MARCH 9, 2015

INVESTMENT FUNDS UPDATE

MAS Consults on Proposed Amendments to Strengthen Regulation of Derivatives Trading and the Securities Market – How the Proposed Amendments Affect Singapore Fund Management Companies On February 11, 2015, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on Proposed Amendments to the Securities and Futures Act (the Consultation Paper). The Consultation Paper seeks, among other things, to amend the Securities and Futures Act, Chapter 289 of Singapore (SFA) to complete the expansion of the SFA to regulate over-the-counter (OTC) derivative contracts as well as to strengthen Singapore’s securities market. This briefing focuses on the proposals which may have an impact on Singapore fund management companies (FMCs)1 who are either holders of a capital markets services license (CSML) or registered FMCs (RFMCs).2

Key amendments proposed in the Consultation Paper A summary of the key amendments proposed in the Consultation Paper that may impact FMCs is set out below.

I. RATIONALIZATION OF DEFINITIONS IN THE SFA 1.

Revised definition of

•

“derivative contract”

The definition of “derivative contract” will be amended to a new principles-based definition aimed at describing the key elements of derivatives.

•

“Derivative contract” will be defined as “any contract or arrangement where (i) a party to the contract or arrangement is, or may be required to, discharge its obligations under the contract or arrangement at some future time, and (ii) the discharge of its obligations, or the value of the contract or arrangement, is ultimately determined, derived from or

1 This

briefing assumes that such FMCs are not separately licensed under the Commodity Trading Act, Chapter 48A of Singapore (CTA) (proposals relating to persons licensed under the CTA are not discussed in this briefing).

2 Please

note that there are other proposals in the Consultation Paper which are not covered in this briefing.

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varies by reference to (wholly or in part), the value or amount of one or more underlying things3.” •

Securities and spot contracts4 will be excluded from the definition of “derivative contract.”

•

As futures contracts are essentially exchange-traded derivative contracts, references to “futures contract” will be replaced with “derivative contract” throughout the SFA.

2.

Revised definition of

•

“securities”

The current list-based approach of defining “securities” will be simplified.

•

“Securities” will be defined to mean (i) any shares or any similar instrument representing a legal or beneficial ownership interest in a corporation, partnership, limited liability partnership or unit in a business trust; or (ii) debentures of a government, corporation, body unincorporated, partnership or business trust.

•

Units in a collective investment scheme (CIS) will no longer fall within the definition of “securities” and will be defined and referred to separately in the SFA.

•

Securities-based derivatives will fall within the proposed new definition of “derivative contract.” A new “securities-based derivative contract” definition will be introduced as a subset of the proposed “derivative contract” definition.

3.

Revised definition of

•

The definition of “capital markets products” will be revised to become a

“capital markets

catch-all term for references to all regulated products in the SFA

products”

(including derivative contracts).

II. REGULATION OF OTC DERIVATIVES 4.

Reporting of derivative contracts

•

Part VIA of the SFA (Reporting of Derivative Contracts) will be amended to clarify that contracts which are booked in Singapore will have to be reported even if they were not traded in Singapore.

•

Banking confidentiality will be lifted to permit financial institutions to report customers’ information for the purposes of complying with trade reporting obligations.

3 An “underlying thing” will be defined as (i) any unit in a collective investment scheme, (ii) a commodity, (iii) a financial instrument, or (iv) any arrangement, event, index, intangible property, tangible property or transaction prescribed by the MAS. 4 “Spot contract” will be defined as a contract or arrangement for the sale or purchase of any underlying thing at the current spot price, where it is intended for a party to the contract or arrangement to take actual delivery of the underlying thing.

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5.

Trading of derivative contracts

•

The MAS has indicated that it currently does not intend to mandate a trading regime for OTC derivatives, as the appropriateness of such mandate still has to be carefully studied.

•

Nonetheless, a new Part VIC of the SFA (Trading of Derivative Contracts) will be introduced to empower the MAS to subject specified derivative contracts to mandatory trading on exchanges or electronic trading facilities. The MAS will also have the power to request for information from relevant persons to facilitate the process of determining the products and entities to be subjected to the trading mandate.

•

The MAS will continue to monitor the development of the OTC derivatives market and will further consult the public on any proposal to identify products for mandatory trading.

6.

New regulated activity of “dealing in capital markets products”

•

A new regulated activity of “dealing in capital markets products” will be introduced. o

It will cover the existing regulated activities of “dealing in securities,” “trading in futures contracts” and “leveraged foreign exchange trading” (i.e., they will be collapsed into one regulated activity).

o

It will also include a new regulated activity of dealing in OTC derivatives.

