Singapore – Policy Consultations On Margin Requirements For Non- Centrally Cleared Derivatives.

In-Scope entities

The following entities (“MAS Covered Entities”) that are

conducting regulated activities under the Securities and

Futures Act (Cap. 289 of Singapore) (“SFA”):

1. (a)  banks licensed under the Banking Act

2. (Cap. 19 of Singapore) (“Banking Act”);

3. (b)  merchant banks approved as financial

4. institutions under Section 28 of the MAS

5. Act (Cap. 186 of Singapore)

6. (“MAS Act”); and

7. (c)  other licensed financial institutions

8. (“Other Financial Institutions”) – this

9. would include entities licensed under the

10. Finance Companies Act (Cap. 108 of

11. Singapore), Insurance Act (Cap. 142 of

12. Singapore), SFA and Trust Companies

13. Act (Cap. 336 of Singapore). Fund managers

14. are in-scope too if they are legal counterparties

15. to the transaction. Note: MAS has not indicated

16. the proposed implementation commencement

17. dates and exemption thresholds for 

Other Financial Institutions.

Other proposals relating to in-scope entities

1. (1)  a limited exemption for Other Financial Institutions, should the exposure of their uncleared derivative transactions booked in Singapore fall below a certain threshold; and

2. (2)  to require investment funds domiciled in Singapore to comply with the proposed margin requirements, if these funds have exposure in uncleared derivatives in excess of a certain exemption threshold.

In-Scope products

All OTC derivative contracts that are not centrally cleared by a qualifying central counterparty, other than physically-settled foreign-exchange forwards and swaps.

Conditions to be met for initial margin (“IM”) and variation margin (“VM”) requirements to apply

Subject to the implementation schedule and exemption thresholds applicable to MAS Covered Entities as set out in Annex E to the Consultation Paper, the IM and VM requirements, on a collect-only basis, will be triggered when all of the following conditions are met:

1. (a)  the MAS Covered Entity is a legal counterparty1 to the transaction;

2. (b)  the transaction is booked in Singapore; and

3. (c)  the transaction is entered into with a counterparty which is either (i) an MAS Covered Entity; or (ii) an

   overseas regulated financial firm.

Other proposals relating to application of IM/VM requirements

1. (1)  to apply an exemption threshold when an MAS Covered Entity transacts with overseas regulated financial firms from jurisdictions with different implementation schedules for margin requirements or have unclear netting laws;

2. (2)  to deem an MAS Covered Entity to have complied with MAS’ margin requirements when it has, under certain circumstances, complied with the margin requirements of a relevant foreign jurisdiction;

3. (3)  an MAS Covered Entity may apply to exempt intra- group transactions from the IM/VM requirements, subject to the condition that the MAS Covered Entity

comes under group-wide supervision by MAS or

regulators in other jurisdictions; and
(4) IM/VM requirements need not apply to uncleared

derivatives involving sovereign bodies, central banks, public sector entities, multilateral development banks and the Bank for International Settlements as counterparties.

Implementation Schedule

The implementation schedule which MAS has proposed for banks licensed under the Banking Act and merchant banks approved under Section 28 of the MAS Act, who conduct regulated activities under the SFA, is set out in Annex E to the Consultation Paper. MAS proposes to provide a 6- month transition period from the respective IM or VM commencement dates to provide sufficient time for these MAS Covered Entities to be operationally ready for a smooth implementation of the requirements.

Initial margin

Variation margin

Rationale for margin exchange/collection

The background discussion in paragraph 3(d) of the WGMR Report states that IM is meant to protect a transacting party from the potential future exposure that could arise from future changes in the mark-to- market value of the uncleared derivative contract during the time it takes to close out and replace the position in the event that the counterparty defaults. Accordingly, the amount of IM reflects the size of the potential future exposure.

The background discussion

in paragraph 3(c) of the WGMR

Report states that VM is meant to

protect a transacting party from the

current exposure that has already

been incurred by the transacting

party from changes in the

mark-to- market value of the

uncleared derivative contract

after the transaction has been

executed. Accordingly, the amount

of VM reflects the size of this

current exposure.

Calculation methodology

An MAS Covered Entity may opt for IM to be calculated by reference to either:

1. (i)  a quantitative portfolio margin model2; or

2. (ii)  a standardised IM schedule prescribed by MAS, as set out in Annex B to the

   Consultation Paper.

While an MAS Covered Entity need not restrict itself to the approach in either (i) or (ii) for the entirety of its derivative activities, the choice of either approach should be made consistently over time for all transactions within the same well-defined asset class.

Uncleared derivatives for which an MAS Covered Entity faces zero counterparty risk require no IM to be exchanged/collected and may be excluded from the IM calculation.

VM shall be calculated based on an MAS Covered Entity’s mark-to-market exposure of uncleared derivatives.

Frequency of calculation and exchange/collection

IM shall be exchanged/collected at the outset of a transaction, and thereafter on a routine and consistent basis upon changes in the calculated potential future exposures. At a minimum, IM shall be recalculated and exchanged/collected when:

VM obligations shall be calculated at least on a daily basis.

The full amount of VM shall be exchanged/collected from the counterparty within two business days following the execution of a new uncleared derivative contract.3

1. (i)  a new contract is executed;

2. (ii)  an existing contract expires;

3. (iii)  the IM model is recalibrated due to changes in market

   conditions; or

4. (iv)  no IM recalculation

   has been performed in the last 10 days.

IM shall be exchanged/collected from the counterparty within two business days following any recalculation of IM obligations.

Minimum threshold

Exchange/collection of IM is only required if the cumulative IM exposure from the counterparty exceeds S$80million, calculated based on all uncleared derivatives between the two counterparties’ respective consolidated groups.

Zero threshold. Subject to the proposed de minimis minimum transfer amount, the full amount of VM must be exchanged/collected.

De minimis minimum transfer amount

Minimum transfer amount for all margin transfers shall not be higher than S$800,000.

Gross vs net basis

IM shall be calculated and exchanged/collected on a gross basis (i.e., no netting of IM payments between the counterparties).

VM shall be calculated and exchanged/collected on an aggregate net basis across all uncleared derivatives that are executed under a single, legally enforceable netting agreement.

An MAS Covered Entity is required to have rigorous and robust dispute resolution procedures in place with its counterparties before the onset of a transaction.

If a margin dispute arises, the non-disputed amount shall be exchanged/collected first, while all necessary and appropriate efforts, including timely initiation of dispute resolution protocols, should be taken to resolve the dispute, and to exchange/collect the remaining amount of IM/VM in a timely fashion.