MAS Proposes Enhanced Requirements for Protection of Client Moneys and Assets held by Capital Markets Intermediaries
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Client Update | Financial Services Regulatory | July 2016
On 19 July 2016, the Monetary Authority of Singapore (“MAS”) issued a consultation paper proposing various enhancements to the regulatory regime governing the protection of client moneys and assets held by Capital Markets Services licence holders (“CMS licensees”). The proposed enhancements take into account the recommendations of the International Organisation of Securities Commission (“IOSCO”) and the Financial Stability Board (“FSB”).
Presently, CMS licensees are required under the Securities and Futures Act (“SFA”) to implement a range of measures to safeguard client moneys and assets. These measures are set out in the Securities and Futures (Licensing and Conduct of Business) Regulations (“SFLCBR”). MAS is now proposing to enhance these requirements by means of amendments to the SFLCBR.
This note summarises the various proposals, which do not apply to margin collateral received on behalf of customers in respect of non-centrally cleared OTC derivatives contracts. Safe-keeping requirements for such assets have been separately proposed in MAS’ Consultation Paper issued on 1 October 2015 on Margin Requirements for Non-centrally Cleared OTC Derivatives.
Safeguarding, Identification and Use of Customer’s Moneys and Assets
I. Definition of Customer’s Moneys
MAS has proposed to expand the definition of “customer’s moneys” in Part III of the SFLCBR to include, in addition to moneys received from or on account of the customer, contractual rights arising from transactions entered into by the CMS licensees on behalf of a customer (for example, futures contracts) or with a customer (for example, contract for differences). The proposed definition would ensure that all customer’s moneys received and held by CMS licensees are accorded similar protection under the SFLCBR.
On the other hand, no changes have been proposed by MAS to the term “customer’s assets” as defined in the SFLCBR, given that in general, mark-to-market accruals and other contractual rights owed by the CMS licensee to the customer are met with cash, as opposed to assets.
II. Due Diligence on Third Party Custodian
While CMS licensees are presently required under regulation 29 of the SFLCBR to conduct due diligence on the suitability of the third party custodian with whom customer’s assets are maintained, a similar requirement has not been imposed with respect to deposit-taking financial institutions (“FIs”) with whom customer’s moneys are safe-kept. There are also no requirements for ongoing assessment of the suitability of the deposit-taking FI or custodian. As such, MAS has proposed to require CMS licensees to:
(a) Conduct due diligence on the suitability of deposit-taking FIs with whom CMS licensees intend to deposit their customer’s moneys, prior to opening the trust account with the deposit-taking FI; and
(b) Conduct periodic reviews of the suitability of the deposit-taking FIs and custodians with whom they maintain the trust account and custody account to keep their customer’s moneys and assets respectively.
In determining the suitability of the deposit-taking FIs or custodians (whether prior to account opening or as part of the periodic reviews), it is proposed that the CMS licensee should consider the following factors:
(a) The legal requirements or market practices relating to the holding of customer’s moneys and assets that could adversely affect the customer’s rights during the usual course of business and in the event of default or resolution of the CMS licensee, the third party deposit-taking FI or custodian;
(b) The financial condition, expertise and market reputation of the third-party deposit-taking FI or custodian;
(c) Whether there is protection attendant upon the regulatory status of the third party deposit-taking FI or custodian; and
(d) Whether there is a need to diversify and mitigate risks by placing customer’s moneys and assets with more than one third party deposit-taking FI or custodian.
III. Acknowledgement from financial institutions
Presently, CMS licensees are required under regulations 18 and 28 of the SFLCBR to obtain certain confirmations from domestic FIs with whom customer’s moneys and assets are kept. The existing requirements do not extend to situations where customer’s moneys and assets are placed with overseas FIs.
In order for investors to be afforded similar protection, even where their moneys and assets are placed with overseas FIs, MAS has proposed to expand the scope of regulations 18 and 28 of the SFLCBR to require that CMS licensees also obtain the requisite acknowledgment from overseas FIs with whom customer’s moneys and assets are placed.
IV. Information Requirement and Record Keeping
Presently, a CMS licensee is required under section 102 of the SFA and regulation 39(1) and (2) of the SFLCBR to maintain records of customer’s holdings for 5 years or more in the manner as prescribed. A CMS licensee is also required to maintain records of assets which do not belong to it.
To enhance the existing record keeping requirements, MAS has proposed to require CMS licensees to maintain information systems and controls which allow prompt access to salient information pertaining to their customer’s moneys and assets under normal circumstances and in the event of resolution or insolvency. The information should be presented in a format understandable by an external party (for example, a resolution authority or an administrator) and contain details on:
(a) The location of the customer’s moneys and assets, the manner in which such assets are held and the identity of all relevant depositories;
(b) The type of segregation (i.e. “omnibus” or “individual”) applied to the customer’s moneys and assets, and how it impacts upon customer’s ownership rights;
(c) The applicable customer’s moneys and assets protection rules, and where customer’s moneys and assets are held in a foreign jurisdiction, the resolution or insolvency regime of such jurisdiction; and
(d) Outstanding loans of customer’s securities arranged by the CMS licensee, including details of counterparties, contract terms and collateral received on behalf of the customers.
V. Disclosure to Customers
In practice, the types of arrangements adopted by CMS licensees to hold customer’s moneys and assets may potentially impact upon the nature of claims and entitlements of the individual customer. Hence, in order that customers are aware of the attendant risks arising from the manner in which their moneys and assets are held by CMS licensees, MAS has proposed to require CMS licensees to provide prior disclosure to customers of:
(a) The manner in which the customer’s moneys and assets are held, including the type of segregation and the existence of any holding chain, and the risks associated with the arrangements adopted by the CMS licensees; and
(b) Where the customer’s moneys and assets are held in a foreign jurisdiction, the material differences between the customer’s moneys and asset protection regimes of Singapore and that jurisdiction, and the potential consequences of such differences.
