Debated in Parliament on 15 Mar 2013.
Order for Second Reading read.
Mdm Speaker, I beg to move, "That the Bill be now read a Second time."
The principal impetus for this Bill comes from international developments in financial regulation following the recent global financial crisis. An important dimension of this, as advanced by the Financial Stability Board (FSB), involves enhancing the powers of regulators and widening their options in dealing with domestic and international financial institutions in distress. Singapore is a member of the FSB and has contributed actively to its deliberations.
The FSB has issued a set of principles in this regard, which are called "Key Attributes of Effective Resolution Regimes for Financial Institutions". In keeping with these principles, member countries are expected to equip their national authorities with the capacity to respond effectively and swiftly when a financial institution is in distress.
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The Monetary Authority of Singapore (MAS) had itself embarked on a review of its regulatory framework for financial institutions, with a view to strengthening our framework for financial stability and ensuring robust protection of depositors, insurance policy holders and consumers of financial services. As part of the review, MAS took into account the FSB's Key Attributes where they are relevant to Singapore. In addition, MAS has relooked its own objects and functions, to ensure they are up-to-date and well aligned with global standards. Further, MAS has reviewed the framework for the issuance of securities by MAS.
This Bill, therefore, proposes changes to the MAS Act in four key areas: (a) to extend the principal objects of MAS and to amplify its functions; (b) to expand the range of tools available to MAS for the resolution of distressed or insolvent financial institutions; (c) to update the regulatory framework for the issuance of securities by MAS, including the regulation of primary dealers of these securities; and (d) housekeeping changes to enable better administration of the MAS Act.
MAS has consulted the industry and the public on these changes. The feedback received has been carefully considered and incorporated into the Bill where practicable and appropriate. MAS has published on its website its responses to feedback on the Bill which were of wider interest.
Mdm Speaker, I will now go through the key amendments in the Bill.
First, the objectives and functions of MAS. As a central bank and integrated financial supervisor, MAS safeguards and seeks to maintain a high level of public confidence in the stability of Singapore's financial system. Therefore, to strengthen and clarify MAS' powers to act in relation to maintaining financial stability, clause 4 of the Bill amends section 4 of the MAS Act to provide expressly that MAS has the objective of promoting financial stability.
The second set of changes concerns MAS' powers of resolution with regard to institutions in distress. While MAS seeks to promote financial stability through high standards of licensing, regulation and supervision, it does not aim to prevent the failure of financial institutions in all circumstances. A "zero-failure" regime is neither feasible nor desirable. It will lead to considerable moral hazard and financial institutions taking excessive risks. To minimise the chance of such behaviour, a regulator would have to impose a heavy regulatory burden on financial institutions, which will inevitably increase costs for
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consumers or borrowers.
The alternative and better approach is to accept that failure cannot be avoided even in a well-regulated financial system, and ensure that the regulator is able to deal effectively with a financial institution in distress in order to minimise losses to depositors and other creditors, and to maintain stability in the financial system.
The Banking Act and the Insurance Act were amended in 2007 and 2011, respectively, to empower MAS, with the approval of the Minister-in-charge of MAS, to (a) direct the sale of the business of a bank or insurance company, and (b) where such an institution is incorporated in Singapore, to require the issuance of new shares, to restructure the share capital or to sell existing shares to other investors. I shall refer to these collectively as "resolution powers".
The Bill extends these resolution powers – which already exist for banks and insurance companies – over a wider range of financial institutions, and also enhances MAS' resolution options. These financial institutions include finance companies, merchant banks, operators and settlement institutions of designated payment systems, approved exchanges, approved clearing houses, licensed trade repositories, as well as designated financial holding companies. As far as designated financial holding companies are concerned, these will be regulated under a new Financial Holding Companies Act. I shall refer to this group as "other financial institutions".
