Kai Loon Loh and Patrick Phua at global law firm Ashurst sum up the key takeaways from the MAS response to consultative feedback and the now-finalised mandatory trading regulations.
On 13 March 2019, the MAS (Monetary Authority of Singapore) published its Response to Feedback Received on the Consultation Paper P005-2018 titled “Draft Regulations for Mandatory Trading of Derivatives Contracts”. The final mandatory trading regulations, namely the Securities and Futures (Trading of Derivatives Contracts) Regulations 2019, were also published on 13 March 2019.
In this client bulletin, we set out the key takeaways from the MAS Response as well as the Mandatory Trading Regulations. For further details on the topic and the Consultation Paper, please refer to our previous client bulletin.
When will the mandatory trading obligation apply?
From 1 April 2020.
Who will be subject to the mandatory trading obligation?
The mandatory trading obligation will apply to all specified persons, which includes banks, merchant banks, finance companies and insurers licensed in Singapore, as well as holders of a capital markets services licence.
However, the manner in which the exemptions operate is such that the initial application of the mandatory trading obligation is limited to only banks whose aggregate notional amounts of outstanding OTC derivatives contracts (excluding exchange-traded derivatives contracts) booked in Singapore, as at the last day of each of the 4 consecutive calendar quarters, exceed a SGD 20 billion threshold. This approach is consistent with the clearing obligation.
There is a question as to how a bank knows whether its counterparty is above the SGD 20 billion threshold. In this regard, the MAS has indicated that it will not publish a list of banks which exceed the trading threshold. Instead, all banks are encouraged to trade on organised markets, even if they do not exceed the trading threshold, and banks which exceed the trading threshold should not limit trading on organised markets only to trades with other banks that also exceed the trading threshold. Therefore, banks should seek confirmation from their counterparties that the counterparties are exempt from the mandatory trading obligation if they do not intend to trade on organised markets with such counterparties.
What types of transaction are subject to the mandatory trading obligation?
The mandatory trading obligation will apply to all specified derivatives contracts executed on or after 1 April 2020 where both counterparties are subject to the mandatory trading obligation (i.e. where both parties are banks which exceed the SGD 20 billion threshold).
Specified derivatives contracts refers to derivatives contracts prescribed by the MAS for such purposes, namely the following types of interest rate swaps (IRS) that are traded in Singapore by both counterparties:
- USD fixed-floating IRS, 2/3/5/7/10 years, no optionality, constant notional
- EUR fixed-floating IRS, 2/3/5/7/10 years, no optionality, constant notional
- GBP fixed-floating IRS, 2/3/5/7/10 years, no optionality, constant notional
The detailed contract specifications are set out in the Schedule to the Mandatory Trading Regulations.
What is traded in Singapore?
For the purposes of the Mandatory Trading Regulations, the concept of “traded in Singapore” means each party executes the relevant derivatives contract through that party’s office located in Singapore (whether through a head office or a branch office).
You should note that this is different from the concept in the Consultation Paper (and also in the reporting obligation) and results from a response to operational difficulties raised by some respondents relating to ascertaining the location of the counterparty’s trader on a pre-trade basis. Accordingly, the MAS has proposed using the office through which a transaction is executed which should be easier to identify, and the regulatory expectation is that specified persons should implement an appropriate policy to ensure that trades falling within the trading nexus are traded on organised markets.
Are there any exemptions?
The following exemptions apply:
- Intragroup transactions
- Transactions with public bodies
- In the draft regulations, there was a list of exempted public bodies set out in the Second Schedule but this schedule has been removed from the final regulations because by definition, both parties have to be specified persons before the mandatory trading obligation applies, and specified persons would not include the relevant public bodies.
- Transactions resulting from a portfolio compression cycle
- Package transactions
- Unlike the draft regulations, package transactions are now expressly set out in the Mandatory Trading Regulations as being exempt.
- However, it should be noted that not all types of package transactions are exempt. For example, package transactions comprising only specified derivatives contracts are not exempt, and neither are package transactions comprising only specified derivatives contracts and government bonds denominated in the same currency as the underlying floating rate of such derivatives contracts.
- Block trades are not exempt, because the mandatory trading obligation does not require specific execution methods unlike certain other jurisdictions. As such, block trades in respect of specified derivatives contracts will still be subject to the mandatory trading obligation.;
For US and EU market participants, you may already be subject to mandatory trading obligations in the US and EU respectively. In other words, the USD, EUR and GBP IRS you trade may already be caught by the US and/or EU rules, and they will be subject to the Singapore rules if they are traded in Singapore by both counterparties.
Accordingly, if any of your trades are caught by the US and/or EU rules, substituted compliance will be important so that you may continue to execute such trades on the relevant US or EU platforms.
In this regard, on 20 February 2019, the MAS also announced its intention to recognise that certain EU multilateral trading facilities and organised trading facilities are equivalent in a joint media release with the European Commission.
Additionally, on 13 March 2019, the MAS and the CFTC (Commodity Futures Trading Commission) announced in a joint statement the mutual recognition of certain trading venues in the US and Singapore. For the purposes of the Mandatory Trading Regulations, this is in the form of the Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations 2019, under which the MAS has prescribed certain US swap execution facilities (SEFs) as equivalent and such SEFs are also exempt from the requirement to be licensed as an approved exchange or recognised market operator for operating an organised market so long as it does not deal with retail investors.
This client bulletin was first published by Kai Loon Loh, counsel, and Patrick Phua, partner, at global law firm Ashurst.