Debated in Parliament on 15 Nov 2012.
Order for Second Reading read.
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Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."
Since its introduction in October 2001, the Securities and Futures Act (SFA) has undergone several reviews to ensure that Singapore's regulatory framework remains robust and keeps pace with developments in the capital markets. The last amendments to the SFA were passed by this House in 2009.
The 2008/2009 global financial crisis has led to significant reforms in the regulation of financial markets. This Bill seeks to amend the SFA in line with reforms being implemented in most other major financial centres. It concerns two key areas.
First, over-the-counter (OTC) derivatives. These are derivatives that are not traded on exchanges. The events surrounding the collapse of major financial institutions, such as Bear Sterns, Lehman Brothers and AIG, exposed significant weaknesses in the structure of OTC derivatives markets. The Financial Stability Board (FSB) has, after extensive deliberations, issued recommendations to strengthen the regulation of OTC derivatives markets and improve their transparency, in order to mitigate risks to the broader financial system, as well as to guard against market abuse. Singapore, through the Monetary Authority of Singapore (MAS), is a member of the FSB and has contributed to formulating these global reforms.
Second, the crisis highlighted the need to strengthen safeguards for retail investors, particularly in light of the mis-selling of certain Lehman Brothers-related investment products. There were other examples as well. From 2009 to 2010, MAS conducted a review of its regulatory regime for the sale and marketing of investment products, and put forward a number of proposals to protect the interests of retail investors. This Bill seeks to give legal effect to the proposals that require legislative changes. The Bill will also strengthen the protection of retail investors' monies that are placed with capital market services licensees.
To support a tighter regulatory framework in the two major areas I have just mentioned, the Bill will also enhance and refine MAS' supervision and enforcement powers, and make other ancillary amendments to the SFA.
The MAS has consulted the industry and the public on the proposed amendments this year. It has considered all the views and feedback received, and taken them into account in the amendments where appropriate.
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Mr Speaker, Sir, let me expand first on the amendments relating to OTC derivatives.
The Financial Stability Board (FSB) has made specific recommendations for regulators globally to institute reforms in the following four areas: (i) reporting of OTC derivatives contracts to trade repositories; (ii) central clearing of all standardised OTC contracts; (iii) standardisation of OTC derivatives contracts; and (iv) trading of standardised OTC derivatives contracts on exchanges or electronic platforms, where appropriate.
Singapore is committed to implementing reforms in accordance with the FSB recommendations. In view of the wide-ranging amendments necessary for effective implementation, MAS is undertaking this exercise in two phases.
The first phase, proposed in this Bill, involves the mandatory reporting of OTC derivatives trades to trade repositories, and mandatory central clearing of OTC derivatives trades at central counterparties (CCPs). We are carefully deliberating how best to implement the remaining reforms in the context of the nature and state of the OTC derivatives markets in Singapore, and with due regard to international developments. MAS will issue further consultations on these remaining aspects of the OTC reforms, which include the introduction of mandatory trading obligations where appropriate and the regulation of OTC derivatives market operators and market intermediaries at a later stage.
I will now describe the first of the two main thrusts to implement OTC reforms in this Bill – the reporting of OTC derivatives trades. The crisis highlighted a lack of transparency in OTC derivatives markets globally, which compromised the ability of regulators to assess the build-up of systemic risks and detect market misconduct. The new Part VIA in the Bill requires financial institutions and large non-financial entities which book or trade prescribed OTC derivatives in Singapore to report such trades to a trade repository licensed by MAS. MAS will prescribe OTC derivatives trades for the purpose based on their significance in Singapore's OTC derivatives market, as well as international approaches towards reporting of such trades.
Trade repositories are a new class of financial infrastructure, whose main function is to collect and maintain information on financial transactions. To support the reporting mandate, the new Part IIA introduces a framework for the regulation of trade repositories. Any trade repository that intends to facilitate the reporting of transactions subject to the reporting mandate under the SFA will have to obtain a licence issued by MAS. The proposed amendments set out statutory obligations on the safe and efficient operation of regulated trade repositories and ensure that the authorities are able to access the information reported.
The second major initiative is to subject certain OTC derivatives trades to central clearing. Traditionally, OTC derivatives trades are privately negotiated bilateral transactions, where a participant assumes the credit risk of its counterparty and manages the risk bilaterally. Systemic build up of large counterparty exposures among market participants, if not properly managed, can, however, destabilise the financial system and cause stress to market participants generally in the event that one large participant fails. Requiring OTC derivatives trades to be centrally cleared aims to mitigate such risks by substituting the credit risk of the counterparty with the credit risk of a regulated, well-capitalised Central Counterparty (CCP). At the same time, it allows the CCP to reduce overall credit risk in the system by netting risks across participants.