One area of feedback during the public consultation was that the resolution powers to be exercised under the Bill may affect the contractual rights of parties under set-off and collateral arrangements in industry master agreements, such as the ISDA Master Agreement. The Bill addresses this concern. It introduces the power to prescribe safeguards from the exercise of resolution power, in the form of carve-outs that preserve such contractual rights.
Like the Banking Act and the Insurance Act which empower MAS to take over the management of a bank or an insurance company in distress, or to appoint a statutory manager to do so, similar powers are proposed in respect of the other financial institutions. This will be effected through the Financial Institutions (Miscellaneous Amendments) Bill, which will be read for a Second time after this Bill.
The Bill also seeks to enhance the MAS' resolution tool-kit by adopting those recommendations set out in the FSB's Key Attributes which are relevant
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to Singapore. The enhancements to MAS' powers are as follows:
(a) MAS will be vested with the power to issue directions to a non-regulated entity that is incorporated or established in Singapore. This power will apply where the entity belongs to a group of companies of which a financial institution regulated by MAS is part of and where the entity is significant to the business of such a group;
(b) MAS may apply to the Court to claw back the salary, remuneration or benefits given to a director or executive officer under certain circumstances, for example, when the director or executive officer has failed to discharge his or her duties;
(c) MAS may share information with a foreign resolution authority if the information is necessary in the resolution of a financial institution.
MAS will continue to monitor the global implementation of the FSB's Key Attributes, before making any further changes to the resolution regime for financial institutions in Singapore.
Let me move on now to the issuance of securities by MAS. Primary dealers play a critical role in underwriting primary auctions, serving as counterparty to monetary policy transactions and providing liquidity to Singapore dollar markets. MAS currently issues MAS book-entry securities pursuant to section 23(1)(k) of the MAS Act. However, the Act does not provide for a primary dealer framework for MAS book-entry securities. This is unlike the Government Securities Act which explicitly empowers the Government to regulate primary dealers and the Government securities market.
To address this gap, clause 11 introduces new Parts VA and VB to the MAS Act to give MAS similar powers over primary dealers and the MAS book-entry securities market. The proposed amendment will provide greater clarity to the legal and regulatory frameworks for MAS book-entry securities and the conduct of monetary policy operations by MAS.
Let me, finally, turn to two operational aspects of the Bill.
(a) Clause 5 of the Bill amends section 7 of the MAS Act by expanding the maximum number of directors on the MAS Board from 10 to 14. This will enable MAS to benefit from the experience and perspectives of a wider group of individuals, and further strengthen the Board in dealing with future challenges
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in the financial and economic landscape, both globally and in Singapore.
(b) Clause 8 of the Bill amends section 23 of the MAS Act to provide that an MAS officer who is designated under the Corruption, Drug Trafficking and Serious Crimes (Confiscation of Benefits) Act (Cap 65A) as a Suspicious Transaction Reporting Officer (STRO) and has received information pursuant to his role of a STRO, is able to disclose such information to other MAS officers for the purpose of discharging MAS' supervisory and regulatory functions. This will enable MAS to have a holistic assessment of money laundering risks posed by persons or institutions who wish to conduct financial activities under MAS' purview.
Mdm Speaker, a stable and sound financial sector is an integral part of ensuring the success and resilience of the Singapore economy. These amendments to the MAS Act are part of the on-going process to enhance the robustness of our regulatory framework and ensure that it keeps up with global developments, including powers to enable swift and effective resolution of a financial institution in distress. Mdm Speaker, I beg to move.
Question proposed.
Mdm Speaker, allow me to declare my pecuniary interest as a banker, and also to beg the pardon of the House for putting you through yet another speech after the COS. But I figured since I know a little bit about the financial industry, I should do my part.
The MAS Amendment Bill has come about to strengthen the regulatory framework for the resolution of financial institutions in the light of global developments. It enables the MAS to exercise a wider range of options in dealing with a failed financial institution.
