banks - financial regulation in singapore · banks - financial regulation in singapore . ... •...

Adrian Ang

Partner

Financial Services

9 October 2015

Banks - Financial Regulation in

Singapore

Content

• Overview of regulated financial activities

• Regulatory Authorities

• Analysis of licensing/regulatory issues

• Banking

• Moneylending

• Trust Business

• Securities

• Futures Contracts

• Leveraged Foreign Exchange Trading

• Commodity Trading

• Extraterritoriality

• Recent Developments

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Overview of regulated financial activities Deposit taking / banking business Banking Act, Finance

Companies Act

Moneylending Moneylenders Act

Securities Securities and Futures Act,

Financial Advisers Act

Futures contracts Securities and Futures Act,


Leveraged foreign exchange trading Securities and Futures Act,


Trust business Trust Companies Act

Commodity trading Commodity Trading Act

Money broker Monetary Authority of Singapore Act

Insurance Insurance Act,


Regulatory Authorities

3


• Monetary Authority of Singapore (“MAS”)

– Central bank of Singapore:

• Banker to and financial agent of Singapore

Government

– Integrated regulator and supervisor of the

Singapore financial services sector:

• Banks, insurers, capital markets

intermediaries (e.g. securities and futures

dealers, fund managers), financial advisers,

finance companies, etc.

4


5

• Singapore Exchange Securities Trading Limited (“SGX-

ST”)

– Singapore’s securities exchange

– Regulates securities market

– Administers SGX-ST Rules governing securities

trading members

– Also regulates listed issuers

– Financial institutions which are members of the SGX-

ST must comply with the SGX-ST Rules


6

• Singapore Exchange Derivatives Trading Limited

(“SGX-DT”)

– Approved futures exchange

– Regulates futures market on SGX-DT

– Administers SGX-DT Rules governing derivatives

trading members

– Financial institutions which are members of the SGX-

DT must comply with the SGX-DT Rules


• Insolvency & Public Trustee’s Office (IPTO),

Ministry of Law

– Moneylenders

• International Enterprise (IE) Singapore

– Commodity Trading

7


• Accounting and Corporate Regulatory Authority

(“ACRA”)

– Supervises and regulates companies

incorporated in Singapore or which otherwise

fall under the jurisdiction of the Companies Act

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Analysis of licensing/regulatory issues

1. Identify the underlying product (e.g. securities)

2. Identify the activity (e.g. dealing in securities) and

licence required (e.g. capital markets services

licence)

3. For cross border activities: Do they fall within

territorial scope of licensing requirements?

4. Licensing exemptions?

5. Having identified the licence/exemption: What

regulatory/compliance requirements apply?

Banking

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Banking

Definition of “banking business”:

• Receiving money on current or deposit account (i.e.

deposit taking activity);

• The making of advances to customers; and

• Paying and collecting cheques drawn by or paid in by

customers

12

Banking – Meaning of “deposit”

• Section 4B Banking Act: “Deposit” means a sum

of money paid on terms –

– Under which it will be repaid…either on

demand or at a time or in agreed

circumstances; and

– Which are not referable to the provision of

property or services or to the giving of

security

13

Banking (Deposit taking)

Prohibition on accepting deposits in the course of carrying on a

deposit-taking business (section 4A Banking Act):

• A business is a deposit-taking business if:

(a) In the course of the business, money received by way of

deposit is lent to others; or

(b) Any other activity of the business is financed, wholly or to

any material extent, out of the capital of or the interest on

money received by way of deposit,

• But not if the person carrying on the business:

(a) Does not hold himself out as accepting deposits on a day

to day basis; and

(b) Does not accept deposits on a day to day basis.

• Certain bonds excluded from def of “deposit” (reg 5, Banking

Regs)

• “Agent bank” exemption (reg 3A, Banking Regs)

Types of Banks

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• Full Banks

• Wholesale Banks

• Offshore Banks

Merchant Banks

Banking Act (for

Domestic Banking Unit

(“DBU”) and Asian

Currency Unit (“ACU”))

• MAS Act

• ACU governed by

Banking Act

Types of Banking Licences

Full Banks

• Entire range of banking business

• Any type of client, including retail investors

• Full range of S$ deposits

• Chequing

• Loans

15


Wholesale Banks

• NO Singapore Dollar retail banking activities:

• Banking business with “approved financial institutions”

(Singapore licensed banks, finance companies,

merchant banks, insurers)

• Banking business with other clients except:

– No S$ savings accounts without MAS approval

– No S$ fixed deposits except minimum of S$250,000

– No S$ interest-bearing current accounts for

Singapore resident individuals except with MAS’

approval

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Offshore Banks

• Narrowest type of licence

• Banking business with Singapore licensed banks,

finance companies, merchant banks, insurers

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Offshore Banks

• Banking business with other Singapore resident clients

except:

– No S$ savings or fixed deposit accounts

– No S$ interest-bearing current accounts except in

connection with credit facilities or other business

dealings with the customer or where customer has

existing relationship with head office or overseas

branch. S$ current accounts offered to individual

resident in Singapore cannot be interest-bearing

– S$500 million cap on outstanding S$ credit facilities

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Offshore Banks

• Banking business with other non-Singapore

resident clients except:

