28 May 2020
On 15 May 2020, the Monetary Authority of Singapore (“MAS”) issued its response to feedback received from its public consultation on “Proposed Regulatory Approach for Derivatives Contracts on Payment Tokens” (“Response”). The Security and Futures (Prescribed Underlying Thing) Regulations 2020 (“Regulations”) were also gazetted and came into operation on 18 May 2020.
On 20 November 2019, MAS issued a consultation paper setting out and seeking feedback on its proposed regulatory approach under the Securities and Futures Act (“SFA”) to regulate derivatives contracts traded on approved exchanges (“AE”) that reference payment tokens as underlying assets (“Payment Token Derivatives”). The consultation closed on 20 December 2019.
Respondents were broadly supportive of MAS’ proposed approach to regulate Payment Token Derivatives offered by an approved exchange and not to regulate Payment Token Derivatives offered by other entities (“non-AE”), as well as of MAS’ additional measures to protect retail investors.
1. Payment Token Derivatives on AEs regulated by MAS
Since the coming into operation of the Regulations on 18 May 2020, MAS regulates Payment Token Derivatives that are offered on an AE. MAS views AEs as systemically important trading facilities, coupled with the importance of having effective oversight over products offered on AEs due to its risk of contagion to the wider financial system.
The regulation of Payment Token Derivatives on AEs is notwithstanding MAS agreeing with some respondents that Payment Token Derivatives as a general asset class are not yet suitable to be regulated, as payment tokens and Payment Token Derivatives tend to exhibit high volatility and are intrinsically difficult to value. MAS reiterated in the Response its caution to investors of the risk of trading payment tokens and Payment Token Derivatives as such products are not suitable for retail investors.
2. Non-AE Payment Token Derivatives not regulated
Non-AE Payment Token Derivatives are not regulated by MAS. MAS considers that the regulation of Payment Token Derivatives offered by non-AE entities (including digital payment token service providers under the Payment Services Act (“PS Act”)) will confer misplaced confidence in such highly volatile products that could lead to a wider offering to retail investors. MAS notes the relatively low retail participation in such products and will continue to monitor developments in this area.
MAS’ calibrated overall approach would provide institutional investors a regulated alternative to gain exposure to the underlying assets, giving room for the industry to potentially transform and develop alternative products better suited to a wider group of investors.
3. Other regulatory clarifications on regulatory approach for Payment Token Derivatives under SFA
The Response clarifies MAS’ position on certain questions that were raised in the consultation, which are set out as follows:
(a) Regulation of overseas exchanges: While overseas exchanges are not prohibited by MAS from offering Payment Token Derivatives, MAS will not regulate such Payment Token Derivatives under the SFA.
(b) Regulatory requirements for custodising underlying payment tokens of Payment Token Derivatives: While MAS does not directly regulate the custody of payment tokens under the SFA, where payment token custody services are provided in relation to AE Payment Token Derivatives, MAS will require that the AE be responsible for the appointment of the custodian and that the custodian be properly regulated (i.e. custodian subject to similar regulation that a custodian of securities or other capital markets products is subject to).
(c) Investor protection measures in spot payment token markets: Under the PS Act, MAS regulates certain activities relating to “digital payment tokens” for spot payment token markets. MAS has issued a consultation paper titled “Consultation on the Payment Services Act: Proposed Amendment to the Act” on 23 December 2019, which discussed, among other things, powers to impose user protection measures on certain digital payment token service providers, and will be responding to that consultation in due course.
4. Additional measures to protect retail investors
MAS proposed in the consultation to implement margin requirements to reduce the amplification of losses experienced by retail investors. In this regard, MAS-regulated financial institutions will have to collect from retail investors 1.5 times the standard amount of margin required for contracts offered by approved exchanges (“1.5x margin requirement”), subject to a floor of 50%. The 1.5x margin requirement will apply to both listed and over-the-counter Payment Token Derivatives. In addition, to discourage retail investors from trading in these highly risky products, measures such as tailored risk warnings and restrictions on advertising will be implemented.
Such measures will also be extended to cover products like debentures that are based on payment tokens. MAS strongly encourages issuers to engage MAS in advance if they intend to offer such products to the public.
According to MAS, these measures are expected to be implemented by 30 June 2020.
Feedback on additional measures for products referencing payment tokens
MAS has received feedback that additional measures, including restrictions on advertising and the imposition of 1.5x minimum margin requirements for retail investors, may drive retail investors to unregulated entities and lead to a loss of competitiveness for SFA-regulated intermediaries offering Payment Token Derivatives.
