26 July 2018
On 5 July 2018, the Singapore Exchange (“SGX”) issued a Consultation Paper titled “Proposed Revision of the Financial and Capital Requirements on Bank and Remote Members” (“Consultation Paper”). The SGX seeks feedback on proposed recalibrations of these requirements for Remote Clearing Members (“RCMs”), Remote Trading Members (“RTMs”), Bank Clearing Members (“BCMs”) and Bank Trading Members (“BTMs”) (collectively, “Members”).
The current financial and capital requirements of RCMs, RTMs, BCMs and BTMs were imposed to provide a common regulatory framework amongst all classes of Members, and to mirror statutory requirements. There have since been significant developments in the regulatory landscape, such as the introduction of increased minimum capital requirements and new leverage ratios and liquidity standards for banks pursuant to Basel III.
The proposals in the Consultation Paper seek to take into account developments in the regulatory landscape and the levels of risk posed by members. The proposed amendments are to the Clearing Rules of SGX-Derivatives Clearing (“SGX-DC”) and the Central Depository (“CDP”), the Trading Rules of SGX-Securities Trading (“SGX-ST”) and the Futures Trading Rules (“FTR”).
The consultation closed on 27 July 2018.
Subject to regulatory clearance, SGX aims to implement the revision of financial and capital requirements for BCMs, RCMs, BTMs and RTMs in the fourth quarter of 2018.
The proposed changes are set out briefly here.
Proposed removal of risk-based capital requirements and reliance on RRA requirements
SGX proposes to remove current requirements applicable to members and rely on the minimum capital and liquidity requirements as imposed by the Members’ respective home regulator’s financial and capital requirements, i.e. the MAS if Singapore-incorporated, or a foreign regulator if foreign-incorporated (“Relevant Regulatory Authority” or “RRA”). This reliance is contingent on the financial and capital requirements of the RRA being in line with the Basel capital adequacy and liquidity framework. The Consultation Paper notes that if the RRA’s requirements are in line with the Basel framework, which is an internally recognised regulatory framework for banks, it is appropriate to rely on the RRA’s requirements to regulate bank members.
Proposed redefinition of base capital for bank members
SGX seeks to redefine base capital to be of more direct and relevant application. It proposes to amend the definition from the meaning under Regulation 2 of the Securities and Futures (Financial and Margin Requirements) Regulations (“SFR”) to paid-up ordinary share capital and unappropriated profit or loss. With the amended definition of base capital, the capital and financial requirements of all classes of BCMs of the SGX-DC will be harmonised. Currently, SGX-DC BCMs who clear only Over-the-Counter Traded Financial Derivative contracts are required to maintain paid up ordinary share capital and unappropriated profit or loss of not less than S$50,000,000, while other SGX-DC BCMs are required to comply with base capital requirements (base capital as defined by the SFR). With the redefinition, all SGX-DC BCMs will be subject to the same base capital requirement.
Removal of risk-based capital requirements and reliance on RRA’s requirements for RCMs
The RCM membership class was introduced in 2013 to enable overseas-based clearing brokers who do not have a Singapore presence to clear over-the-counter swaps and/or commodities. The Consultation Paper proposes to replace current risk based capital (“RBC”) requirements with the financial and capital requirements as adopted by the RCMs’ RRA, if such RRA adopts a capital adequacy framework comparable to SGX’s. The Consultation Paper sets out the criteria it will follow in determining if a foreign regulator is an RRA. RCMs with accepted RRAs will not be required to compute and submit financial reports in the SGX RBC format if they already submit financial reports to their RRA using the Net Capital Requirements (NCR) or Basel approaches.
Removal of net liquid capital requirements for RTMs
SGX currently requires RTMs engaging in agency trades (“Agency RTMs”) to comply with requirements imposed by their RRA and SGX’s requirements to compute and maintain net liquid capital requirements of at least S$1 million, and submit financial returns and audit reports in an SGX-prescribed format (“NLC requirements”). The Consultation Paper proposes to remove the need for Agency RTMs to comply with NLC requirements and instead require Agency RTMs to maintain a base capital (defined as paid-up ordinary share capital and unappropriated profit or loss) of not less than S$1 million.
Redefinition of base capital for Remote Members
The Consultation Paper proposes to apply the amended definition of base capital to Remote Members as well, i.e. from the meaning under Regulation 2 of the SFR to paid-up ordinary share capital and unappropriated profit or loss, as the current definition of base capital lacks relevance to remote members and the proposed definition of base capital will be of more direct and relevant application to them.
The following materials are available on the SGX website www.sgx.com or by clicking on the links below.
- SGX media release
- Consultation Paper on Proposed Revision of the Financial and Capital Requirements on Bank and Remote Members
- Appendix 1 Proposed amendments to SGX-DC Clearing Rules
- Appendix 2 Proposed amendments to CDP Clearing Rules
- Appendix 3 Proposed amendments to Futures Trading Rules
- Appendix 4 Proposed amendments to SGX-ST Rules