"The Securities and Futures (Amendment) Bill 2012" - Second Reading Speech by Mr Tharman Shanmugaratnam, Minister for Finance, Deputy Prime Minister and Chairman, Monetary Authority of Singapore
1 Mr Speaker Sir, I beg to move, "That the Bill be now read a second time".
2 Since its introduction in Oct 2001, the Securities and Futures Act (SFA) has undergone several reviews to ensure 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.
3 The 2008/09 global financial crisis has led to significant reforms in 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.
4 First, OTC derivatives. 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 regulation of OTC derivatives markets and improve their transparency, in order to mitigate risks to the broader financial system as well as 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.
5 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. 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 protection of retail customers’ monies that are placed with capital market services licencees.
6 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.
7 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.
8 Mr Speaker Sir, let me expand first on the amendments relating to OTC derivatives.
Regulation of OTC derivatives
9 The 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 derivative contracts on exchanges or electronic platforms, where appropriate.
10 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.
11 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 for 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.
Mandatory reporting of OTC derivatives transactions to trade repositories
12 I will now describe the first of 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.
13 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.
Mandatory clearing of OTC derivatives transactions on central counterparties
14 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 risk by substituting the credit risk of the counterparty with the credit risk of a regulated, well-capitalised CCP. At the same time, it allows the CCP to reduce overall credit risk in the system by netting risks across participants.
15 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.
16 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.
17 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 is currently imposed on designated clearing houses.
18 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 are have begun to be implemented in other jurisdictions. Some of the reforms have cross-border impact on foreign entities, including entities 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.
Strengthening safeguards for retail investors
19 Mr Speaker, Sir, I would like to turn next to amendments relating to the strengthening of safeguards for retail investors.
Imposing obligation on issuers to classify investment products
20 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” or “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 the 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.
Promoting more effective disclosure for retail investment products
21 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 PHS must summarise key information in clear, objective and simple language. A similar requirement has been introduced in other jurisdictions, such as EU, 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.
22 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.
Appoint trustees for unlisted debentures
23 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 the 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.
Strengthening safeguards for retail customers’ monies held with capital markets services licencees
24 Currently, firms who 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.
Enhancing and refining supervision and enforcement powers
25 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.
Enhancing civil remedies for market misconduct
26 The Bill will also 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 for 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.
Strengthening MAS’ powers to investigate and take regulatory action
27 To better ensure compliance with the SFA, the Bill will strengthen MAS’ powers to investigate and take regulatory action. For example, MAS’ powers to revoke capital markets services 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.
28 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.
Enhancing the prohibition order regime
29 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 are 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.
Refinement of false trading and market rigging provisions
30 Lastly, arising from judicial guidance in MAS’ first civil penalty court action under section 197 of the SFA, the Bill give greater clarity with regard to the mental state required for liability to be established against a person with respect to for 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.
31 Mr Speaker Sir, let me conclude. This 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.
32 Sir, I beg to move.