28 October 2020

On 23 October 2020, the Monetary Authority of Singapore (“MAS”) issued a consultation paper on “Proposed Amendments to the Capital Requirements for Locally Incorporated Recognised Market Operators”, seeking comments on proposals to introduce a liquidity requirement and recalibrate the solvency requirement for recognised market operators (“RMOs”), as well as a draft Notice setting out details of the new capital requirements for RMOs. The consultation closes on 4 December 2020.

The primary regulated function of a market operator is to operate organised markets in a fair, orderly and transparent manner. This includes promoting price discovery through the linking up of sellers of financial products with buyers. The key risk posed by an RMO to the financial system is operational risk, i.e. the risk that the RMO is unable to continue operating its organised markets, leaving participants of the RMO with the need to find alternative trading venues. Capital requirements are therefore imposed on RMOs to provide sufficient resources for the RMO to wind down its operations in an orderly fashion and provide time for participants to switch to alternative trading platforms.

There is now greater diversity in the entities that are seeking an RMO recognition since capital requirements for RMOs were introduced in 2005. First, over-the-counter-derivatives (OTCD) trading venues will now be regulated as organised markets, whereas the previous licensing regime for market operators was for exchange-listed products. Second, with the FinTech revolution, more start-ups are seeking to become RMOs, whereas in the past, typically only well-established players with a track record of operating markets (e.g. in other jurisdictions) would apply for an RMO recognition.

MAS is therefore reviewing whether the capital requirements imposed on RMOs continue to be appropriate for these new market operators, taking into consideration the key risk that RMOs pose and the capital standards of international jurisdictions.

1. Proposed capital requirements for locally incorporated RMOs

Currently, RMOs hold financial resources that are at least the highest of (i) 18% of their annual operating revenue, (ii) 50% of their annual operating costs, and (iii) S$500,000.

There are currently no direct liquidity requirements imposed on RMOs. While liquidity risk is addressed indirectly in the current capital requirements through the deduction from financial resources of assets not convertible to cash within 30 days, financial resources could still include components that are not available for immediate use to sustain their operations.

MAS therefore proposes to introduce a direct liquidity requirement, which requires RMOs to hold cash and cash equivalents of at least 25% of their annual operating costs. Requiring RMOs to hold liquid assets to cover operating costs for approximately three months will give participants time to source for and switch to alternative trading venues. Similar approaches are adopted by reputable international jurisdictions.

2. Proposed recalibration of solvency requirement

MAS is of the view that a baseline solvency is still necessary as a hygiene factor since market participants would generally want to deal with entities that are solvent.

However, given that solvency is not a key area of concern, MAS is of the view that the current solvency requirement can be lowered. MAS therefore proposes a revised solvency requirement for RMOs to hold eligible capital of at least the higher of (i) 25% of their annual operating costs, or (ii) S$250,000. The proposed recalibrated requirement is comparable to those in international jurisdictions.

With the proposed introduction of a separate liquidity requirement, there is no need to deduct illiquid assets from eligible capital. Further, as RMOs pose little financial risks to their participants, MAS will confine the deductions from eligible capital only to assets that are more unlikely to be realisable upon insolvency of the RMO (e.g. prepaid expenses).

3. Proposed Notice on capital requirements for RMOs

Currently, capital requirements are imposed via recognition conditions. To improve the transparency of the capital requirements for current and future entrants, MAS intends to issue a Notice which sets out details of the new capital requirements for RMOs. The draft Notice is set out in Annex B to the consultation paper.

Reference materials

The following materials are available from the MAS website www.mas.gov.sg or by clicking here: