5 November 2021
The Monetary Authority of Singapore (Resolution of Financial Institutions) Regulations 2018 (“Regulations”) have been amended with effect from 1 November 2021 to provide for the contractual recognition requirement for qualifying pertinent financial institutions (“QPFIs”) and their related entities to include enforceable provisions in their financial contracts which contain early termination rights where such contracts are governed by foreign law. The effect of the provisions is to have all parties to the contract agree that their exercise of termination rights will be subject to MAS’ temporary stay powers in the event of a resolution.
QPFIs will have three years from 1 November 2021 to make the necessary preparations to implement the contractual recognition requirement.
MAS will also be engaging the International Swaps and Derivatives Association (“ISDA”) to explore the possibilities of putting in place an ISDA Jurisdictional Module for Singapore, to support industry efforts.
In its consultation paper published on 16 July 2018, MAS proposed regulations to enhance the resolution regime for financial institutions in Singapore to support amendments introduced by the Monetary Authority of Singapore (Amendment) Act 2017. Among other things, in relation to temporary stays on termination rights, MAS proposed a contractual recognition requirement to ensure that certain contracts governed by foreign laws contain enforceable provisions the effect of which is that all the parties to the contract agree that their exercise of termination rights may be subject to MAS’ temporary stay powers.
However, in view of feedback received from respondents on the scope and application of the contractual recognition requirement, MAS stated in its Response on 26 October 2018 that it would not promulgate regulations relating to the contractual recognition requirement at that point in time, and would engage the industry further.
MAS has since had further discussions with financial institutions which would be subject to the contractual recognition requirement, regarding the scope and application of the requirement. On 29 October 2021, MAS issued its Response relating to the requirement.
Set out below are the key responses which have been incorporated into the Regulations.
Scope of QPFIs
MAS had originally proposed that the contractual recognition requirement apply to QPFIs that are incorporated in Singapore and issued with a notice by MAS to perform recovery and resolution planning. These would be (a) banks, (b) financial holding companies, (c) operators or settlement institutions of designated payment systems, (d) approved exchanges, recognised market operators, licensed trade repositories, approved clearing houses, recognised clearing houses, approved holding companies, holders of a capital markets services licence, or depositories, or (e) insurers.
In response to feedback that the scope of QPFIs was too wide, MAS has narrowed the scope of QPFIs subject to the contractual recognition requirement to only banks incorporated in Singapore and to which a direction has been issued under the Monetary Authority of Singapore Act to perform recovery and resolution planning, and the subsidiaries of these banks. The contractual recognition requirement will not apply to banks operating as branches in Singapore.
Scope of contracts
In its Response, MAS has stated that the contractual recognition requirement will apply to:
(a) a contract that is a financial contract (i.e. a securities contract, a derivatives contract, a securities lending or repurchase agreement, and a spot contract) which is governed by foreign law and which contains a termination right; and
(b) any contract which falls within (a) above entered into, or any transaction executed under a contract which falls within (a) above, on or after 1 November 2024 (“relevant date”).
Hence, a financial contract which (i) contains a termination right but is governed by Singapore law, or (ii) is governed by foreign law but does not contain a termination right, will not be subject to the contractual recognition requirement.
Financial contracts between a QPFI and its intragroup entities are included in the scope of the contractual recognition requirement.
MAS has also clarified that the contractual recognition requirement will apply to contracts where new transactions are executed even if the contract had been entered into before the relevant date (including master agreements). On the other hand, contracts where there are transactions which are outstanding at the relevant date but where no new transactions are executed, will not be in scope. In other words, outstanding transactions of existing contracts as at the relevant date would not be impacted by the requirement. The requirement will impact new transactions executed after the relevant date.
Enforceability of contracts
In response to queries as to whether QPFIs are required to obtain a legal opinion stating the enforceability of the provisions which are inserted in contracts to recognise MAS’ temporary stay powers, MAS has clarified that while legal opinions on the enforceability of the provisions are not required, MAS expects QPFIs (and their subsidiaries) to satisfy themselves that the provisions are enforceable, and to be able to demonstrate so, should the need arise.