29 November 2018
The Monetary Authority of Singapore Act (“Act”) has been amended with effect from 29 October 2018 to strengthen and enhance the powers of the Monetary Authority of Singapore (“MAS”) to resolve distressed financial institutions (“FIs”) in an orderly manner. Most notably, the powers of MAS to bail in instruments of ownership and liabilities of a distressed FI to help recapitalise it have come into force and will apply in respect of eligible instruments issued on or after 29 November 2018.
To assist in the implementation of the changes, the Monetary Authority of Singapore (Resolution of Financial Institutions) Regulations 2018 (“RFI Regulations”) have been issued and also took effect from 29 October 2018. MAS had, from 16 July 2018 to 16 August 2018, consulted on draft versions of these regulations. On 26 October 2018, MAS issued its Response to the feedback received.
The following are the key enhancements to FI resolution regime in Singapore:
- Framework for statutory bail-in regime;
- Temporary suspension of termination rights of counterparties;
- Recognition of foreign resolutions;
- Creditor compensation framework; and
- Recovery and resolution planning for pertinent FIs.
Framework for statutory bail-in regime
MAS is empowered to bail in instruments of ownership and liabilities of a distressed FI. This is intended to help recapitalise distressed FIs, and reduce the risk to depositors and reliance on public funds to “bail out” distressed FIs. The bail-in powers include the power to cancel, modify or convert an instrument, e.g. converting from debt to equity, and are subject to the approval of the Minister for Finance. Upon approval, the Minister will issue a bail-in certificate, which has effect despite any restriction arising by reason of contract, any written law or rule of law in force before the appointed date of the bail-in certificate.
The RFI Regulations prescribe the scope of FIs and instruments subject to statutory bail-in (“eligible instruments”), set out the information to be specified in the bail-in certificate, and require disclosure of the consequences of a bail-in on the front cover of any offering document related to an eligible instrument.
FIs subject to MAS’ bail-in powers
The FIs within the scope of MAS’ bail-in powers are Singapore-incorporated banks and bank holding companies. MAS explained that, as bail-in involves imposing express losses on creditors and not just delaying contractual rights, MAS has adopted a more prudent approach of starting with Singapore-incorporated banks and bank holding companies. For non-bank FIs, MAS will continue to monitor international developments on bail-in regimes.
The statutory bail-in provisions will apply in respect of eligible instruments issued on or after 29 November 2018.
The eligible instruments within the scope of bail-in are:
- any equity instrument or other instrument conferring or representing a legal or beneficial ownership in the FI, except an ordinary share;
- any unsecured liability or other unsecured debt instrument that is subordinated to unsecured creditors’ claims of the FI that are not so subordinated;
- any instrument that provides for a right for the instrument to be written down, cancelled, modified, changed in form or converted into shares or another instrument of ownership, when a specified event occurs.
MAS stated in its Response that for eligible instruments that are partially secured, only the unsecured portion will be within the scope of MAS’ bail-in powers. Vanilla senior perpetual securities, senior convertible bonds and senior exchangeable bonds, options and warrants also generally would not meet the definition of eligible instruments set out in the RFI Regulations.
Derivatives contracts (as defined in the RFI Regulations) are expressly excluded from the scope of eligible instruments.
Requirement for contractual recognition provisions and independent legal opinion on enforceability
An eligible instrument that is not governed by Singapore law must contain a provision to the effect that the parties to the contract agree that the eligible instrument may be the subject of a bail-in certificate. Specifically, the contract must contain provisions to the effect that the eligible instrument may be subject to cancellation, modification, conversion, change in form, or have the effect as if a right of modification, conversion, or change of its form had been exercised by MAS in the exercise of its bail-in powers, and that the parties agree to be bound by a bail-in certificate.
Where a contract which governs an eligible instrument is not governed by Singapore law, the FI must, before the issuance of the eligible instrument, provide MAS with a legal opinion by a person qualified to practise law in the jurisdiction of the governing law of the eligible instrument, as to the enforceability in that jurisdiction of the contractual recognition provisions. However, recognising the time sensitivity of issuing capital market instruments, MAS may, on an application made by an FI before the issuance of an eligible instrument, and subject to such conditions and restrictions as MAS may impose, extend the time for the provision of the legal opinion by up to 10 business days after the date of issuance of the eligible instrument. A single legal opinion may be provided for one or more contracts or classes of contracts.
