Mandatory trading obligations apply to specified OTC derivatives contracts executed on or after 1 April 2020
29 April 2019
With effect from 1 April 2020, banks licensed in Singapore and with significant over-the-counter (“OTC”) derivatives activity in Singapore will be required under the Securities and Futures Act (“SFA”) to execute a “specified derivatives contract” on an organised market, or on or through any other facility prescribed under the SFA.
This requirement for mandatory trading of OTC derivatives contracts helps improve market transparency and will complete the implementation of the G20 OTC derivatives reforms by the Monetary Authority of Singapore (“MAS”).
Background information
By way of background, in October 2018, new requirements for the mandatory trading of OTC derivatives contracts on organised markets (“Trading Obligations”) were introduced in the SFA. The SFA requires every “specified person” who executes a “specified derivatives contract” to do so on an organised market operated by an approved exchange or a recognised market operator, or on or through any other facility prescribed under the SFA (“Prescribed Facility”). On 14 March 2019, the Securities and Futures (Trading of Derivatives Contracts) Regulations 2019 (“Regulations”), which set out the implementation details of the Trading Obligations, came into force.
Pursuant to the Regulations, the Trading Obligations apply to banks licensed under the Banking Act (“licensed banks”) with significant OTC derivatives activity in Singapore. To provide sufficient time for the licensed banks to gain access to organised markets and Prescribed Facilities, the Trading Obligations will only apply to OTC derivatives contracts which are executed on or after 1 April 2020.
From 21 February 2018 to 23 March 2018, MAS conducted a public consultation on the draft Regulations in the consultation paper entitled “Draft Regulations for Mandatory Trading of Derivatives Contracts”. On 13 March 2019, MAS issued its Response to feedback received on the consultation paper.
“Specified persons” subject to Trading Obligations
The SFA provides that all banks, merchant banks, finance companies, insurers and capital markets services licence holders regulated in Singapore are “specified persons”, who are subject to the Trading Obligations. However, at the initial stage, MAS intends to subject licensed banks with significant OTC derivatives activity in Singapore to the Trading Obligations and exempt all other “specified persons” from the Trading Obligations.
Therefore, currently, the Trading Obligations only apply to a licensed bank whose aggregate outstanding notional amount exceeds a threshold of S$20 billion of OTC derivatives contracts booked in Singapore (“Trading Threshold”) for each of the last four consecutive quarters and the bank has been carrying on business for one year or more.
“Specified derivatives contracts” subject to Trading Obligations
The Trading Obligations will apply to any derivatives contracts executed on or after 1 April 2020 which are prescribed as “specified derivatives contracts” in the Regulations. These include fixed-to-floating interest rate swap (“IRS”) contracts denominated in US dollar, Euro and Pound Sterling, with the contract specifications set out in the Schedule to the Regulations, and meet the criteria prescribed in the Regulations.
Executing “specified derivatives contract” on organised market or Prescribed Facility
The SFA provides that a “specified person” who executes a “specified derivatives contract” must do so on an organised market operated by an approved exchange or a recognised market operator, or on or through any Prescribed Facility.
The Prescribed Facilities refer to foreign trading venues that are prescribed by MAS as eligible for the purposes of the Trading Obligations. The Prescribed Facilities thus far include:
- Certain Swaps Execution Facilities in the US which are prescribed under the Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations 2019; and
- Certain EU Multilateral Trading Facilities and Organised Trading Facilities which are prescribed under the Securities and Futures (Trading Venues for Derivatives Contracts in the European Union) Regulations 2019.
Reference materials
The following material is available on the MAS website www.mas.gov.sg:
The following materials can be accessed from the Singapore Statutes Online website sso.agc.gov.sg:
- Securities and Futures (Trading of Derivatives Contracts) Regulations 2019
- Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations 2019
- Securities and Futures (Trading Venues for Derivatives Contracts in the European Union) Regulations 2019