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18 April, 2018
On 28 March 2018, the Monetary Authority of Singapore ("MAS") published the Response to Feedback Received on Proposed Amendments to the Securities and Futures (Reporting of Derivatives Contracts) Regulations (the "Reporting Regulations") (the "MAS Response") and the Securities and Futures (Reporting of Derivatives Contracts) (Amendment) Regulations 2018 (the "Reporting Amendment Regulations 2018").
The Reporting Amendment Regulations 2018 are long-awaited because the related consultation paper (the “Consultation Paper”) was issued by MAS back in January 2016 and, more importantly, the implementation timeline will commence from 1 October 2018.
The Reporting Regulations have been amended many times since 2014 and the Reporting Amendment Regulations 2018 mark the final phase-in of the reporting obligation for OTC derivatives transactions.
We discuss below the key changes introduced by the Reporting Amendment Regulations 2018, as well as important aspects of the MAS Response.
Implementation timeline
The final implementation timeline is set out in the table below.
Although the Consultation Paper envisaged collateral reporting, MAS has agreed to delay the implementation recognising that international standards for collateral reporting are yet to be in place.
Equity and commodity derivatives phased in
Equity and commodity derivatives contracts are now in scope of the reporting obligation.
Equity derivatives contract is defined to mean an OTC derivatives transaction over a single share, a share basket, a share index, a unit of business trust or a unit in a collective investment scheme ("CIS unit").
Commodity derivatives contract is defined to mean an OTC derivatives transaction over commodities and commodity is in turn defined in the Securities and Futures Act ("SFA").
Exclusions from both equity derivatives contract and commodity derivatives contracts include:
- a debenture;
- an exchange-traded derivatives contract ("ETD"); and
- a CIS unit.
It is arguable that there is no need to exclude debentures and CIS units because the definition of "derivatives contract" already excludes securities and CIS units. Accordingly, securities such as equity-linked notes, convertible bonds and equity warrants should not be in scope of the reporting obligation.
The exclusion of ETD is however necessary and useful because it clarifies that the reporting obligation applies to only OTC derivatives.
Physically settled commodity derivatives
Physically settled commodity derivatives transactions are also excluded from the definition of “commodity derivatives contract” provided that they satisfy the prescribed characteristics.
The contract should be one for the sale and purchase of one or more commodities for the purpose of fulfilling the needs of the day-to-day operations of the business of one or both parties. In practice, if a corporate end-user uses such commodity derivatives only for hedging purposes, those hedging trades will not be in scope of the reporting obligation. This is the case regardless of whether the parties have an option to cash settle, in whole or in part.
However, it should be noted that hedging trades are not generally exempt. Only those in respect of physically settled commodity derivatives contracts are exempt, and pure cash settled commodity derivatives contracts, even if entered into for hedging purposes, are not exempt.
Exemptions
The Reporting Amendment Regulations 2018 introduced a number of new exemptions but they are not applicable to all specified persons. Broadly speaking, the new exemptions benefit approved trustees ("ATs"), licensed trust companies ("LTCs") and, if certain conditions are met, CMSL holders, subsidiaries of a bank in Singapore and insurers.
Approved trustees and licensed trust companies exemption
Although ATs and LTCs are specified persons as defined in the SFA, they are exempt under the Reporting Regulations.
Retail investor exemption
CMSL holders do not have to report OTC derivatives transactions with retail investors.
There are a few points to note in this regard:
- Banks and merchant banks are not covered by this exemption. This appears to be a consequence of feedback received which suggested that there may be "operational costs and difficulties in differentiating transactions along the investor profile". Accordingly, MAS concluded that since most retail investors will be transacting with CMSL holders, the exemption was scoped to benefit only CMSL holders. This therefore results in an anomalous outcome whereby banks and merchant banks will have to report OTC derivatives transactions with retail investors but not CMSL holders.
- The term "retail investors" is used in the sense of excluding accredited investors ("AIs") and institutional investors ("IIs"). This means that expert investors (unless they are also AIs for example) will be considered "retail investors". Separately, when the opt-in regime for AIs comes into force, there is also a question as to whether AIs that opt out can be considered retail investors for the purposes of the Reporting Regulations.
S$5 billion threshold exemption
For CMSL holders, subsidiaries of a bank in Singapore and insurers, if their aggregate gross notional amount of the specified derivatives contracts to which they are party and which are booked or traded in Singapore for the year ending on the last day of a quarter does not exceed S$5 billion for the most recently completed quarter and for each of the 3 immediately preceding consecutive quarters, they are also exempt from the reporting obligation.
Fund management/REIT management exemption
For CMSL holders licensed to carry on the business of fund management and real estate investment trust management, if the total value of the holder's managed assets at the end of its most recent completed financial year does not exceed S$8 billion, they will be exempt from the reporting obligation.
This exemption used to be contained in the Securities and Futures (Reporting of Derivatives Contracts) (Exemption) Regulations 2014 ("SF(RDC)(E)R "). However, in an effort to consolidate the existing regulations relating to the reporting obligation, it has been moved to the main regulations and the SF(RDC)(E)R has accordingly been repealed.
Booking location and trader location
There will be two new data fields under Part IA of the First Schedule. These are booking location and trader location and are intended to correspond to the definitions of "booked in Singapore" and "traded in Singapore" in the Reporting Regulations.
Other amendments
The Reporting Amendment Regulations 2018 also made many other changes in addition to the above. It is beyond the scope of this publication to enumerate all the changes in detail but it is necessary to consider them to determine whether they affect existing operations and the overall implementation framework that is already in place for some market participants.
These includes amendments to:
- (definitions) the definitions of "interest rate derivatives contract", "credit derivatives contract" and "foreign exchange derivatives contract";
- (significant derivatives holder) Regulation 6 to clarify how the S$8 billion threshold is calculated and from when a significant derivatives holder becomes subject to the reporting obligation;
- (UTI) the UTI deadline extending it from 1 April 2018 to 1 April 2020 for uncleared OTC derivatives contracts that are not electronically confirmed;
- (legacy trades) reporting of termination of legacy trades; and
- (public bodies) the list of public bodies that qualify for the public bodies exemption to conform with the list contained in the draft regulations published by MAS recently in its Consultation Paper on Draft Regulations for Mandatory Trading of Derivatives Contracts.
Conclusions
The Reporting Amendment Regulations 2018 contain a number of significant changes to the reporting obligation and also introduced certain changes to existing regulations that are otherwise unrelated to the phase-in of equity and commodity derivatives contracts and the new SFA. It is therefore important to understand these changes and assess whether (and if so to what extent) existing operations are affected.
The phase-in of more types of OTC derivatives contract also means that the likelihood of a corporate end-user becoming a significant derivatives holder will become higher from 2019. It is therefore crucial to work out how to calculate the S$8 billion threshold by reference to the relevant universe of derivatives contracts to determine whether an entity is likely to become a significant derivatives holder as more types of OTC derivatives contract are phased in.
If it is determined that a corporate end-user is likely to become subject to the reporting obligation, such entity would have to consider how it would be able to undertake trade reporting. One option is to delegate trade reporting to the counterparty so there may be merit in a buy-side participant being pro-active in this regard and reaching out to the relevant counterparties with a view to agreeing the path forward. For counterparties which are already subject to the reporting obligation (e.g. a bank or a CMSL holder), there may be scope to delegate but if both parties are significant derivatives holders subject to the reporting obligation for the first time, they will have to consider how to report their trades in the future.
For further information, please contact:
Kai Loon Loh, Ashurst
kailoon.loh@ashurst-adtlaw.com
