Jul 08 2015 Patricia Lee, Regulatory Intelligence
The Monetary Authority of Singapore is seeking to close potential loopholes by proposing to require over-the-counter (OTC) derivatives trades booked in the Singapore-based entities of both transacting counterparties to be subject to mandatory clearing.
The U.S. Commodity Futures Trading Commission (CFTC) is also trying to address similar issue. At the moment the offshore branches of U.S. banks are not yet caught by mandatory clearing obligations, officials said.
In its latest consultation paper on draft regulations for mandatory clearing of derivatives contracts, released on July 1, MAS outlined a number of proposals that covered five main areas: derivatives contracts to be cleared; circumstances under which contracts are to be cleared; specific persons to be subject to clearing obligations; exemptions from clearing obligations; and implementation of clearing obligations.
Andrew Pal, senior consultant at DerivAsia in Singapore, pointed to a MAS’ proposal that subject transactions that are booked in the Singapore-based operations of both transacting counterparties, i.e. a Singapore-incorporated company or a Singapore branch of a foreign entity, to clearing obligations, as significant. He said the CFTC is currently examining a loophole whereby the offshore branches of U.S. banks are not yet required to do mandatory clearing of OTC derivatives trades. He said MAS is trying to address similar concerns.
“There is the whole concept of extra-territoriality and the question of who regulates the transactions carried out by the branches of foreign banks based in Singapore. For example, would it be the MAS or the relevant foreign regulator who would regulate mandatory clearing in Singapore for such an entity? It’s not mutually exclusive. A U.S. bank could be subject to both MAS and U.S. rules,” he said.
MAS was also concerned about cross-border transactions involving a counterparty that resides in a jurisdiction which does not have mandatory clearing requirements, according to Sam Ahmed, managing director at DerivAsia in Singapore. MAS would not have direct supervision over transactions that are executed in Singapore but booked outside the city-state, he said.
“In such instances, MAS would have to work with the regulators in the jurisdictions where the trade is booked,” he said.
There is, however, less of a concern, if cross-border transactions are carried out between counterparties that are based in Singapore and in jurisdictions such as the U.S., Europe or Japan where clearing mandates are consistent with that of MAS, Ahmed said.
Clearing of interest rate swaps a priority
In the consultation paper, MAS has also proposed to commence mandatory clearing by asset class, beginning with interest rate derivative contracts, which the regulator said, made up about 50 percent of all derivatives booked in Singapore by gross notional amount outstanding. MAS has proposed to subject, at a minimum, the Singapore dollar fixed-to-floating swaps based on the Singapore Swap Offer Rate (SOR) and the U.S. dollar fixed-to-floating swaps based on Libor to clearing obligations. MAS is also considering subjecting interest rates swaps (IRS) denominated euros, UK pounds and Japanese yen to mandatory clearing obligations.
Kishore Ramakrishnan, executive director, financial services at EY in Hong Kong, said it made sense for MAS to prioritise interest rates swaps for mandatory clearing because IRS accounted for 50 percent of derivatives activities booked in Singapore.
“If you look at the underlying principles for mandatory clearing of products, it is no different from what Hong Kong and other regulators try to do,” he said.
MAS has also sought views on whether it would be appropriate to make clearing of euros, pounds and yen-denominated IRS mandatory. Ahmed said MAS appeared to have considered that this might facilitate cross-margining should more currencies be in scope for IRS clearing. Cross-margining means market participants would benefit from a reduction in margin requirements as margining can be done across various products rather than having to put up separate margin for each product.
At the moment, market participants have to put up margins for clearing U.S. dollar and Singapore dollar swaps at central counterparties (CCPs). They also have to post margin separately for their bilateral trades such as euros and yen swaps. Ahmed said if MAS were to make euros and yen swaps mandatory for clearing, it would be important for CCPs such as the Singapore Exchange to offer clearing for euros and yen IRS products, and more importantly to provide incentives for clearing members of cross-margining.
“Only then will the rest of the market truly gravitate toward OTC clearing voluntarily,” he said.
Pal said the MAS needs to look into not just the types of derivatives contracts that have to be cleared but also the impact of such requirements on global banks which are clearing brokers as well as local and regional banks. He said clearing brokers that are subject to mandatory clearing would be required to put up more capital and put systems in place to facilitate clearing.
“This could in turn be an opportunity, a positive, for local and regional banks if some large global banks don’t have the additional capital and IT resources to clear derivatives contracts,” he said.
MAS to take the lead in ASEAN
Pal said MAS could also consider taking the lead within ASEAN by further developing the concept of allowing non-cash collateral such as Singapore bonds or other sovereign bonds to be used more extensively in lieu of cash for initial margin.
“The concept of using non-cash collateral as eligible collateral needs to be looked into. Although Singapore is not part of the G20, MAS, in its continued adherence to global best practice, could potentially take the impetus further within ASEAN. Looking ahead, Thai bonds could also be considered [as non-cash collateral],” he said.
MAS has proposed a number of exemptions from clearing obligations. For instance, it has proposed to exempt all banks from clearing obligations as long as they do not exceed a maximum threshold of S$20 billion gross notional outstanding derivatives contracts booked in Singapore for each of the last four calendar quarters.
MAS has also proposed to exempt intra-group transactions from clearing obligations, as will public bodies, including all central banks and governments, international multilateral organisations such as the Bank for International Settlements, the International Monetary Fund and the World Bank.
MAS plans to issue the mandatory clearing regulations by end of this year, with a six-month transition period before mandatory clearing takes effect.
- Patricia Leeis South-East Asia editor at Thomson Reuters Regulatory Intelligence in Singapore. She also has responsibility for covering wider G20 regulatory policy initiatives as they affect Asia.
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