(Comment: This will affect existing FMCs who also hold a CMSL for dealing in securities, trading in futures contracts or leveraged foreign exchange trading.) •

A CMSL holder will have to indicate the specific class(es) of capital markets products that it will be dealing in (i.e., securities, CIS, exchangetraded derivatives, OTC derivatives and spot foreign exchange contracts traded on a margin basis).

•

A CMSL holder who intends to expand its dealing activity into another product class will need to seek MAS’ approval by way of an application for variation of license. Appointed representatives who intend to expand their dealing activities into another product class will also have to notify the MAS of the same.

•

Information on the product classes which a CMSL holder and its appointed representatives are allowed to deal in will be published on the MAS Financial Institutions Directory and Register of Representatives.

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7.

Licensing exemptions

•

The MAS has indicated that as far as practicable, the scope of existing licensing exemptions will be maintained for the new regulated activity of “dealing in capital markets products.” It will separately consult on the amendments to the licensing exemptions at a later date.

(Comment: FMCs currently are exempted from obtaining a CMSL for dealing in securities, trading in futures contracts or leveraged foreign exchange trading if such dealing/trading is solely incidental to its fund management business.) •

Nonetheless, in relation to dealing in capital markets products for OTC derivative contracts: o

The MAS has proposed an “own account” licensing exemption for persons which deal in OTC derivatives for their own account with prescribed financial institutions, and do not receive or derive a commission, spread or other remuneration in return.

o

The MAS has also proposed a licensing exemption for OTC interdealer brokers, being persons which deal in OTC derivatives but do not take on any principal position in OTC derivatives, do not handle or hold any customer’s position, margin or account in their books, and which deal only with institutional and corporate accredited investors. Such OTC inter-dealer brokers will be required to register with the MAS upon the commencement of business and comply with certain ongoing conduct of business requirements.

o

Annex 4 of the Consultation Paper which sets out the draft amendments to the Second Schedule of the Securities and Futures (Licensing and Conduct of Business) Regulations (SFR) provides for a licensing exemption for dealing in OTC derivative contracts where such dealing is solely incidental to the business of fund management.

•

With regards to dealing in capital markets products for the exchangetraded derivative contracts product class: o

The MAS has similarly proposed to exempt futures inter-dealer brokers, being persons which deal in block futures contracts but do not take on any principal position, customer’s position, margin or account and which deal only with institutional and corporate accredited investors. Such futures inter-dealer brokers will be required to register with the MAS upon the commencement of business and comply with certain ongoing conduct of business requirements.

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III. 8.

FUND MANAGEMENT AND COLLECTIVE INVESTMENT SCHEMES

Revised definition of “fund management”

•

In line with the rationalization of the definitions of the various financial products set out above, the definition of “fund management” will be revised as follows: “undertaking on behalf of a customer (whether on a discretionary authority granted by the customer or otherwise) – (a) the management of a portfolio of capital markets products; or (b) the management of a collective investment scheme; or (c) entering into spot foreign exchange contracts trading for the purpose of managing the customer’s funds, but does not include real estate investment trust management.”

•

The amendment clarifies that the regulatory scope of fund management activity extends to all capital markets products and all managers of CISs.

•

An exemption will be granted to persons who manage CISs that invest in physical assets only (i.e., assets other than capital markets products) and whose investors are institutional and accredited investors.

9.

Custody of physical assets

•

As the custody of physical assets is currently unregulated, the MAS has proposed to impose measures on CIS managers where they appoint nonregulated persons to provide custody services for their physical assets. Such measures could include for example:

10.

More flexibility for criteria for recognition of a foreign CIS

•

o

minimum financial or capital requirements;

o

insurance coverage for the custodied assets;

o

segregation of assets under custody.

Currently the SFA allows the MAS to recognize a foreign CIS for offer to retail investors only if the laws and practices of the jurisdiction where the CIS is constituted and regulated provide retail investors with a level of protection that is equivalent to a locally constituted CIS.

•

The MAS has proposed to provide flexibility for other factors to be taken into account when considering whether to recognize the foreign CIS.

(Comment: This is relevant only for the offer of offshore CISs to retail investors in Singapore.)

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IV. SHORT SELLING 11.

Definition of “short position” and “interest”

•

A new Part VIIA (Short Selling) will be introduced to the SFA to set out the framework for (i) short position reporting and (ii) marking of short sell orders. The relevant details will be set out in regulations and consulted on separately.

•

A seller will be regarded as having a “short position” in a specified capital markets product if his interest in the said product is less than what he has sold.

•

A new definition of “interest in a specified capital markets product” will be introduced to make clear that such interest include the scenarios where the person has legal or beneficial ownership over a specified capital markets product, or the authority to dispose of the same.