In response, MAS states that it has introduced additional measures for retail investors who trade Payment Token Derivatives with financial institutions (“FIs”) regulated under the SFA, in line with MAS’ view that Payment Token Derivatives are not suitable for most retail investors. In addition, MAS discourages retail investors from trading with unregulated entities which could be fraudulent. When retail investors trade with unregulated entities, they forgo regulatory safeguards under the SFA and do so at their own risk.
MAS states in the Response that it will continue to step up consumer education efforts to caution investors against the high risks of trading Payment Token Derivatives and against dealings with unregulated entities.
MAS also received suggestions that it should allow SFA-regulated intermediaries offering Payment Token Derivatives to determine their own margin rates for non-retail investors according to their credit risk management policies.
In response to the suggestions, MAS states that it is of the view that a prescribed baseline margin requirement is still necessary to prevent investors, particularly retail investors, from being overly leveraged and simultaneously instituting a reasonable level of risk management for the FIs, noting that SFA-regulated intermediaries are already required to have in place robust credit risk management policies. As non-retail investors are likely to have a greater financial capacity to withstand losses, the margin requirements applicable to non-retail investors are lower than those for retail investors.
To clarify various operational aspects of the additional measures, MAS has updated its FAQs on Licensing and Business Conduct (Other than for Fund Management Companies) on 27 February 2020.
MAS response to suggestions on other alternative measures to reduce retail participation
MAS’ response to the following suggestions on other alternative measures to limit retail participation are as follows:
(a) Suggestion to set high minimum investment amount: In response to the suggestion to set a high minimum investment amount for Payment Token Derivatives, MAS explains that setting a high minimum investment amount could have the unintended consequence of pushing investors to allocate more money to Payment Token Derivatives in order to meet the minimum amount, which may lead to even larger investment losses.
(b) Suggestions to restrict trading of Payment Token Derivatives: In relation to the suggestions to allow retail investors to trade Payment Token Derivatives only on a pre-funded basis, i.e. fully margined and disallowing retail investors from trading Payment Token Derivatives and to disallow retail investors from trading Payment Token Derivatives, MAS is of the view that these suggestions are more heavy-handed than the ones MAS proposed and that the additional measures MAS had introduced are sufficient to discourage retail investors from trading in Payment Token Derivatives, and commensurate with the current level of risks to retail investors.
MAS states that it will continue to review the effectiveness and sufficiency of the measures, monitory industry developments and assess whether they should be supplemented or substituted by other options such as those suggested by the respondents.
5. Amendments to subsidiary legislation
MAS clarifies the following in relation to the amendments to the Regulations:
(a) Difference between definitions of “payment token” and “digital payment token” under the PS Act: The definition of “payment token” for the purposes of the Regulations means any digital representation of value that:
- is expressed as a unit,
- is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt; and
- can be transferred, stored or traded electronically but does not include any payment token that is a digital representation of value where the value is fixed to (i) a single currency; or (ii) two or more currencies, in amounts that are determined at the time of issuance of the payment token and thereafter cannot be changed.
MAS clarifies that the proposed definition of “payment token” is for the purposes of the SFA, and does not affect the definitions of payment tokens or similar terms (if any) found in any other Acts.
(b) Whether derivatives on fiat-backed stablecoins or stable coin derivatives were considered “payment token” derivatives: MAS clarifies that a derivatives contract referencing a token which value is permanently fixed to one or more currencies is not considered a Payment Token Derivative and thus not subject to the additional measures for retail investors. However, it is still a derivatives contract regulated under the SFA, as it is one that is based on currency.
(c) Suggestion to include derivatives on other tokens such as utility tokens: MAS will look through to the underlying that these utility tokens represent and regulate the derivatives of such utility tokens under the SFA if the tokens are within the scope of an underlying thing that currently attracts regulation under the SFA.
(d) Suggestion to publish list of tokens for which the derivatives are within regulatory scope: MAS does not consider it necessary to publish a list of regulated derivatives of tokens in line with MAS’ general stance of not endorsing specific products and further states that interested persons should make their own assessment as to whether their activities fall within regulatory scope and whether they are in compliance with regulatory requirements.
The following materials are available on the MAS website www.mas.gov.sg:
- Response to feedback received: Proposed regulatory approach for derivatives contracts on payment tokens
- Securities and Futures (Prescribed Underlying Thing) Regulations 2020
- Media release - MAS consults on proposed changes to regulate payment token derivatives traded on Approved Exchanges
- Consultation paper on proposed regulatory approach for derivatives contracts on payment tokens
- Annex B: Draft amendments to Securities and Futures (Prescribed Underlying Thing) Regulations