These rules are made for following
12 July 2017
The Asian market often makes it difficult to determine which jurisdictions will adopt which rulings, the pending changes that Singaporean regulators have proposed should come as no surprise, says Tracey Adams of Lombard Risk
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It would seem that the Monetary Authority of Singapore’s (MAS) focus on derivatives at the start of 2017 will be no less demanding than 2016. In January 2016, MAS consulted on proposed amendments to the Securities and Futures Regulation relating to the derivatives reporting regime. Exactly a year later and MAS has announced a new wave of amendments aimed at bolstering existing regulation. These changes seek to tighten the underlying framework of the original Securities and Futures Act (SFA) of 2012, enhancing transparency and strengthening the market against financial misconduct.
While the fragmentation of the Asian market often makes it difficult to determine which jurisdictions will adopt which rulings, the pending changes that Singaporean regulators have proposed should come as no surprise.
A combination of record foreign exchange volumes and steadily increasing interest rate derivative transactions coupled with a requirement for banks to come to par with other global players meant that regulators deemed it a necessity to ensure that global rulings must apply.
Some of the key proposals that were made on 9 January 2017 include:
A takeover of all over-the-counter derivatives activities, including commodity derivatives. This enables MAS to regulate market operators and capital markets intermediaries.
The empowerment of MAS to stipulate the trading of all derivatives contracts on organised trading facilities instead of over the counter.
The disclosure of short-sell orders to the relevant exchange and reporting of short positions above specified thresholds to MAS and the recommendation to introduce a new framework for financial benchmarking.
Further clarification and stringency around the original SFA regarding the influence of market prices by ‘persons who commonly invest’.
Creating a balance between the promotion of growth while also ensuring that regulation is adhered to is a fine line that regulators are having to walk. MAS has said that it will continue to review and expand the scope of both derivatives and securities finance regulation, taking into account both national and international demands. While this may cause concern for some, others would argue that Singapore stands in a position of strength in comparison to some of its Asian counterparts.
The regulators are taking a consultative approach, banks are well capitalised with strong capital adequacy ratios and most buy-side participants already have the correct legal frameworks in place for the exchange of collateral. In short, the building blocks of the Singapore capital market segment is strong enough to weather incremental waves of regulatory change.
What both the sell and buy side now need to address is the internal system infrastructure upon which the regulations can be implemented. The need for organisations to have a comprehensive, robust, operationally integrated, and technologically advanced solution for enterprise-wide and cross product collateral management has become imperative. For example, on the sell side, while a strong capital base will help ease immediate pressure, the lack of an adequate/centralised inventory layer or tools to optimise assets will result in the inefficient use of collateral. As the cost of collateral increases and the requirement to hold increasing amounts of unencumbered high-quality liquid assets is introduced, many banks are having to adapt.
In terms of post-trade measures, what forms the strength and backbone of an institution’s ability to manage collateral pressures is the further centralisation of inventory and liquidity funding functions across desks/products. This gives firms a view on forecasting, maturity ladders and funding diversification which will in turn allow for greater opportunities around optimisation and less liquidity wastage. On the buy side, while legal frameworks with banking counterparties to collateralise are in place, many of these processes are manual. Equally, and like the sell side, buy side participants will see margin call volumes increasing.
Firms will need to explore cross-product margining opportunities, develop analytics to drive margin efficiencies, and move their manual, spreadsheet-based tools to a more automated and compliant collateral management infrastructure. Participants will need to track, value, and substitute collateral seamlessly. Implementing such solutions will be crucial to keeping an organisation competitive—particularly if it is part of a proactive approach to managing risk, regulation, and capital.
While the fragmentation of the Asian market often makes it difficult to determine which jurisdictions will adopt which rulings, the pending changes that Singaporean regulators have proposed should come as no surprise.
A combination of record foreign exchange volumes and steadily increasing interest rate derivative transactions coupled with a requirement for banks to come to par with other global players meant that regulators deemed it a necessity to ensure that global rulings must apply.
Some of the key proposals that were made on 9 January 2017 include:
A takeover of all over-the-counter derivatives activities, including commodity derivatives. This enables MAS to regulate market operators and capital markets intermediaries.
The empowerment of MAS to stipulate the trading of all derivatives contracts on organised trading facilities instead of over the counter.
The disclosure of short-sell orders to the relevant exchange and reporting of short positions above specified thresholds to MAS and the recommendation to introduce a new framework for financial benchmarking.
Further clarification and stringency around the original SFA regarding the influence of market prices by ‘persons who commonly invest’.
Creating a balance between the promotion of growth while also ensuring that regulation is adhered to is a fine line that regulators are having to walk. MAS has said that it will continue to review and expand the scope of both derivatives and securities finance regulation, taking into account both national and international demands. While this may cause concern for some, others would argue that Singapore stands in a position of strength in comparison to some of its Asian counterparts.
The regulators are taking a consultative approach, banks are well capitalised with strong capital adequacy ratios and most buy-side participants already have the correct legal frameworks in place for the exchange of collateral. In short, the building blocks of the Singapore capital market segment is strong enough to weather incremental waves of regulatory change.
What both the sell and buy side now need to address is the internal system infrastructure upon which the regulations can be implemented. The need for organisations to have a comprehensive, robust, operationally integrated, and technologically advanced solution for enterprise-wide and cross product collateral management has become imperative. For example, on the sell side, while a strong capital base will help ease immediate pressure, the lack of an adequate/centralised inventory layer or tools to optimise assets will result in the inefficient use of collateral. As the cost of collateral increases and the requirement to hold increasing amounts of unencumbered high-quality liquid assets is introduced, many banks are having to adapt.
In terms of post-trade measures, what forms the strength and backbone of an institution’s ability to manage collateral pressures is the further centralisation of inventory and liquidity funding functions across desks/products. This gives firms a view on forecasting, maturity ladders and funding diversification which will in turn allow for greater opportunities around optimisation and less liquidity wastage. On the buy side, while legal frameworks with banking counterparties to collateralise are in place, many of these processes are manual. Equally, and like the sell side, buy side participants will see margin call volumes increasing.
Firms will need to explore cross-product margining opportunities, develop analytics to drive margin efficiencies, and move their manual, spreadsheet-based tools to a more automated and compliant collateral management infrastructure. Participants will need to track, value, and substitute collateral seamlessly. Implementing such solutions will be crucial to keeping an organisation competitive—particularly if it is part of a proactive approach to managing risk, regulation, and capital.
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