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The new Part VIB sets out the obligation for financial institutions and large non-financial entities to clear certain prescribed derivatives contracts booked in Singapore on CCPs. MAS will prescribe certain OTC derivatives contracts for clearing, taking into account factors, such as the level of systemic risk they pose and the characteristics and degree of standardisation of the contract.
Mr Speaker, Sir, to reap the benefits of central clearing and preserve stability of the financial system, the sound functioning of clearing facilities for OTC derivatives is vital. The current regulatory regime in the SFA extends only to clearing facilities for securities and futures contracts. Such clearing facilities are regulated as designated clearing houses only if they are systemically important to Singapore's capital markets. The Bill will, therefore, amend Part III of the SFA to introduce an authorisation regime for all clearing facilities, including securities, futures contracts and OTC derivatives clearing facilities.
Under the authorisation regime, systemically important locally-incorporated clearing facilities, including CCPs, will be regulated as approved clearing houses, while all other clearing facilities will be regulated as recognised clearing houses. The proposed amendments set out statutory obligations on the safe and efficient operation of regulated clearing facilities similar to what are currently imposed on designated clearing houses.
I would like to assure this House that MAS will continue to engage the industry to ensure that these wide-ranging reforms do not impinge unduly on the smooth and efficient functioning of the markets. The OTC derivatives reforms are taking effect in the US, and have begun to be implemented in other jurisdictions. Some of the reforms have cross-border impact on foreign entities, including entities operating in Singapore, resulting in potentially overlapping requirements and increased compliance burdens. MAS is sensitive to these issues and is working closely with our regulatory counterparts abroad to minimise unintended consequences of the OTC derivatives reforms.
Mr Speaker, Sir, I would like now to turn to the amendments relating to the strengthening of safeguards for retail investors.
In January 2012, MAS introduced new requirements for intermediaries to formally assess a retail investor's investment knowledge and experience before selling more complex investment products, termed as "Specified Investment Products" (SIPs). These requirements were aimed at ensuring that intermediaries recommend investment products that are suitable to the investor, taking into account his ability to understand and bear the risks inherent in that product. The Bill will formalise the obligations of issuers to properly classify capital markets products, and provide certainty with regard to the products subject to the new requirements.
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The Bill will also introduce amendments to promote more effective disclosure to enable investors to make better-informed investment decisions. Specifically:
(i) Prospectuses for offers of asset-backed securities, structured notes, unlisted collective investment schemes and exchange-traded funds are to be accompanied by Product Highlights Sheets (PHS). The Product Highlights Sheets must summarise key information in a clear, objective and simple language. A similar requirement has been introduced in other jurisdictions, such as in the European Union, Hong Kong and Australia.
(ii) Issuers of unlisted debentures with tenures of 12 months or longer will be required to immediately disclose any material information concerning the debentures. They will also have to make available to debenture holders semi-annual reports containing pertinent information on the debentures, and semi-annual and annual financial accounts. Where the terms of the unlisted debentures allow for redemption at the option of the holder of the unlisted debenture, issuers will be required to make available, publicly and regularly, bid or redemption prices.
The Bill will also enhance the regime governing advertisements of certain offers of securities by empowering MAS to prescribe additional requirements and restrictions on advertisements, such as the requirement for fair and balanced advertising.
Next, to provide a further safeguard for investors, the Bill will require issuers of a debenture offered with a prospectus, including unlisted debentures, to appoint a trustee for the entire tenure of this debenture. Currently, only issuers of listed debentures are required to do so under the Listing Rules of the Singapore Exchange. The amendments will ensure that there is an independent party vested with the legal right and obligation to take timely collective action on behalf of retail investors in the event of default by the issuer.
Currently, firms which are holders of a capital markets service licence are permitted to withdraw customers' monies maintained in segregated trust accounts, subject to customers' written authorisation. For instance, with the authorisation that a customer gives at the point at which he enters into a contract, the firm can withdraw and place the customer's monies with other counterparties to meet the firm's own obligations incurred in connection with the customers' transactions. Customers in such an arrangement will lose the trust protection accorded under the SFA or find that their monies are not readily recoverable should the licensee default. Such arrangements expose customers' monies to risks and will often not be in the best interest of retail investors. The Bill will disallow such arrangements as MAS may prescribe.
