mandated for clearing (for example, intra-group transactions or trades entered into for hedging purposes);
(ii) Providing further exemptions for banks whose total clearing activity exceed the clearing threshold but have relatively small exposures in the products mandated for clearing; and
(iii) Publishing a list of banks who have crossed the clearing threshold.
With regard to suggestions (i) and (ii) above, MAS reiterated that the objective of the clearing threshold was to subject the most active banks trading OTC derivatives in Singapore to clearing obligations. It was for this reason that the clearing threshold computation was based on a simple measure of activity. Given that banks with high levels of OTC derivatives activity would already be likely to have clearing memberships on CCPs or have access to clearing services via clearing members, MAS stated that it would expect that banks which exceed the clearing threshold to not have any issues complying with the clearing obligations that MAS would impose. Nonetheless, MAS said that it would continue to assess the suitability of other OTC derivatives products to be subject to the clearing obligations.
With regard to suggestion (iii) above, MAS took the view that there should not be a need to publish such a list. MAS reasoned that the products mandated for clearing would be widely cleared, and as such a bank trading in these products ought to presume that such products would be required to be cleared on CCPs and should voluntarily have these products centrally cleared, even if the bank itself fell below the clearing threshold and thus would not be subject to the clearing obligations. And in a case where the bank decides it would not centrally clear such a product, that bank should make it clear to its counterparty that it is not subject to MAS’s clearing obligations.
(d) Exemptions from clearing obligations
Most respondents were agreeable to MAS’s proposal to exempt intra-group transactions and public bodies from the clearing obligations, although some have also recommended that MAS should exclude trades resulting from portfolio compression from the clearing obligations, so as not to dis-incentivise risk mitigation practices.
To this, MAS said that it agreed with the feedback and would exempt intra-group transactions and public bodies from the clearing obligations. To address the feedback regarding trades resulting from multilateral portfolio compression, MAS said that it will provide a limited exemption for such trades, subject to conditions including requiring the multilateral portfolio compression to be carried out by a third party operator and among at least three participants, and that the original trades are not contracts mandated for clearing.
(e) Implementation of clearing obligations
Respondents generally supported MAS’s proposal to commence clearing for contracts that are entered into on or after the effective date and to review and expand the scope of the mandatory clearing regime when appropriate. On the latter topic, some respondents mentioned that certain foreign exchange derivatives (“FX derivatives”) (for example, non-deliverable forwards) ought not to be considered for mandatory clearing as yet, given that FX derivatives clearing are still nascent activities and there might be a lack of infrastructure for the clearing of such products.
In response, MAS said that it agreed with the feedback and that it would not be imposing backloading requirements for the clearing obligations. As for the scope of the mandatory clearing regime, MAS had pointed to its recent proposal for mandatory clearing for EUR and GBP IRS in the 21 February 2018 Consultation Paper, and said that it will study the feasibility of other options at a later stage and consult on its proposals in due course.
Next Steps
Having considered feedback received on the Consultation Paper, MAS would now finalise the form of the Securities and Futures (Clearing of Derivatives Contracts) Regulations and publish them to take effect from 1 October 2018.
MAS’s response can be accessed here.
