3 November, 2018
On 28 September 2018 and 1 October 2018, the Monetary Authority of Singapore ("MAS") published its Response to Feedback Received on the Consultation Papers on Draft Regulations pursuant to the Securities and Futures Act ("SFA").
This is the final installment of the trilogy of updates and in this update, we will consider certain aspects of the second MAS Response in relation to the new Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018 (the "2018 Prospectus Regulations"). Our previous updates are available here and here.
Extension of Prospectus Requirements to (Cash Settled) Securities-based Derivatives Contracts
Under the new 2018 Prospectus Regulations, offers of securities as well as securities-based derivatives contracts ("SBDC") will be caught by the prospectus requirements under the SFA.
Although this appears to be a significant change to the rules, it should be noted that strictly speaking, the actual extension is only in relation to cash settled SBDC. This is because the prospectus rules used to apply to securities (and debentures) as well as "units" in securities (and debentures). Units in securities (and debentures) would have included, for example, physically settled OTC equity / bond derivatives. This is an oft overlooked fact but this was made very clear in the MAS Response. In other words, the regulatory expectation is that market participants should already be complying with the prospectus rules in relation to certain types of OTC derivatives contracts and should therefore apply the same criteria when assessing cash settled OTC derivatives contracts under the new regime.
Accordingly, in addition to the licensing requirements that now apply to dealing in all types of OTC derivatives contracts, market participants should now consider the application of the prospectus rules to all of their OTC SBDC as well.
Is an "offer" of OTC derivatives contracts the same as an "offer" of a note? Does it have a similar meaning to offer and acceptance under contract law? Or is an invitation to treat sufficient? Arguably, these questions should already have been addressed in relation to "units" in securities and debentures but the extension of the regime has now made the issue more obvious.
The expedient solution (of avoiding the problem) is to rely on one or more exemptions.
The obvious exemption would be the one for accredited investors and institutional investors.
The other exemptions may be more difficult to apply. Certain exemptions apply only to listed SBDC so they will not assist in the case of OTC derivatives. Others such as the personal offer and private placement exemptions will run into the difficulties surrounding what is considered a "closely related offer" for the purposes of aggregation.
The MAS Response made it clear that the current criteria in Regulation 28 of the 2018 Prospectus Regulations "remain appropriate". This was in response to the suggestion that offers of SBDC should be treated as closely related only if they have the same underlying security / index / basket, the same start dates, fixing dates and maturity dates and the same risk and pay-off profiles.
The MAS Response is understandable given the way the suggestion was framed – it would be extremely easy to circumvent the rules if the aggregation requirements were so strict. However, it remains to be seen how Regulation 28 should be applied in relation to OTC derivatives.
For example, one of the criteria, namely both offers are made in connection with the same business or in relation to a common business venture could be so broadly construed that otherwise unrelated transactions will have to be aggregated. On the other hand, the limb relating to a single plan of financing may be more appropriate – for example, where a number of total return swaps were entered into over the same underlying in connection with syndicating the risk of subscribing for the underlying in connection with capital raising by a particular issuer, would this be considered a "single plan of financing"?
Singapore Selling Restrictions
For the eagle-eyed among you, you would have noticed that the standard Singapore selling restrictions will require updating. As such, if you are sending out a term sheet or other document containing the standard Singapore selling restrictions, it would be necessary to update the wording to ensure that the statutory references and wording are accurate.
For instance, Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 (the "2005 Prospectus Regulations") is often referred to in the long-form version of the Singapore selling restrictions, but the 2005 Prospectus Regulations have already been revoked.
The term "securities" is also no longer defined in section 239(1) of the SFA so if your selling restriction contains such a reference, the language will also require amendment.
In the most part, the content of the exemptions that form the backdrop of the Singapore selling restrictions have not changed materially but the wording does require some scrutiny.
The International Capital Market Association ("ICMA") is also currently in the process of amending the Singapore selling restrictions in Appendix A13a of the ICMA Primary Market Handbook. But given that this will take a bit of time, it would be important to ensure that you have updated wording which you can use between now and then.
For further information, please contact:
Kai Loon Loh, Ashurst
kailoon.loh@ashurst-adtlaw.com