– No S$ savings accounts

– No S$ fixed deposit accounts unless

S$250,000 or more

19


Merchant Banks

• Permitted to carry out the following activities:

– floatation, underwriting, buying and selling of shares,

loan stocks and bond issues and other securities

– investment portfolio management, investment

advisory services and nominee services

– unit trust management and sales

– advice on corporate reconstruction, takeovers and

mergers

– management advisory services

– arranging finance, lending or participating in

syndicated loans and acting as guarantors

20


Merchant Banks

• Permitted to carry out the following activities:

– financing or lending in the institutional money

markets;

– discounting of negotiable securities or money market

instruments in Singapore dollars; and

– dealing in gold and foreign exchange.

21


Merchant Banks

• Restricted Activities:

– No deposit-taking or borrowings from the public

except from other banks, finance companies,

shareholders or companies controlled by

shareholders

– Cannot raise monies by issuing promissory notes,

commercial papers, certificates of deposit or by

acceptance or endorsing of bills of exchange

22

Asian Currency Unit

• A bank (whether licensed as a wholesale bank, offshore

bank or merchant bank) is permitted to apply to the MAS

for permission to operate an Asian Currency Unit, or

"ACU".

• An ACU is a separate accounting unit in which the non-

Singapore dollar business of a bank (such as non-

Singapore dollar loans or deposits) can be booked.

– The DBU of a bank holds its domestically-focused

operations, which are predominantly denominated in

Singapore dollars.

– The ACU of a bank holds its offshore operations,

which are (entirely) denominated in foreign currency.

23

Asian Currency Unit

• An ACU is subject to slightly lighter regulation than the

rest of the bank (referred to as the Domestic Banking

Unit, or "DBU").

• The operation of the ACU will be subject to the Asian

Currency Unit Terms and Conditions of Operation issued

by the MAS.

• In June 2015, MAS announced that it will remove the

DBU-ACU divide. The manner in which this will be

implemented is still being considered.

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Moneylending

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Moneylending

Regulated activity: carrying on business as a “moneylender”

Licence required: Moneylender's licence, unless “excluded

moneylender” or “exempt moneylender”

“Excluded moneylenders” include:

(a) any person licensed, approved, registered or otherwise

regulated by MAS under any other written law, to the

extent that such person is permitted or authorised to lend

money or is not prohibited from lending money under that

other written law

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Moneylending

Excluded moneylenders (cont’d):

(b) Any person who —

(i) Lends money solely to his employees as a benefit of

employment

(ii) Lends money solely to accredited investors

(iii) Lends money solely to —

(A) Corporations;

(B) Limited liability partnerships;

(C) Trustees or trustee-managers of business trusts for the

purposes of the business trusts;

(D) Trustees of REITs for the purposes of the REITs

(c) Any person carrying on any business not having for its primary

object the lending of money in the course of which and for the

purposes whereof he lends money

Trust Business

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Trust business

Regulated activities:

(a) The provision of services with respect to the creation of an

express trust;

(b) Acting as trustee in relation to an express trust;

(c) Arranging for any person to act as trustee of an express trust;

(d) The provision of trust administration services in relation to an

express trust.

Licence required: Trust business licence

• Exemption for banks and merchant banks for:

– the provision of services in relation to the

creation of an express trust

– the arrangement for any person to act as

trustee in relation to an express trust

– the provision of trust administration services

which are procedural and non-discretionary

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Securities

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Securities

Definition of “securities”:

• Shares, debentures, stocks, bonds or notes issued by a

government, a corporation or an unincorporated body

• Any right, option or derivative in respect of any such shares,

debentures or stocks

• Any right under a contract for differences or under any other

contract the purpose or pretended purpose of which is to secure a

profit or avoid a loss by reference to fluctuations in:

The value or price of any such shares, debentures or stocks

or any group thereof; or

An index of any such shares, debentures or stocks

• Any unit in a collective investment scheme or business trust, or

derivatives of units in business trust

but excludes futures contracts, bills of exchange, promissory notes

and bank certificates of deposit

33

Securities

Are the following “securities”?

• Bilateral loan

• Bond with no principal protection

• Bond with no fixed amount payable

• Interest rate swap

• Equity Option

34

Securities (SFA)

Regulated activities under SFA:

• Dealing in securities

• Fund management

• REIT management

• Providing custodial services for securities

• Securities financing

• Advising on corporate finance

Licence required: Capital markets services licence (CMSL) for the

relevant activity

Licence exemptions:

• Section 99 (Banks are exempted) and 3rd Schedule, SFA

• 2nd Schedule, Securities and Futures (Licensing and Conduct of

Business) Regulations

35

Securities (SFA):

Compliance requirements

• Licensed banks are exempted from licensing

requirements under the SFA

• But must comply with requirements listed in reg

54 of Securities and Futures (Licensing and

Conduct of Business) Regulations

• MAS Notices/Guidelines under the SFA also

apply

• Same applies for all other activities regulated

under SFA

36

Securities (SFA):