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Sir, I will now turn to the last category of amendments to the SFA. These amendments will enhance civil remedies, strengthen MAS' supervision and enforcement powers, and make other ancillary changes.
The Bill will enhance civil remedies available to investors in cases of market misconduct. It will allow investors who have suffered loss as a result of relying on false or misleading statements or omissions to obtain compensation, regardless of whether the contravening person had gained a profit or avoided a loss. For insider trading cases, the Bill will provide compensation to be based on the difference between the price transacted by the claimant and the notional price if the inside information had been generally available, instead of the notional price if the contravention had not occurred. This will ensure that compensation awarded more accurately reflects the loss suffered by the claimant.
To better ensure compliance with the SFA, the Bill will also strengthen MAS' powers to investigate and take regulatory action. For example, MAS' powers to revoke capital market service licences or revoke the status of an individual as a representative on the Public Register will be extended to a wider range of situations. These include situations where directions issued under the SFA have been breached or where the licensee or representative has not acted in the client's best interests.
MAS' investigation powers will also be extended to allow MAS to enter premises without a warrant in certain circumstances and to apply for search warrants without having to first issue a production order, if there are reasonable grounds for suspecting that documents required as evidence would be concealed, removed, tampered with or destroyed. This would give MAS investigation powers similar to what securities regulators in Australia and the United Kingdom have, for example, the ability to enter premises without a warrant is also similar to powers that the Competition Commission of Singapore currently has.
MAS is currently empowered to impose prohibition orders (POs) on representatives who are registered on the Public Register (Register) under the Representative Notification Framework.
The Bill will extend the class of persons against whom POs may be issued to include representatives who are not required to be registered on the Register. For example, employees of financial institutions who undertake proprietary trading for the institutions are not required to be registered on the Register as they do not deal with customers. However, as the nature of their activities is similar to that of regulated persons, they should be subject to similar regulatory actions as representatives on the Register if they commit a serious offence, such as fraud or dishonesty. Consistent with MAS' existing practice, all POs issued will be published.
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Lastly, arising from judicial guidance in the MAS' first civil penalty court action under section 197 of the SFA, the Bill will give greater clarity with regard to the mental state required for liability to be established against a person with respect to false trading or market rigging. In summary, the person must have done the prohibited act knowingly or recklessly, or with the purpose of creating a false or misleading appearance with respect to the market or the price of securities.
Mr Speaker, Sir, let me conclude. The Bill introduces significant changes to our capital markets legislation, particularly to strengthen MAS' oversight of OTC derivatives markets and to strengthen safeguards for retail investors. MAS will propose further amendments to the SFA at a later stage to implement other elements of the FSB's recommendations on OTC derivatives. MAS will continue to review our regulations and policies to ensure that they remain effective in preserving the integrity and stability of Singapore's financial system, and the confidence of investors in our markets. Sir, I beg to move.
Question proposed.
Mr Speaker, Sir, thank you for allowing me to join the debate. First off, I would like to disclose that I work in the financial services industry. I would like to concentrate my speech on the regulation of OTC derivatives.
Sir, in my view, there are two main considerations to formulating an appropriate framework for this issue. The first consideration is what position Singapore wants to take within the spectrum of regulatory regimes, given the need to be a responsible global citizen working under G20 guidelines.
The second consideration is, given the position that we have chosen, how would this impact our ability to prevent systemic risks to our financial architecture and, consequentially, the need to use taxpayer's money to bail out failed financial institutions?
Sir, the G20 leaders met in the Pittsburgh Summit in September 2009 in the aftermath of the global financial crisis and issued a set of guidelines to "rein in the excesses that led to the crisis".
It is, therefore, imperative that Singapore must be a responsible global citizen. However, what does this mean in the context of regulating OTC derivatives? There are generally two approaches in the spectrum of regulatory regimes. Should we lean towards a prescriptive rules-based approach or do we want to adopt a more flexible principles-based approach?
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The United States is at the forefront of this regime change. It has chosen to take the position of enacting rules-based approaches via the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act has been criticised in some quarters and, just this month, the CME group sued the US CFTC to block Dodd-Frank swap reporting rules, because it felt that these rules would impose "costly, cumbersome and duplicative requirements on derivatives clearing organisations".