The requirement to provide an independent legal opinion setting out the enforceability of the contractual recognition provisions will apply to all eligible instruments issued by an FI to all entities, including an intragroup entity. The intent of the legal opinion is to provide more legal certainty as to the enforceability of the contractual provision where the contract is governed by foreign law. Therefore, where different provisions are governed by different laws, a legal opinion would still be required for that legal certainty, notwithstanding that the provision may be governed by Singapore law while the other provisions in the contract are governed by foreign law.
Requirement for disclosure of bail-in consequences on front cover of offering documents
An FI must disclose, on the front cover of a prospectus, information memoranda, offering circular or other offering document related to an eligible instrument issued by it, that the instrument may be subject to cancellation, modification, conversion, or change in form under a bail-in certificate. MAS has stated that the issuer may provide a cross-reference within the offering document for details of the consequences of a bail-in. MAS has also stated that the front cover disclosure requirements will apply to any prospectus, information circular or other offering document related to an eligible instrument, including those issued to intragroup entities.
Temporary suspension of termination rights of counterparties
In order to ensure the orderly resolution of pertinent FIs, MAS is empowered to temporarily suspend counterparties’ exercise of any termination right in a contract with a pertinent FI in resolution. Pertinent FIs include banks, finance companies, merchant banks, financial holding companies, operators of designated payment systems under the Payment Systems (Oversight) Act, and approved exchanges. Certain counterparties, such as foreign central banks, operators of designated systems under the Payment and Settlement Systems (Finality and Netting) Act, approved or recognised clearing houses, and depositories, are excluded from these powers.
A “termination right” is defined to mean:
- a right to terminate a contract;
- a right to accelerate, close out, set off or net an obligation under a contract that would result in a suspension or modification or the extinguishment of the obligation;
- a right to suspend, modify or extinguish an obligation of a party to a contract; or
- in the case of a reinsurance contract, a right of the reinsurer to terminate or not to reinstate coverage under the contract.
The Act has also been amended to introduce provisions that will dis-apply counterparties’ rights to terminate contracts with pertinent FIs where these rights arise by reason of MAS undertaking a resolution measure in respect of the pertinent FI, provided that the substantive obligations of the contract continue to be performed. The provisions also extend to entities which are part of the pertinent FI’s group (“Related Entities”), where the obligations of the Related Entity are guaranteed or otherwise supported by the pertinent FI.
MAS had originally intended to impose a contractual recognition requirement on qualifying pertinent FIs, such that their financial contracts governed by foreign laws contain enforceable provisions whereby all parties to the contract agree that their exercise of termination rights may be subject to MAS’ temporary stay powers. Further, MAS would impose the same contractual recognition requirement on related entities of qualifying pertinent FIs where the financial contracts are guaranteed or otherwise supported by these qualifying pertinent FIs. However, in view of feedback about difficulties in complying with the proposed requirement, particularly in light of its compulsory nature, MAS will engage the industry further on the scope and application of the contractual recognition requirement. At this point in time, MAS will not promulgate regulations relating to the contractual recognition requirement.
Recognition of foreign resolutions
A statutory framework has been introduced for MAS to recognise a foreign resolution in relation to a foreign financial institution by a foreign resolution authority. MAS will only recognise the foreign resolution if such recognition would not have a widespread adverse effect on the Singapore financial system, result in inequitable treatment of Singapore creditors and shareholders of the foreign financial institution, be contrary to Singapore’s national or public interest, or have material fiscal implications in Singapore.
Creditor compensation framework
In the event of a resolution of an FI, a compensation framework has been put in place for creditors and shareholders who are worse off as a result of the resolution than they would have been in a liquidation.
Recovery and resolution planning for pertinent FIs
With effect from 5 June 2018, MAS has express powers to require pertinent FIs to prepare, review and keep up-to-date a recovery plan, i.e. a plan to restore an FI’s financial strength or viability should it become distressed. This requirement will apply to FIs that are systemically important or that maintain critical functions in Singapore. Among other things, MAS may issue a notice to a pertinent FI (as defined in the RFI Regulations) requiring it to prepare, in the form and manner and containing the information specified in the notice, a recovery plan to restore the financial strength and viability of the FI in the event it suffers financial pressure or stress.
For more information on recovery and resolution planning for pertinent FIs, please see the article titled “Partial commencement of changes to Monetary Authority of Singapore Act: New provisions on recovery and resolution planning in force from 5 June 2018” that was featured in the Allen & Gledhill Financial Services Bulletin (June 2018).
The Monetary Authority of Singapore Act and Monetary Authority of Singapore (Resolution of Financial Institutions) Regulations 2018 are available from the Singapore Statutes Online website sso.agc.gov.sg.