On 1 October 2015, the Monetary Authority of Singapore (MAS) published its Policy Consultation on margin requirements for non-centrally cleared derivatives.
In its broad outline, the Singapore regime would be similar to the internationally agreed BCBS-IOSCO Margin requirements for non-centrally cleared derivatives. That is not to say that entities in Singapore will avert all friction with foreign margin rules, but MAS presents a particular approach designed to minimise the risk of standoff.
MAS would dispense with the requirement to collect Initial Margin (IM) and Variation Margin (VM) on a bilateral basis (post-and-collect). Instead, the margin rules would be collect only. As major jurisdictions such as the United States, Europe and Japan are now in the advanced stages of designing post-and-collect margin rules, MAS submits that a Singapore collect-only system would be sufficient to achieve the same outcome as a post-and-collect regime.
The collection would be performed under the Singapore requirements, but deemed compliance might be available. MAS would conduct a comparability assessment of the margin requirements in foreign jurisdictions to permit the MAS Covered Entities to follow the foreign rules instead.
Scope of entities
MAS Covered Entities include:
- the banks licensed under the Banking Act;
- merchant banks approved as financial institutions under Section 28 of the MAS Act; and
- other licensed financial institutions: entities licensed under the Finance Companies Act (“FCA”), Insurance Act (“IA”), Securities and Futures Act (“SFA”), Trust Companies Act (“TCA”) and fund managers if they are legal counterparties to the transaction.
A limited exception is being considered for other licensed financial institutions, should the exposure fall below a threshold, currently unspecified.
MAS is also considering whether to require certain investment funds to comply with the margin rules.
Scope of transactions
Margin obligations on MAS Covered Entities would be limited to transactions where:
- the MAS Covered Entity is a legal counterparty to the transaction;
- the transaction is booked in Singapore; and
- the transaction is with another MAS Covered Entity or with an oversea regulated financial firm.
MAS proposed an exemption for intra-group transactions, provided the group produces consolidated financial statements.
MAS is also considering an exemption for transactions with oversea financial firms not otherwise subject to margin rules. Accordingly, not all cross-border trades would require collection of margin if the exposure to foreign counterparties remains below a threshold, to be specified.
The BCBS-IOSCO Margin requirements set out commencement dates and thresholds identical for all covered entities.
In contrast, not all MAS Covered Entities would receive identical treatment. Banks will be captured first, then the merchant banks. The other licensed financial institutions will be subject to a phase-in determined in a later stage.
Under the BCBS-IOSCO Margin requirements, all covered entities must:
Post-and-collect Initial Margin (IM)
- From 1 September 2016 if aggregate month-end average notional amount exceeds €3.0 trillion
- From 1 September 2017 if aggregate month-end average notional amount exceeds €2.25 trillion
- From 1 September 2018 if aggregate month-end average notional amount exceeds €1.5 trillion
- From 1 September 2019 if aggregate month-end average notional amount exceeds €0.75 trillion
- From 1 September 2020 if aggregate month-end average notional amount exceeds €8 billion
Post-and-collect Variation Margin (VM)
- From 1 September 2016 if aggregate month-end average notional amount exceeds €3 trillion
- From 1 September 2017 for all other covered entities
As set out in the Consultation Paper, in Singapore:
Banks must collect IM and VM
- From 1 September 2016 if aggregate month-end average notional amount exceeds S$4.8 trillion (€3.0 trillion)
Banks and commercial banks must collect IM
- From 1 September 2017 if aggregate month-end average notional amount exceeds S$3.6 trillion (€2.25 trillion)
- From 1 September 2018 if aggregate month-end average notional amount exceeds S$2.4 trillion (€1.5 trillion)
- From 1 September 2019 if aggregate month-end average notional amount exceeds S$1.2 trillion (€0.75 trillion)
- From 1 September 2020 if aggregate month-end average notional amount exceeds S$13 billion (€8 billion)
Banks and commercial banks must collect VM
- From 1 September 2017
Other licensed financial institutions
The requirement to collect IM and VM is yet to be determined for other licensed financial institutions, in conjunction with the threshold-based exemption, also to be specified. Other jurisdictions tied similar exemptions based on the clearing threshold, for instance NFC- in the European Union or the end-user exception to clearing (section 2(h)(7)(A) of the Commodity Exchange Act) in the United States.
By suggesting a collect-centric regime, Singapore is decisively taking the path of least resistance vis-à-vis the jurisdictions with post-and-collection margin rules. Other jurisdictions might be tempted to follow a similar approach in order to avoid engaging in interminable discussions on compatibility with foreign rules.
Comments on the Policy Consultation must be submitted by 1 November 2015.