"Securities and Futures (Amendment) Bill 2016" - Second Reading Speech by Mr Ong Ye Kung, Minister for Education (Higher Education and Skills) and Second Minister for Defence, on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister-in-charge of the Monetary Authority of Singapore on 9 January 2017
1 Madam Speaker, on behalf of the Minister-in-Charge of MAS, I beg to move, "That the Bill be now read a second time".
2 In the aftermath of the Global Financial Crisis, the Financial Stability Board (“FSB”), an international organization comprising policymakers and financial regulators around the world, was established to promote international financial stability. MAS as a member of the FSB has been actively involved in its development of its recommendations.
3 In 2010, the FSB introduced a set of recommendations for its members to implement reporting, central clearing and trading of over-the-counter (“OTC”) derivatives, and to subject OTC derivatives market operators and intermediaries to stronger regulatory oversight.
4 Arising from the FSB’s recommendations, the Securities and Futures Act (“SFA”) was amended in 2012, as part of this international effort to strengthen the regulation of OTC derivatives markets. The 2012 amendment also drew on our own review in light of Singapore’s experience in the crisis, and sought to strengthen safeguards for retail investors and enhance MAS’ supervision and enforcement powers.
5 As the amendments are wide-ranging, MAS had indicated then that the reforms to strengthen the regulation of OTC derivatives would be undertaken in two phases for effective implementation. The first phase of reforms undertaken in 2012 requires contract details of OTC derivatives transactions, such as the size, mark-to-market value and maturity, to be reported to licensed trade repositories. This enables MAS to monitor any potential financial stability risks. Later this year, MAS will finalise and implement regulations for the central clearing of widely traded OTC derivatives contracts. Central clearing will mitigate the counterparty credit risks inherent in such trades, and limit the effects of systemic contagion.
6 This Bill implements the remaining aspects of the reforms in OTC derivatives regulation. MAS also took the opportunity to amend the SFA in three other key areas:
- first, enhancing regulatory safeguards for retail investors;
- second, enhancing credibility and transparency of the capital markets; and
- third, strengthening the enforcement regime against market misconduct.
7 MAS has consulted the industry and the public on the proposed amendments. It has considered all the feedback received, and taken them into account as appropriate.
8 I will go through the amendments in turn.
Regulation of OTC derivatives
9 Madam Speaker, let me elaborate first on the amendments relating to OTC derivatives reforms arising from the Financial Stability Board’s recommendation.
10 The events leading to the collapse of major financial institutions during the Global Financial Crisis exposed significant weaknesses in the structure of OTC derivatives markets, necessitating regulatory reforms. As a leading financial centre and an active member of the FSB, it is important that we are aligned to these latest international standards and best practices.
11 This Bill completes the reforms, to further enhance transparency and improve supervisory oversight of our OTC derivatives markets operators and intermediaries. The Bill also empowers MAS to require OTC derivatives products that meet prescribed criteria to be traded on organised trading facilities such as exchanges instead of over-the-counter.
12 Internationally, the United States and Japan have commenced their requirements to trade OTC derivatives products on organised trading facilities. Others, like the European Union, Hong Kong and Australia have yet to do so, despite having the legal frameworks in place. MAS will continue to monitor international developments and market liquidity conditions in determining the timing and scope of implementing the trading requirement in Singapore.
13 Operators of organised trading facilities for OTC derivatives products will have to be authorised by MAS, and must comply with requirements aimed at maintaining fair, orderly and transparent markets. Intermediaries in the OTC derivatives markets will also be subject to regulation to ensure that risks associated with their activities are well-managed.
14 While the Bill tightens the OTC derivatives regime to better safeguard financial stability, we also need to strike a balance against our objective to promote ease of doing business, innovation and a vibrant financial sector. As part of this effort, this Bill therefore also seeks to streamline existing regulatory regimes for commodity derivatives and exchange-traded derivatives.
15 Commodity derivatives market operators and intermediaries, which are currently regulated under the Commodity Trading Act administered by IE Singapore, will consequently be regulated under the SFA. This avoids subjecting them to two regulatory regimes and ensures more efficient regulation. MAS will provide for appropriate transition periods to minimise any industry impact.