I believe I speak for the industry in saying that we welcome the partial adoption of the Financial Stability Board's (FSB) "Key Attributes of Effective Resolution Regimes for Financial Institutions" and we also acknowledge the importance of cooperation between regulatory authorities to ensure that resolution plans can be agreed and enacted globally. We welcome the enhanced powers to the MAS to safeguard and strengthen Singapore's regulatory and legal framework.
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Many in the House will remember how widely felt the reverberations were from the Lehman crisis. Consumers, bankers, depositors, regulators, policymakers – all of us have learnt our lessons from what happened in 2008. I, for one, remembered it clearly because it happened on 16 September 2008. It happened to be my birthday and I was with an American institution then. We were all staying overnight in the bank, all of us in our pyjamas and slippers, and trying to figure out what was happening. I remember seeing large queues of worried investors outside some financial institutions. The contagion that came from that single failure is still being unwound till this day.
On my part, I learnt the importance of knowing what we "do not know". At the time, industry players had massive amounts of OTC derivatives exposures that amounted to trillions of dollars. Nobody really knew how much exposure each had to whom. This was a major source of the contagion. Even the most sophisticated global regulators were not clear as to what was the right thing to do. One important consideration then was that financial institutions (FIs) at the time were reporting their exposures on a net basis, not a gross basis. Hence, the issues of counterparty risk exposures were not really accounted for. For many banks, if one had to use the gross exposures of these derivatives, just a small level of default would have triggered a wipe-out of many of these banks' net tangible equity. And that was precisely what happened when Lehman defaulted. The domino effect and the chaos that ensued caused many jobs and households' savings to disappear overnight. Hence, the benefit of a central clearing house and Trade repositories for all of these OTC contracts have been discussed globally and some have already been implementing this.
Hence, this Bill is timely, welcomed and I hope that MAS would not have the need to use it anytime soon!
However, there are a few issues that I wish to bring to the House and the Deputy Prime Minister's attention and I have summarised them below.
First, enforceability of bilateral netting arrangements. I appreciate and thank the Deputy Prime Minister for bringing this up in a speech earlier and, as I had earlier mentioned about net and gross exposures, it is useful to point out – as he had rightly pointed out – that most industry players here use the ISDA Master Agreement to enforce bilateral netting arrangements.
Many industry players are also concerned that the proposed resolution powers may affect the enforceability of such arrangements, as the proposed powers are broad and it appears that they may, in some instances, defeat
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existing contractual rights. If this leads, for example, to "cherry picking" of which transactions to close out, then this could lead to counterparty losses. Section 30A(am) may also give the MAS powers to override the institution's existing contractual obligations. If this is the case, FIs around the world will have to re-assess their exposure to Singapore FIs. And this would affect our status as a good "netting" jurisdiction and increase the cost of doing business here.
We welcome subsidiary legislation to ensure bilateral netting arrangements will be carved out and ask that this be extended to cover the Banking Act and Insurance Act, too.
Second, different resolution for clearing houses. With the general trend now towards encouraging trades to be centrally cleared by a central clearing house, it is the industry view that the failure of such clearing houses would pose a major systemic risk. Hence, the resolution regime may need to be enhanced to ensure that such risks are mitigated, for example, through clear segmentation of clients' monies. The suggestion is that the resolution powers should be consistent with the loss allocation mechanisms that apply now under the clearing's rules in the event of a member company's default, and they should not be exercised in a manner that increases the loss suffered by non-defaulting members.
Thirdly, challenges faced by nascent Asian markets. The Asian markets are still developing. Whether it is in offshore RMB products, OTC derivatives or interest rate swaps, we are still in the early stages of growth. Mr Lee Chuan Teck, assistant MD at the MAS, has rightly pointed out in a speech that regulatory changes in Asia are important "but they must not overwhelm the market so that it ceases to function effectively."
Another challenge is that Asian market infrastructure remains relatively under-developed. Trading repositories, central counterparties are still not present in many markets in the region. So, we need to "build before we legislate".
