MAS Proposes Amendments to RMO Capital Requirements

MAS proposes to introduce a direct liquidity requirement for recognised market operators, and to revise downward the solvency requirement.

MAS (Monetary Authority of Singapore) has issued a consultation paper proposing amendments to the capital requirements for locally incorporated RMOs (recognised market operators).

According to MAS, the key risk posed by an RMO to the financial system is operational risk, i.e. the risk that the RMO is unable to continue operating its organised markets, leaving participants with the need to find alternative trading venues.

The main objective of imposing capital requirements on RMOs therefore is to provide sufficient financial resources for it to wind down its operations in an orderly fashion and provide time for participants to switch to alternative trading platforms.

Currently, RMOs hold financial resources that are at least the highest of (i) 18 percent of their annual operating revenue, (ii) 50 percent of their annual operating costs, and (iii) SGD 500,000.

While there are no direct liquidity requirements imposed on RMOs, liquidity risk is addressed indirectly in the current capital requirements through a deduction from financial resources of assets not convertible to cash within 30 days.

Under the existing approach, however, financial resources could still include components that are not available for immediate use to sustain an RMO’s operations.

“MAS therefore proposes to introduce a direct liquidity requirement, which requires RMOs to hold cash and cash equivalents of at least 25 percent of their annual operating costs,” the consultation paper says.

“By requiring RMOs to hold liquid assets to cover operating costs for approximately three months, participants will have the time to source for and switch to alternative trading venues. Such an approach is similar to the approach in reputable international jurisdictions.”

In addition, MAS proposes to revise downward the baseline solvency requirement for RMOs, requiring them to hold eligible capital of at least the higher of (i) 25 percent of their annual operating costs, or (ii) SGD 250,000.

As a separate liquidity requirement is proposed to be introduced, there is no need to deduct illiquid assets from eligible capital, the paper says.

MAS intends to issue a Notice which sets out details of the new capital requirements for RMOs, instead of the current approach of imposing capital requirements via recognition conditions.

The consultation paper and draft Notice are open for comment until 4 December 2020.

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