•

A person will not be regarded as having an interest in a specified capital markets product if he has borrowed the capital markets product through a securities lending arrangement.

12.

Aggregate net short position reporting

•

The MAS previously announced, pursuant to an earlier consultation paper5, that it would introduce aggregate net short position reporting in 2016.

•

Following from the MAS announcement, a new provision will be included in the SFA to require a person to report to the MAS certain information where his short position in any specified capital markets product exceeds the prescribed short position threshold.

(Comment: In the previous MAS announcement, the proposed short position reporting threshold was the lower of 0.05% or S$1 million of issued shares in a listed entity, with weekly reporting required.)

•

Detailed requirements on the calculation of net short positions, reporting thresholds and exemptions will be provided in forthcoming regulations, for which the MAS will seek comments on a later date.

13.

Marking of short sell orders

•

A new provision will be included in the SFA to make clear that the onus to mark a short sell order lies with the market participant.

•

There will be no change to the policy intent and current operational aspects of short sell order marking. The Singapore Exchange Limited (SGX) will continue to administer the requirement to mark short sell orders.

5 Joint

consultation paper between the MAS and SGX entitled “Review of the Securities Market Structure and Practices” issued on February 7, 2014.

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V. MARKET MISCONDUCT 14.

Prohibition of false and misleading statements

•

The current section 199 of the SFA, which prohibits the making of false or misleading statements, will be revised to make clear that there is no requirement of material price impact before a contravention of this section can be established.

15.

Insider trading – definition of “persons who commonly invest in securities”

•

In order for the concept of a “common investor” to better reflect the realities of the Singapore market, the MAS has proposed to introduce a definition for “persons who commonly invest in securities” and to issue guidelines to elaborate on its policy intent and guidance as to the interpretation of that definition.

(Comment: Under the SFA, a person will be subject to the insider trading restrictions if he possesses material non-public information concerning a corporation. The information would be regarded as having a material effect on the price or value of securities if it would be likely to influence “persons who commonly invest in securities” in deciding whether or not to deal in the securities.) 16.

Revision of ceiling for civil penalty quantum

•

Currently, if an individual who engaged in market misconduct (the offender) gained a profit or avoided a loss (Benefit), the maximum amount of civil penalty payable is capped at the higher of three times the amount of Benefit obtained or S$50,000. If the offender did not obtain a Benefit, the maximum amount of civil penalty payable is capped at S$2 million.

•

To reflect the culpability of the offender where the market misconduct is egregious even though the Benefit obtained is small, the MAS has proposed to revise the civil penalty ceiling to be the greater of either S$2 million or three times the amount of Benefit obtained in all cases.

17.

Priority for MAS’ civil penalty claims

•

The MAS has proposed to confer priority on its civil penalty claims in the same way as government claims under Government Proceedings Act, Chapter 121 of Singapore.

•

Such priority is intended to prevent a third party from varying or discharging a freezing order obtained by the MAS against the assets of a suspect (e.g., to satisfy a private debt that is owed by the suspect to the third party).

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Invitation for Comments Please refer to the Consultation Paper for the complete set of proposals. The deadline for comments and feedback to be submitted to the MAS is March 24, 2015. We are collating comments from clients and industry participants for submission to the MAS. If you have any comments on the proposals that you would like us to submit on your behalf, please contact Han Ming Ho (+65.6230.3966, [email protected]) or Josephine Law (+65.6230.3916, [email protected]). If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.

The Investment Funds, Advisers and Derivatives practice of Sidley Austin LLP Sidley has a premier, global practice in structuring and advising investment funds and advisers. We advise clients in the formation and operation of all types of alternative investment vehicles, including hedge funds, fund-of-funds, commodity pools, venture capital and private equity funds, private real estate funds and other public and private pooled investment vehicles. We also represent clients with respect to more traditional investment funds, such as closed-end and open-end registered investment companies (i.e., mutual funds) and exchange-traded funds (ETFs). Our advice covers the broad scope of legal and compliance issues that are faced by funds and their boards, as well as investment advisers to funds and other investment products and accounts, under the laws and regulations of the various jurisdictions in which they may operate. Our practice group consists of approximately 120 lawyers in New York, Chicago, London, Hong Kong, Singapore, Shanghai, Tokyo, Los Angeles and San Francisco. In Asia, our practice includes Singapore, U.S., English, Hong Kong and Japanese-qualified lawyers. For further information on our Investment Funds, Advisers and Derivatives practice, please contact the co-heads of Sidley’s Asia Investment Funds practice: Han Ming Ho, Singapore (+65.6230.3966, [email protected]), or Effie Vasilopoulos, Hong Kong (+852.2509.7860, [email protected]). To receive Sidley updates, please sign up at www.sidley.com/subscribe.

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