16 MAS will also allow derivatives products to be listed and traded on organised trading facilities without the need for case-by-case approval. They will be required to certify that the contract design satisfies conditions required for fair, orderly and transparent trading. As these conditions will be set out publicly, market operators will clearly know the boundaries within which they can design their products. They will not need to seek MAS’ approval.
17 The streamlined listing process will enable our market operators to innovate and launch new derivatives products to meet market demands. Reducing the time-to-market could also encourage trading of derivatives contracts on organised trading facilities, instead of OTC, without MAS having to specifically require such products for platform trading.
Enhancing regulatory safeguards for retail investors
18 Madam Speaker, I would like to turn next to the set of amendments to enhance regulatory safeguards for retail investors.
19 A primary objective of MAS’ regulatory framework for capital markets aims to safeguard the interests of retail investors, who are really the man-in-the-street, putting their savings and nest egg in investment products. We want to ensure these investors have access to adequate information and that intermediaries deal fairly with them. That is why:
(i) Public offers of securities such as shares and bonds, and investment funds must be made with a prospectus registered by MAS. The prospectus must contain all material information relating to the investment.
(ii) Intermediaries, such as brokers, financial advisers, and fund managers must be licensed by MAS, and adhere to rules governing their conduct of business with customers in a fair, transparent manner.
Extending capital markets regulatory safeguards to non-conventional investment products
20 In recent years, MAS has observed a number of non-conventional products that are marketed to retail investors as alternative investments. Some of these products display essentially the same characteristics as traditional capital markets products, but are deliberately structured to fall out of MAS’ regulatory framework.
21 To enhance investor protection, the Bill provides MAS greater flexibility and powers to bring non-conventional investment products within MAS’ regulatory perimeters. This is achieved in the following ways:
22 First, the Bill empowers MAS to prescribe certain products as debentures. With these powers, MAS intends to prescribe as debentures, buy-back arrangements involving gold, silver and platinum. This is because in substance, such schemes are similar to collateralised borrowing arrangements. Once classified as a debenture, offers of products with such buy-back arrangements will have to be made with a prospectus registered with MAS. This will provide retail investors better access to information on product features and risks, and make more informed investment decisions.
23 Second, the Bill widens the definition of collective investment schemes, or CIS, which must be authorised or recognised by MAS for public offers made to retail investors. Currently, for a scheme to be regarded as a CIS, both profits and contributions from investors must be pooled. But investment schemes can be structured to sell investors sub-divided interests in physical assets such as undeveloped land, plantation plots or even units in an apartment block to be run as a hotel. Such schemes have typically been called land-banking, plantation schemes, and condo-tels respectively. By structuring the schemes this way, the pooling element can be avoided, and regulation as a CIS circumvented.
24 The amended CIS definition will no longer require investors’ contributions and profits to be pooled for a scheme to be regarded as a CIS. A scheme can be caught as CIS as long as the scheme property is managed as a whole. This recognises the “collective” nature of such schemes, since property is still managed as a whole by the scheme manager, to generate profits for the collective interests of scheme investors. Such arrangements in substance pose the same risks to investors as traditional CIS, and should be regulated as such. This is the approach adopted in the United Kingdom and Hong Kong.
25 At the same time, we do not want to extend the regulatory perimeter too far. The amendment will not capture schemes which are predominantly for the consumption of, rather than investment in, property, or where property is managed for the benefit of investors on an individual basis. For example, arrangements where property owners simply use the same operator to help them let out their individual apartment units, will not be considered as a CIS.
26 I would like to emphasise all investments carry risk, that ultimately, investors must take responsibility for their financial decisions. Investors need to critically assess investment products and refrain from investing in any product that they do not understand or where the returns sound too good to be true.
Refining the classification of non-retail investors
27 The next set of amendments relate to the classification of non-retail investors. There are two main types of non-retail investors under MAS’ capital markets regulatory framework.
(i) Accredited investors, who are identified based on prescribed wealth or income thresholds; and
(ii) Institutional investors, who are widely accepted as having a high degree of financial knowledge.