No less influential a figure than CFTC Commissioner Jill Sommers, has, in a speech made on October 2012, admitted to the confusion and uncertainty that Dodd-Frank rules have introduced. She remarked that, in her view, it was a mistake to abandon principles-based approach in favour of a prescriptive one-size-fits-all regime. Lack of clarity, higher compliance costs, potentially cross-border duplicative compliance regimes. She asked and I would pose the same question to the Minister today: can these rules stand the test of time?
The MAS, to its credit, is well aware of these criticisms. In a powerful joint statement together with five Asian regulators to CFTC Chairman Gary Gensler on 27 August 2012, MOF expressed its preference for a principles-based approach to achieve the concept of international comity which the CFTC is seeking.
Sir, even though Singapore is a small country, we must have the courage of conviction to do what is best for our own interests, according to the geography of our local financial landscape. This courage must be maintained even in the face of accusations of regulatory arbitrage by various international commentators.
Singapore, unlike New York City or London, is not the centre of the financial universe. It is not our prerogative to take the lead to be the world's financial police. We have neither the moral obligation nor the legal necessity to be the first mover. However, our duty to responsible global citizenry compels us to support G20 guidelines. I would submit that we should not follow these guidelines blindly, but to consider rules enacted by other countries carefully, and to apply them judiciously as it suits our conditions. Rules that we enact have to be fit for purpose. In this regard, I state my support for the Bill.
Sir, this brings me to my next point. Given the principles-based position that we have chosen, how do we prevent systemic risks and protect our taxpayers from ever having to bail out our financial institutions?
MAS has created a superstructure by mandating OTC derivatives to be centrally cleared on central counterparties and to be reported to licensed trade repositories or licensed foreign trade depositories. The structure has to be made sense of against the definition of "specified person" and "specified derivatives contract", which, I submit, is where the real teeth of this Bill are.
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It is my strong belief that, in this regard, we should seek to protect the integrity of our system by concentrating the definition on local players and local products consistent with the local financial landscape.
My assertions are premised on the following. New York and London set the pace when it comes to finance. They have a culture of creating financial feats of engineering and innovation. They are the trendsetters while we are the trend followers. Their diverse and deep markets account for the bulk of the volume traded in OTC derivatives. So, really, if Singapore does not yet have the scale or sophistication, we are likely to be at the receiving end of any instability to the global system, instead of being a source of it. And to this end, there is precious little that we can do. It would not make sense if we seek to regulate every new fangled product that comes out of New York or every new hedge fund that opens in London.
We should not try to be too strict in our definition of "specified person" because trying to capture all eventualities is too complex without corresponding measurable benefits. It might even be counterproductive by undoing the hard work that we have put in place to position Singapore as a global financial centre. Finance is global, and global firms based in Singapore are not beholden to a jurisdiction that is inhospitable, especially if there is no substantial local market to speak of. We can regulate such global firms with an iron fist and create impractical rules, but they will just leave and we would have tried for nothing.
We should also not try to define "specified derivatives contract" too broadly. It is impossible to capture everything that is traded under the sun. And furthermore, if products can fit into a cookie cutter and be standardised to be cleared, chances are, it will not blow up. What will blow up are the third and fourth derivatives of these standard instruments that are, by definition, too difficult to fit into a cookie cutter and, therefore, too difficult to be defined.
It is my belief that we should tailor the definitions to our local market. "Specified person" should focus on systemically important Singaporean companies. And "specified derivatives contract" should focus on products that have a nexus to Singapore, for example, derivatives on underliers that are traded on our exchanges, Singapore Dollar products, products that originate from companies whose ultimate parent is based in Singapore, and so on.
If we succeed in making the Singapore market a safe place, we have not only protected our taxpayers from bailing out failed financial institutions, but also, by extension, we have made global finance safer.
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Mr Speaker, Sir, in conclusion, I believe the MAS has taken the sensible and logical step in favouring a principles-based approach, at the same time, retaining flexibility to respond to market conditions by not resorting to strict and prescriptive definitions to try to capture all eventualities. On this, I support the Bill.
Mr Speaker, Sir, I thank Mr Ong Teng Koon for his comments on the Bill. Mr Ong has provided an useful perspective on whether Singapore should adopt a prescriptive rules-based approach in regulating OTC derivatives or opt for a principles-based approach. He argues rightly, in my opinion, against imposing one-size rules on an extremely diverse OTC derivatives marketplace.