The above disclosures must be presented in clear and simple language that is easily understood by investors.
VI. Daily Computation of Trust Accounts and Custody Accounts
Presently, under regulation 37 of the SFLCBR, a CMS licensee that conducts the regulated activities of trading in futures contracts or leveraged foreign exchange trading is required to perform daily computation of the amount of its moneys and assets deposited in the customer’s trust accounts or custody accounts. Such requirement ensures proper accountability and reconciliation of moneys and assets held on trust by CMS licensees on behalf of its customers.
MAS has proposed to extend the daily computation requirement to all CMS licensees holding customer’s moneys and assets, moving forward. This is considering that most CMS licensees are already performing daily computation and reconciliation of their customer’s moneys and assets, regardless of the products traded by their customers.
VII. Re-hypothecation and Other Use of Customer’s Assets
As part of existing risk disclosure and consent requirements, CMS licensees are required under regulation 33 of the SFLCBR to provide risk disclosure and obtain the consent of their customers prior to lending out their customer’s securities. Currently, MAS has not prescribed the content of such disclosure or provided for additional situations under which disclosure must be made.
To facilitate informed decision-making by customers on the lending or use of their assets by CMS licensees, MAS has proposed to require CMS licensees to provide risk disclosure to, and obtain consent from, the customers prior to using the customer’s assets, including mortgaging, charging, pledging, charging or re-hypothecating the customer’s assets. Information to be highlighted in the risk disclosure would include the impact on the customer’s rights over the assets in the event that consent is provided to the CMS licensee, and the protection available to the customers under the SFLCBR.
For practical implementation, MAS has proposed to allow CMS licensees to provide the relevant risk disclosure in, and obtain the requisite consent through, the agreement governing the customer’s account.
VIII. Statement of Account
Regulation 40 of the SFLCBR requires that a CMS licensee furnish its customers with monthly and quarterly statements of accounts containing prescribed information, subject to certain exceptions.
In this regard, MAS has proposed to require CMS licensees to respond reasonably promptly to customer’s request for their statements of accounts, such that customers would have timely access to information about their moneys and assets kept with CMS licensees. However, CMS licensees would be permitted to impose a reasonable fee, taking into account the costs of providing such a service.
IX. Other Proposed Amendments to the SFLCBR
CMS licensees are presently allowed under regulations 16(1) (b) and 26(2) of the SFLCBR to deposit customer’s moneys and assets in a trust account or any other account directed by the customer. This requirement is intended to provide flexibility to customers who wish to deposit their moneys and assets in an account of their choice (for example, an account held by the customer with another bank).
Despite this, MAS has observed that CMS licensees would typically only deposit their customer’s moneys or assets into the bank account that has already been previously designated by the customer for such a purpose, and would not accede to any ad hoc request from the customer to deposit the moneys or assets in some other bank account. Furthermore, MAS has also noted that some CMS licensees rely on the current state of regulatory requirements to obtain the customer’s direction to deposit the customer’s moneys and assets into an account that is chosen by the CMS licensee, through a contractual provision in the account agreement. In the consultation paper, MAS has now stated that this was not the intent of the regulations.
MAS pointed out that retail customers, in particular, might unknowingly opt out of protection provided by the SFLCBR because they may fail to fully consider or appreciate the implications of giving consent for their moneys and assets to be deposited into an account that is chosen at the discretion of the CMS licensee. MAS is therefore proposing to dis-apply regulations 16(1) (b) and 26(2) of the SFLCBR in relation to retail customers.
Application of the SFLCBR to Banks, Merchant Banks and Finance Companies
Under the present regulatory framework, banks, merchant banks and finance companies which conduct regulated activities under the SFA are required to comply with the regulations in the SFLCBR governing the treatment and handling of moneys and assets. MAS has proposed however that the set of rules governing the treatment and handling of moneys be dis-applied to this group of exempt FIs.
The proposal follows from observations that this group of exempt FIs do not typically inquire as to the purpose of the moneys received from their customers. As a result, unless the moneys were intended by the customer for capital markets investments, these exempt FIs would place all moneys received from a customer into the deposit account maintained in his/her name. From a practicality standpoint, MAS has also considered that it would not be feasible for these exempt FIs to inquire into the specific purpose of the customer’s moneys at the point of receipt, even assuming that the customers would have already had in mind an intended purpose for their moneys. Under the existing Deposit Insurance Scheme administered by the Singapore Deposit Insurance Corporation Limited (“SDIC”), Singapore dollar denominated deposits held with member banks and finance companies are insured by the SDIC for up to S$50,000. In contrast, moneys held in a trust account do not typically fall within the scope of the deposit insurance coverage. It follows therefore that if these exempt FIs were required to place customer’s moneys in a trust account (as opposed to a deposit account) as stipulated in the SFLCBR, the customer’s deposits may not be accorded similar protection in the event of the institution’s failure.
Notwithstanding the above, MAS has clarified that the rules governing the treatment and handling of assets under the SFLCBR (including the proposed enhancements set out in the consultation paper) shall continue to apply to this group of exempt FIs. This is on the basis that customer’s assets (e.g. securities) are clearly identifiable, as opposed to money which is a fungible good. Hence, these exempt FIs are unlikely to face difficulties in identifying and determining the assets belonging to the different customers in each of their investment or custody accounts and will therefore be able to comply with the regulations relating to assets.
The consultation period ends on 19 August 2016.
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