28 Such investors are generally considered better able to protect their own interests, as compared to retail investors. In line with a measured regulatory approach, there are available exemptions from regulatory requirements for those who deal only with non-retail investors.
29 Currently, individuals qualify as accredited investors if they have more than $2 million of net personal assets. The Bill tightens the way net personal assets is calculated, such that the net equity of an individual’s primary residence can only contribute up to $1 million of the $2 million threshold. The Bill also introduces another avenue for individuals to qualify as accredited investors if they have more than $1 million of financial assets, net of any related liabilities. With the amendment, individuals whose wealth is concentrated in their primary residence, with few other liquid assets to invest, will be treated as retail investors and will benefit from the full range of regulatory safeguards under the SFA when transacting in capital markets products.
30 MAS also intends to introduce in subsidiary legislation an opt-in regime for the accredited investor class. So even if an investor qualifies as an accredited investor, intermediaries cannot automatically treat him as such. Instead, intermediaries will have to inform the investor of the trade-offs involved and get his agreement to be treated as an accredited investor. The investor can choose not to opt-in and remain as a retail investor with greater regulatory safeguards; or he may willingly forego such safeguards in order to more easily access a wider range of niche financial products and services, likely more complex and with higher risk. The choice is ultimately his to make, depending on his own risk profile, investment needs and circumstances.
31 The Bill also amends the institutional investor class to cover a wider range of entities that are professionally active in the capital markets. These institutions are sophisticated in their investment approach and should therefore be accorded minimal safeguards. This includes financial institutions that are regulated by a foreign regulator, foreign central governments and sovereign wealth funds.
32 On the other hand, statutory bodies, other than prescribed statutory boards such as the CPF Board and MAS, will no longer be deemed as institutional investors. Many such entities, such as town councils and religious bodies, do not always possess the level of financial sophistication to be deemed an institutional investors. They will by default be retail investors. But as explained above, they can opt-in as accredited investors if they meet the criteria, which for corporations includes having $10 million or more in net assets.
Enhancing credibility and transparency of the capital markets
33 Madam Speaker, I will now move on to amendments to enhance the credibility and transparency of our capital markets. These changes take into account global best practices recommended by the International Organisation of Securities Commission (IOSCO), the international standard-setting body for securities markets. MAS is an active member of IOSCO, and has contributed to formulating these best practices.
New regulatory framework for financial benchmarks
34 The Bill will introduce a new regulatory framework for financial benchmarks. Financial benchmarks play an important role in the pricing and settlement of financial instruments and contracts. One example is SIBOR, or Singapore Interbank Offered Rate, which is used by various lenders to set interest rates. As it has wide systemic influence, it is critical that the process of setting financial benchmarks is credible and reliable.
35 Following the uncovering of misconduct in the setting of the London Interbank Offered Rate, IOSCO has developed principles to address vulnerabilities in the benchmark-setting process. Regulatory frameworks for financial benchmarks have been implemented in the United Kingdom and are in the process of being implemented at the European level.
36 Under the Bill, MAS will be able to designate key financial benchmarks. Once designated, MAS will regulate those who administer these benchmarks as well as those who submit the information required to compute these benchmarks. MAS intends to designate the Singapore Interbank Offered Rate (SIBOR) and the Swap Offer Rate (SOR). Both are widely referenced by banks to set interest rates for commercial term loans and residential property loans; it is thus important that the setting of these benchmarks be subject to a robust and credible process.
37 The Bill also introduces criminal sanctions and civil penalties to deter manipulation of financial benchmarks. This will cover manipulative acts that occur in Singapore, or are committed in relation to financial benchmarks administered in Singapore even if the acts are perpetrated overseas.
Short-selling disclosures for listed securities
38 Next, we will strengthen disclosure requirements for short selling of listed securities. Short-selling is the practice of selling securities that one does not own. It enhances the price discovery process by allowing market participants who hold a negative view on the price of a security to express this view. The efficacy of the price discovery process can be improved by making available to all market participants information on the extent of any such short-selling in a security.