MAS' approach is to avoid moving towards either of two extremes in financial regulation. To avoid relying solely on prescriptive rules for every type of instrument or market participant on the one hand, or solely on issuing broad principles and guidance, which can be then interpreted in different ways by different market participants, and hence, introduce uncertainty in markets. Neither of these polar extremes in financial regulation – relying solely on prescriptive rules or solely on principles and guidance – has worked well in international experience. They certainly would not work well in preserving stability or enabling sustained growth in today's world.
MAS has taken very seriously the high-level recommendations of the international standards setting bodies, especially the Financial Stability Board, in designing the regulatory framework for OTC derivatives. The proposed legislative framework for trade reporting and central clearing rests on clear principles. But the framework also allows MAS the flexibility to set more detailed requirements through regulations. In other words, the rules are not all written out in the law but our subsidiary legislation will be able to write rules that are carefully calibrated to the circumstances that our markets face. These regulations will provide clarity and certainty where necessary. There is flexibility for the rules to apply differently or not at all, depending on the nature of the derivatives trade or the participants, and for the rules to evolve over time.
Mr Ong Teng Koon rightly said that rules have to stand the test of time and they will only stand the test of time, if we allow them to evolve. MAS will consult the industry in setting out these detailed regulations to ensure that they achieve the broad objectives of the international regulatory community that we are part of while having due regard for the characteristics of the Singapore market.
Mr Ong had also rightly pointed out that it is not Singapore's prerogative to be a first mover in OTC derivatives regulation. We are not a large player in the derivatives space, at least by standards of London, New York and some others. However, we have to recognise, too, the cross-border nature of OTC derivatives transactions, and the need to preserve Singapore's role as a reputable global marketplace. I would add that our reputation as a well-regulated financial centre is itself a competitive advantage for a broad span of financial businesses. Further, Singapore plays a not insignificant role in global trading of certain OTC derivatives, such as interest rate derivatives.
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The European Union, United States and Japan – jurisdictions with the authority over the largest and most developed OTC derivatives markets – are in various stages of establishing legislative and regulatory frameworks to regulate these markets. I would like to assure Members that MAS has been in active engagement with its regulatory counterparts on each of the reforms being undertaken. There is a need for close coordination internationally to address and prevent, where possible, unintended consequences on reforms in any one of the major jurisdictions. The global regulatory landscape for OTC derivatives markets is also still evolving. MAS will develop a regulatory regime with the flexibility to adapt to these on-going international developments.
This evolving regulatory landscape is also one of the reasons why we have phased our reforms in Singapore. This Bill will implement the mandatory reporting and mandatory central clearing requirements as the first phase. The information gathered through this phase of reforms will enable MAS to monitor their impact on our markets and adapt the implementation of further reforms accordingly.
Mr Ong's final points on the scope of the definitions of "specified person" and "specified derivatives contract" are pertinent and are issues that MAS has considered carefully. MAS has considered the definition of "specified person" in the context of our industry players.
Foreign financial institutions form the bulk of the participants in our market, trading significant volumes of OTC derivatives locally. So, if we confine the definition of "specified person" to Singapore-domiciled companies, it would decrease the effectiveness of our regime in mitigating systemic risks, including the build-up of risky bilateral exposures. On the other hand, expanding the definition to include all overseas entities which trade in Singapore would be counter-productive. MAS has, therefore, defined "specified persons" to cover entities with local presence which are already regulated by MAS in Singapore. MAS is keenly aware of Singapore's positioning as a hub for global financial institutions. It has and will continue to align its regulatory approach, such as to relieve global market participants of undue compliance burden, while at the same time ensuring that the objectives of the FSB recommendations are met.
With regard to the definition of "specified derivatives contract", MAS will consider the significance of a product in Singapore's OTC derivatives market, international developments, as well as market feedback, when deciding on the products to include in the reporting and clearing requirements. Where the characteristics of certain OTC products are not standardised, subjecting these not very standardised products to mandatory clearing requirements may not be appropriate. Instead, industry efforts to standardise some of these contracts would usually be a more sensible first step to facilitate moving these products to a central clearing platform. These products should, however, still be monitored by MAS on an on-going basis, for instance, through the trade reporting requirements.
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Mr Speaker, Sir, let me briefly conclude. The proposed reforms to OTC derivatives regulation in Singapore have been designed to provide flexibility to respond to international developments and to take into account our local market conditions. I believe MAS has struck an appropriate balance in its approach, and the steps being taken will enhance the safety, efficiency and reputation of Singapore's financial markets.
*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].*
*Bill considered in Committee; reported without amendment; read a Third time and passed.*
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