BY EMON TABRIZI

Amongst a backdrop of global regulatory changes, many of which emanate from Europe and the US, the Monetary Authority of Singapore has taken their own stance on the challenges facing the industry today, and made great steps towards implementing parallel measures to ensure a global harmonised approach. The following article explores three pertinent areas of global regulatory change, and MAS’ respective approach to each.

AML

The Monetary Authority of Singapore (MAS) has illustrated that it will not tolerate any abuse to Singapore’s rigid financial system through its recent crackdown on a number of firms found to be in breach of Anti Money-Laundering (AML) rules. Such abuses were linked to 1Malaysia Development Bhd (1MDB); a government-controlled fund set up in Kuala Lumpur, with the aim of turning Malaysia into a financial stronghold through various investments. In 2015, the fund came under criticism after reneging on several of its bondholder and bank-based debts, bringing around $11 billion[1] worth of failed payments into question.

Taking after the US, among other regulators, the MAS has recently imposed penalties of several million Singaporean Dollars, with Standard Chartered Bank and Coutts & CO Ltd, Singapore facing fines of 5.2 and 2.4 million, respectively[2]. For both establishments, MAS has inspected and found a lack of due diligence in relation to fund-related flows and politically exposed persons (in the case of Coutts). The regulator revealed that this was due to a number of inadequacies, including a lack of front office oversight, insignificant control measures and a lack of awareness towards money laundering risks among staff. Although possibly perceived as a mere slap on the wrist in comparison to other fines, repeat offences can have a damaging effect on reputation.  As banking and commodities trading take on a large share of Singapore’s GDP, these high revenue streams inevitably create more opportunities for the industry to launder cash. With a relatively stagnant GDP growth in its financial market over the past few quarters, the recent series of fines imposed on the aforementioned parties alongside the recent bans against certain personnel from Goldman Sachs could not have come at a worse time. Corporations should instead take this as a learning point to improve their AML preventative measures.

Global Trade Reporting

In line with the impositions placed on London by the European regulators and authorities, the MAS is also seeking a market place with industry data standards, strong risk management measures and transparency across the OTC space. As part of an ongoing effort to enhance transparency and reduce systemic risk in the OTC market, the Australian Securities and Investments Commission (ASIC) and the MAS will be working together on the supervision and sharing of data for trade reporting rules in the OTC space. MAS requires interest rate and credit derivatives as well as most FX contracts traded or booked in Singapore to be reported. Over the next few years, this is expected to extend to commodity and equity derivatives. For commodity derivatives, the MAS has proposed the mandatory reporting of all forwards, swaps and options that are related to commodities and indices, which include cash flows determined by reference to one or more commodities. For equities contracts, the MAS has proposed an encompassing definition of ‘equity derivatives contracts’ which take on the broad meaning of ‘rights, options or derivatives related to stocks or shares issued or proposed to be issues by a corporation or body unincorporated’.[3] Fortunately for many institutions, certainty comes with specific exclusions, such as physically-settled commodity contracts entered in for commercial purposes as well as exchange-traded equity derivatives.

The MAS is also pushing for a few new inclusions in respect of reportable information. These include additional data fields for collateral, booking location, as well as location of the trader desk. When implemented, these additional requirements will facilitate the implementation of other OTC derivative reforms such as data-sharing for uncleared margin requirements, as well as aligning Singapore with the requirements imposed by international regulators like the US Securities and Exchange Commission. Evidently, the Singapore authorities are attempting to keep up with its global regulators, whilst increasing accountability and transparency within corporations.

Non-cleared margin requirements

End 2016 saw the MAS announcing a revised timeline for its variation margin (VM) requirements - favouring a more urgent implementation date of 1 March 2017. This is in conjunction with the commencement of its new initial margin (IM) calculation requirements, which will be expected to create various commercial and operational challenges for market counterparties.

The VM will serve the purpose of fully collateralising the mark-to-market exposure of an uncleared derivative. Given that this exchange is expected to occur on a daily basis, there is therefore a need for more updated systems to better facilitate these new calculations and requirements. Some new challenges include ensuring the accurate recognition of the minimum transfer amount of S$800,000, ensuring that calculations are accurately produced on an aggregate net basis (across all uncleared derivatives that are executed under a “single, legally enforceable netting agreement”[4]); as well as ensuring that counterparties have rigorous dispute resolution procedures in place.

IM on the other hand, exists to protect the entity from any potential mark-to-market value exposure during the period it takes to close out and replace the position in the event of default. Despite a rather extensive list of new requirements, the consolation is that the new implementation dates stretch generously from 1 March 2017 to 1 September 2020; beginning at S$4.8 trillion depending on the aggregated notional amount of uncleared derivative contracts consolidated between the MAS categorised entity and counterparty.

There are currently various predefined events warranting recalculation - including the execution of a new contract, a recalibration of the IM model due to changes in market conditions, or where no IM is calculated within the last 10 days. Notwithstanding current calculation obligations, it is also advised that the MAS, in line with draft EU regulations, consider reclassification when, for instance, an existing contract is reclassified under the standardised model as a result of a reduced time to maturity.[5] These added rules entail further complications when it comes to constructing models as trading across time zones can also create additional operational challenges. Smaller firms may expect to enjoy some leeway in terms of meeting deadlines for required documentation as well as physically-settled FX forwards and swaps.

Conclusion

The 1MDB fund laundering saga, coupled with challenges to implement new margin rules within such a tight deadline, risks damaging the credibility of many Singaporean establishments and placing burdensome operational requirements on corporations. Nevertheless, often viewed as a strategic location and a trading middle man with sublime regional connectivity, the Singaporean market offers the infrastructure to withstand these pressure points and facilitate the growth of trading assurance.

[1] http://uk.reuters.com/article/us-malaysia-scandal-idUKKCN0X8190

[2] https://www.washingtonpost.com/local/education/feds-seek-record-24-million-fine-against-penn-state-in-sandusky-scandal/2016/11/03/7fbe7bf8-a1cd-11e6-8832-23a007c77bb4_story.html?utm_term=.dfe1e24fa8d6

[3] http://www.whitecase.com/publications/article/otc-derivatives-reporting-and-clearing-singapore-update-regulatory-reforms

[4] http://www.linklaters.com/Insights/AsiaNews/AsiaCapitalMarkets/Pages/MAS-publishes-Guidelines-Margin-Requirements-Non-Centrally-Cleared-OTC-Derivatives-Contracts.aspx

[5] http://www.linklaters.com/pdfs/mkt/singapore/A30546982%20v0.7%20Newsletter_MAS%20CP%20on%20Margining%20Bulletin.pdf.