39 In line with jurisdictions such as Australia, Europe and Hong Kong, the Bill introduces disclosure requirements on the level of short-sell orders and short positions in securities listed on an approved exchange in Singapore. The Bill requires market participants to specifically indicate short-sell orders, giving statutory effect to reporting obligations currently imposed through the trading rules of the Singapore Exchange. Those who hold outstanding short positions above a prescribed threshold will also be required to report those short positions to MAS. Aggregated short-sell orders and short positions will be made available to the public, so that they can make more informed investment decisions.
Strengthen enforcement regime against market misconduct
40 Madam Speaker, I will now turn to the last category of amendments to strengthen MAS’ enforcement powers against market misconduct.
Strengthening MAS’ powers to take enforcement actions
41 Section 199 of the SFA currently prohibits disclosures of statements that are false or misleading in a material aspect and are likely to have an effect on the market price of the securities1. In the 2012 case of Madhavan Peter v Public Prosecutor, the Court held that a significant price effect is required for liability to be established against a person with respect to false or misleading statements under section 199. The Bill clarifies that the Section 199 prohibition applies regardless of the price effect. Price movements of securities may be affected by other contemporaneous and irrelevant market factors such as general market sentiment or market liquidity. As such, MAS’ ability to take enforcement action against material false or misleading disclosures that may wrongly influence persons to trade in the market should not be constrained by the requirement of a significant price effect.
42 The Bill also introduces a statutory definition of “persons who commonly invest”, to better reflect market participants who are accustomed to or likely to invest in securities. This term – which is currently not defined in the SFA – will be used as the reference point in insider trading cases for assessing whether a particular information is generally available and is likely to have a material price impact by influencing the behaviour of common investors.
43 In the 2012 case of Lew Chee Fai Kevin v MAS on insider trading, the Court of Appeal held that “persons who commonly invest” are reasonable investors who possess general professional knowledge, but do not include retail investors who trade regularly. The Court also defined “general professional knowledge” as being a very high standard of market analysis and trading knowledge. This is not reflective of the average investor in the market. The new statutory definition will strengthen MAS’ ability to pursue insider trading cases without having to meet an unrealistically high standard for “persons who commonly invest”. The Court will be able to take into account the reality that there can be different classes of “persons who commonly invest”, each with a different level of knowledge and expertise. MAS will issue guidelines on the interpretation of the statutory definition.
Enhancing the civil penalty regime
44 Currently, the maximum civil penalty that can be awarded against an individual is capped at 3 times the benefits gained or losses avoided, subject to a minimum of $50,0002. So where the benefits gained or losses avoided is small, the civil penalty is effectively $50,000, and may not adequately reflect the culpability of the offender or achieve sufficient deterrence. On the other hand, where there is no benefit gained or loss avoided, the civil penalty can be much higher, capped at $2 million. So the two outcomes are not congruent.
45 The Bill standardises the maximum penalty that can be awarded in all civil penalty cases to the greater of (i) $2 million, or (ii) 3 times the amount of benefits gained or losses avoided. This ensures that the civil penalty quantum that can be awarded is commensurate with the gravity of the misconduct, and is not unduly limited by the value of the benefit gained or loss avoided by the offender.
46 The Bill also confers priority on MAS’ civil penalty claims over private unsecured claims that accrue subsequent to the contravention of the SFA. Such priority will strengthen MAS’ ability to resist attempts by third party creditors to divert funds frozen by MAS under the civil penalty regime, towards satisfaction of the contravening person’s private debts. This is in line with priority that is accorded to government claims in other civil proceedings taken by the Government. This also reduces the potential for dissipation of a defendant’s assets, which may cause MAS’ civil penalty claims to be nothing more than paper judgments.
47 Madam Speaker, let me conclude. This Bill introduces significant and timely changes to our capital markets legislation, particularly to strengthen safeguards for retail investors and enhance the transparency and credibility of the securities and derivatives markets. MAS will continue to review its capital markets regulatory framework to ensure that it keeps pace with market developments and international standards, and supports the growth of Singapore’s economy.
48 Madam Speaker, I beg to move.1 Besides shares and debentures, the term “securities” in paragraphs 41 & 42 also include securities‑based derivatives contracts and units in a collective investment scheme.
2 For a corporation, the minimum is $100,000.