The Monetary Authority of Singapore (“SAM“) seeks comments on its proposal to exempt an approved scholarship (“EA“) or a recognized market operator (“RMO“) that provides limited post-trade services after the execution of a trade on its platform to be regulated as a clearing system under the Securities and Futures Act (“ASF“). It is proposed that the exemption be granted to AEs or RMOs which only provide post-trade services relating to the verification of transactions carried out on the organized market which they operate and to the calculation of the obligations of the parties under of these transactions before the transactions are effected cleared or settled bilaterally between the parties to the transaction.
The proposal is set out in the “Consultation Paper on Proposed Exemptions for Approved Exchanges and Recognized Market Operators Providing Certain Clearing and Settlement Services” (“consultation document“) issued by the MAS. The consultation document is open for consultation until September 9, 2022.
This update provides a summary of the requirements to qualify for the proposed exemptions for those AEs and RMOs that provide limited post-trade services.
Regulation of clearing facilities
All clearing facilities in Singapore must be licensed by MAS
An entity that operates a clearing facility that clears or settles transactions in securities, units of collective investment schemes or derivative contracts in Singapore must be authorized by MAS under the SFA, unless otherwise exempted. This is to ensure that clearing facilities in Singapore are safe and efficient. A clearing house that does not properly manage its risks can threaten the stability of financial markets. MAS imposes regulatory requirements commensurate with the level of systemic risks posed by a clearing facility.
Definition of clearing or settlement activities
“Clearing or settlement”, in relation to a clearing facility, includes the following four categories of activities that occur after the execution of a transaction between the parties to the transaction:
- Verification of business details: the information relating to the conditions of the transaction is verified by the clearing house in order to confirm the transaction.
- Credit substitution by novation or otherwise: the parties to the transaction substitute, by novation or otherwise, the credit of the netting facility for the credit of the parties to the transaction. In this respect, the clearing house acts as a central counterparty (“CCP“).
- Calculation of obligations: the obligations of the parties to the transaction are calculated by the clearing system. These calculations may take into account multilateral netting agreements, which result in net obligations. This process could also include the calculation of margin calls for the trading parties’ open positions.
- Settlement of obligations: the parties to the transaction fulfill their obligations under the transaction, including the obligation of delivery, transfer of funds or transfer of ownership of securities between the parties. In this regard, the clearing system provides an arrangement, process, mechanism or service to facilitate the settlement of obligations between the parties to the transaction. For example, a securities settlement system (“SSS“) is a clearing system that allows the transfer and settlement of securities between the parties to the transaction.
The MAS Guidelines on the Regulation of Clearing Facilities state that a company incorporated in Singapore (“Singapore Company“) that operates a CCP or SSS is considered systemically important and will be regulated as a licensed clearing house (“ACH“). Other Singapore companies that operate clearing facilities in Singapore may be regulated as ACHs or Recognized Clearinghouses (“RCH“) based on their systemic importance, as assessed by the MAS. A foreign entity that operates a clearing facility in Singapore will be regulated by the MAS as an RCH.
Proposed exemption for AEs or RMOs providing limited post-trade services
MAS points out in the consultation document that some newly developed marketplace platforms operated by AEs or RMOs (many of which use new technologies (e.g. blockchain)) bring together buyers and sellers of products which were traditionally traded bilaterally and over-the-counter (instead of being traded on a platform). These platforms may facilitate trading and settlement and may provide post-trade services that fall under the definition of “clearing or settlement” under the SFA. For example, after a trade is executed on the platform of an AE or an RMO, the AE or RMO generates a report indicating the obligations of the respective counterparties to the trade and sends it to the counterparties. to verify and affirm that the details of the transaction are correct. These post-trade services fall under the definition of “clearing or settlement” activities which relate to “verification of trade details” and “calculation of obligations”. However, it should be noted that, typically, such AEs or RMOs do not act as CCPs or facilitate the settlement of obligations between trading parties, or act as SSSs.
MAS is of the view that the post-trade services offered by these AEs or RMOs do not present systemic risks similar to those of clearing or settlement services when trades are routed to a clearing facility to be cleared or settled by clearing facility on a centralized basis. Therefore, MAS proposes to exempt AEs and RMOs that offer post-trade services that only fall within the activities of “clearing or settlement” from “verification of trade details” and “calculation of obligations” to be regulated as an ACH or RCH. . MAS will regulate the marginal risks that may arise from these post-trade services through its supervision of these entities as AE or RMO. AEs or RMOs are subject to regulatory requirements relating to the management of operational, technological and cyber risks, as well as operational resilience and business continuity. MAS explains that the proposal aims to facilitate the provision of these services without imposing additional regulatory costs on these AEs or RMOs, which may not be commensurate with the impact on systemic risks.
The exemption will be prescribed as a class exemption by regulations to be issued under section 49(6) of the SFA. The draft regulations are presented in Appendix B of the consultation document.
To benefit from the exemption, an AE or an RMO must notify the MAS in writing within 14 days from the date on which it establishes or begins to operate the clearing system. This compensation facility must meet the following requirements:
- Each transaction cleared or settled on the clearing system is a transaction that:
- is executed on an organized market that the EA or RMO establishes or operates; and
- after fulfillment, is not forwarded to an ACH or RCH for clearance or settlement; and
- No clearing or settlement is provided on the clearing system other than any arrangement, process, mechanism or service relating to transactions by which any of the following is effected:
- the information relating to the conditions of these transactions is verified by the RA or the RMO in order to confirm the transactions;
- the obligations of the parties under these transactions are calculated, whether or not these calculations include multilateral netting agreements