Singapore on Monday laid out its plans for meeting G20 commitments for over-the-counter (OTC) derivatives reform but diverged from the US and Europe by not requiring that derivatives be traded on formal platforms.
In a “consultation paper”, the Monetary Authority of Singapore explained how it believed Asia’s second largest OTC market – after Japan – should comply with requirements that OTC derivatives be shifted into more transparent trading systems and into clearing houses.
It proposed to expand the country’s Securities and Futures Act to mandate central clearing and reporting of OTC derivative contracts, as well as regulate market operators, clearing facilities, trade repositories and market intermediaries for OTC derivative contracts.
The MAS also proposed to introduce a new class of instruments – “derivative contracts” – in the act. This would encompass OTC commodities, credit, equities, foreign exchange and interest rates.
Like the Dodd-Frank Act in the US, the MAS proposed to introduce legislation to provide for the mandatory central clearing of OTC derivative contracts. It also proposed that trades be reported to trade repositories.
But unlike Dodd-Frank – and Europe’s Markets in Financial Instruments Directive (Mifid) – the MAS proposed “not to introduce a trading mandate at this stage”.
The MAS said it was “currently working with the industry to better understand the costs and benefits of a trading mandate, taking into consideration the characteristics of the Singapore market”.
It would “consult on this at a later juncture”.
That will be welcomed by dealers and interdealer brokers who still dominate trading of OTC derivatives. If the proposed regime were finalised, it could also attract OTC derivatives trading to Singapore.
Singapore has taken a lead in OTC clearing in Asia outside Japan, with the launch in 2010 by SGX, the Singapore exchange, of OTC interest rate swaps denominated in Singapore dollars.
The MAS also proposed to exempt foreign exchange forwards and swaps from the clearing obligation.
“The main source of systemic risk arising from these products is settlement risk, and there is already an established international settlement process to mitigate such risk. Other foreign exchange derivatives such as currency options, non-deliverable forwards and currency swaps are not exempted,” the paper said.
On clearing, the MAS was broadly in line with Dodd-Frank and Emir.
Noting that “most activities in OTC derivatives are global in nature”, the MAS proposed to require central clearing for all derivative contracts “where at least one leg of the contract is booked in Singapore” and either both parties to the contract are resident or have presence in Singapore and are subject to the clearing mandate.
Alternatively this would apply where one party to the contract is resident or has presence in Singapore and is subject to the clearing mandate, “and the other party would have been subject to the clearing mandate if it had been resident or had presence in Singapore”.
Get alerts on Clearing and settlement when a new story is published