Four – and this is my last point – cross border challenges. FIs here trade in multiple products with multiple counterparties operating in multiple jurisdictions. There will be cross-border differences and these issues need to be resolved or the effectiveness of any reform can be weakened and this could lead to the risk of regulatory arbitrage. It can also increase the already high cost of compliance burden for the industry and for the regulators.
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Madam, whilst I have briefly detailed some of the issues faced by the industry players, I fully support the Bill.
Mdm Speaker, I thank Ms Tan Su Shan for speaking in support of the Bill, and for her constructive views. First, let me say that I certainly share her hope that MAS will not need to use these enhanced resolution powers anytime soon.
Let me now respond to a few of the specific points which Ms Tan has raised. First, Ms Tan has expressed a valid concern over the impact of the proposed resolution powers of the Bill on bilateral netting arrangements. This is an important point.
I can assure Members that the carve-outs through subsidiary legislation that we will make, as provided for in the Bill, will include specific provisions for bilateral netting arrangements. I can also confirm that the carve-outs for bilateral netting arrangements will apply across all financial institutions, including banks and insurance companies.
The approach we are taking is essentially similar to that being taken in the United Kingdom where they have adopted a Special Resolution Regime, and the carve-outs that the European Union has now directed its members to put in place when designing their resolution frameworks. It is a system where you put in place the basic provisions and the powers that a regulator needs, but you have carve-outs to ensure that contractual obligations and, specifically, bilateral netting arrangements, are not defeated.
The second point that Ms Tan raised concerned the central clearing houses. This is an important point because, clearly, a failure of a clearing house can be of major systemic consequence. So, she has quite rightly highlighted the systemic risks that are inherent in central clearing houses. She suggested an enhanced resolution regime for central clearing houses but one that takes into account the loss mechanisms that apply under the clearing house's rules in the event of a member company defaulting.
As part of prudent risk management, clearing houses are expected by the MAS to put in place loss allocation mechanisms to manage a member's default. How do they fund it? First, they have margins that are collected from members. And, second, they should have a default fund, which is comprised of funds that
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are contributed by members. There are other measures under the Securities and Futures Act that will require clearing houses to safeguard client monies, including their segregation from the monies of both the clearing house and clearing house members, and placing such client monies in trust.
MAS will certainly take into account these loss allocation mechanisms and their impact on members and their clients in determining an appropriate resolution strategy for a failing clearing house. We will be guided by the need to minimise costs to taxpayers and to consumers of financial services, as well as the need to avoid major disruption to financial markets. We will also, in any resolution exercise to do with a financial institution or clearing house, bear in mind the need to avoid opening up future moral hazards.
A third point which Ms Tan raised concerned the challenges faced by still nascent Asian markets. I note her comment about the need to "build before we legislate". MAS is keenly aware of the need for balance – the balance between allowing the development of a financial market and regulating it. There need not, however, be a significant trade-off between the two – between allowing for development and regulating. MAS' whole approach is, in fact, to minimise such trade-offs. How do we do it? By ensuring that financial regulation is risk-based, rather than applied automatically across-the-board to all activities or to all institutions. Financial regulation has to be risk-based. We also regularly review our rules to make sure that they are not more burdensome than necessary to meet the ultimate objectives of financial regulation.
Finally, let me just say that cross-border issues remain a challenge for regulators around the globe. We engage and cooperate actively with other foreign regulatory authorities on this challenge, both through bilateral and multilateral fora, such as the Financial Stability Board. MAS is, in fact, playing an active role in the ongoing global work on cross-border resolution.
*Question put, and agreed to.*
*Bill accordingly read a Second time and committed to a Committee of the whole House.*
*The House immediately resolved itself into a Committee on the Bill. – [Mr Tharman Shanmugaratnam].*
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*Bill considered in Committee; reported without amendment; read a Third time and passed. (proc text)]
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