30 May 2018

The Securities and Futures (Clearing of Derivatives Contracts) Regulations 2018 (“Regulations”) were gazetted on 2 May 2018 and will come into operation on
1 October 2018. The Regulations will implement a framework requiring over-the-counter (“OTC”) derivatives to be cleared on central counterparties (“CCPs”).

The mandatory clearing requirement will apply to Singapore Dollar (“SGD”) and US Dollar (“USD”) fixed-to-floating interest rate swaps (“IRS”). Banks whose gross notional outstanding OTC derivatives exceed S$20 billion will be required to clear their trades through CCPs that are regulated by the Monetary Authority of Singapore (“MAS”).

Background

The Securities and Futures Act was amended in October 2013 to introduce a framework for the regulation of derivatives contracts by requiring certain derivatives contracts to undergo clearing by a clearing facility operated by an approved clearing house or a recognised clearing house.

From 1 to 31 July 2015, MAS conducted a public consultation on a draft version of the Regulations for the mandatory clearing of OTC derivatives (“July 2015 Consultation”). MAS’ Response to the July 2015 Consultation was published on
2 May 2018.

Specified derivatives contracts to be cleared

The following IRS with tenors of between 28 days and 10 years (inclusive) will be subject to clearing obligations:

  • SGD fixed-to-floating IRS based on the Singapore Dollar Swap Offer Rate (SOR); and
  • USD fixed-to-floating IRS based on the London Interbank Offered Rate (LIBOR).

These clearing obligations are applicable to derivatives contracts entered into on or after 1 October 2018.

Circumstances under which contracts are to be cleared

The clearing obligations will apply to derivatives contracts “booked in Singapore” by both parties to the derivatives contract. “Booked in Singapore” means the entry of the derivatives contract on the balance-sheet or the profit and loss accounts of a person where the person is a party to the derivatives contract, the person’s place of business is in Singapore, and the balance-sheet or the profit and loss accounts relate to the person’s business in Singapore. “Place of business” is defined as a head or main office, a branch, a representative office or any other office of the party.

Trades have to be cleared within one business day after the day on which the specified derivatives contract is entered into.

Specified persons to be subject to clearing obligations

Under the Securities and Futures Act, all banks and other financial institutions such as insurers and capital markets services licence holders are “specified persons” subject to clearing obligations upon commencement of the mandatory clearing regime. In the July 2015 Consultation, however, MAS stated that it would initially subject only banks that have a certain level of OTC derivatives activities to clearing obligations in order to address the largest counterparty credit risks.

The Regulations will provide for the following specified persons to be exempt from clearing obligations:

  • any bank that is licensed under the Banking Act whose aggregate outstanding notional amount does not exceed S$20 billion for the last day of the most recently completed quarter and for the last day of each of the three consecutive quarters immediately preceding that quarter;
  • any bank that is licensed under the Banking Act that has been carrying on business for less than one year;
  • all other specified persons that are not banks licensed under the Banking Act.

Exemptions from clearing obligations

Intra-group transactions and public bodies will not be subject to the clearing obligations. MAS will also provide a limited exemption for trades resulting from multilateral portfolio compression.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg and the Singapore Statutes Online website sso.agc.gov.sg:

 

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