Key compliance requirements

• Trading restrictions – e.g. trading against

customer, front running

• Handling of client moneys/assets

• Contract notes, risk disclosure

• Exam requirements for representatives

37

Securities (FAA)

Regulated activities under FAA:

• Advising

• Issuing / promulgating analyses or reports

• Marketing collective investment schemes

Licence required: Financial adviser’s licence

Licence exemptions:

• Section 23 (licensed banks and CMSL holders exempted)

and First Schedule, FAA

• Part VI, Financial Advisers Regulations

38

Securities (FAA):

Compliance requirements

• Licensed banks are exempted from licensing

requirements under FAA

• But must comply with requirements listed in sections

23(4) and (5) of FAA

• MAS Notices/Guidelines under FAA also apply

• Same applies for all other activities regulated under

FAA

39

Securities (FAA):

Key compliance requirements

• Disclose product information for products that arerecommended to clients

• Have a reasonable basis for recommendations, i.e.recommendation must be based on investmentobjectives, financial situation and particular needs ofthe specific client

• Disclose any interest that the financial adviser has insecurities that are recommended

• Examination requirements for representatives

• Report to MAS of misconduct

Futures Contracts

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Futures contracts (SFA/FAA)

Definition: a contract where

(a) One party agrees to deliver a specified commodity, or a

specified quantity of a specified commodity, to another party at

a specified future time and at a specified price payable at that

time pursuant to terms and conditions set out in the business

rules or practices of a futures exchange or futures market; or

(b) The parties will discharge their obligations under the contract

by settling the difference between the value of a specified

quantity of a specified commodity agreed at the time of the

making of the contract and at a specified future time, such

difference being determined in accordance with the business

rules or practices of a futures exchange or futures market at

which the contract is made,

and includes a futures option transaction.

42

Futures contracts (SFA/FAA)

• “Commodity” (under the SFA) means gold or any

produce, item, goods, article or financial instrument, and

anything else prescribed by MAS as a commodity

• “Financial instrument” includes any currency, currency

index, interest rate instrument, interest rate index, share,

share index, stock, stock index, debenture, bond index, a

group or groups of such financial instruments, and such

other financial instruments as the MAS may by order

prescribe

• Securities and Futures (Prescribed Futures Contracts)

Regulations 2005

43

Futures contracts (SFA)

Regulated activities under the SFA:

• Trading in futures contracts

• Fund management

Licence required: CMSL to trade in futures contracts / fund

management

Licence exemptions:

• Section 99 and 3rd Schedule, SFA

• 2nd Schedule, SFR

44

Futures contracts (FAA)

Regulated activities under Financial Advisers Act:

• Advising

• Issuing / promulgating analyses or reports


Licence exemptions:

• Section 23 and First Schedule, FAA


Leveraged foreign

exchange trading

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46

Leveraged foreign exchange trading

Definition:

(a) Foreign exchange trading on a margin basis whereby a person

undertakes:

(i) To make an adjustment between himself and another person

according to whether a currency is worth more or less, as the

case may be, in relation to another currency, or according to

whether a currency index rises or falls in value, as the case may

be, in relation to an agreed value;

(ii) To pay an amount of money determined or to be determined by

reference to the change in value of a currency in relation to

another currency, or by reference to the change in value of a

currency index in relation to an agreed value; or

(iii) To deliver to another person at an agreed future time an agreed

amount of currency at an agreed price; or

(b) The provision of any advance, credit facility or loan to facilitate an act

referred to in (a)

47Leveraged foreign exchange trading

(SFA)

Regulated activities under the SFA:

• Leveraged foreign exchange trading

• Fund management

Licence required: CMSL for leveraged foreign exchange

trading

Licence exemptions:

• Section 99 and 3rd Schedule, SFA

• 2nd Schedule, SFR

• A contract / arrangement that is arranged by a licensed

bank / merchant bank is excluded from the definition of

“leveraged foreign exchange trading”

48

Foreign exchange trading (FAA)

Regulated activities under the FAA:

• Advising on foreign exchange trading (leveraged or

otherwise)

• Issuing / promulgating analyses or reports on foreign

exchange trading (leveraged or otherwise)


Licence exemptions:

• Section 23 and First Schedule, FAA


Commodity Trading

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50

Commodity Trading

“Commodity” means any produce, item, goods or article that

is the subject of any:

(a) Commodity forward contract;

(b) Leveraged commodity trading;

(c) Contract made pursuant to trading in differences; or

(d) Spot commodity trading,

and includes indices, rights and interests in such commodity

(section 2, Commodity Trading Act)

51“Commodity contracts” – licensing

requirements

“Commodity contract” means:

(a) A commodity forward contract;

(b) Any contract made pursuant to trading in differences with

respect to a commodity, not being a commodity futures

contract; or

(c) Any contract made pursuant to a transaction in leveraged

commodity trading;

Licences:

• Commodity broker

• Commodity trading adviser

• Commodity pool operator

• commodity market

Licence exemptions: Section 14A and Schedule to the CTA

- Licensed bank/merchant bank exempted

52“Spot commodity trading” – licensing

requirements

“Spot commodity trading” means the purchase or sale of a

commodity at its current market or spot price, where it is

intended that such transaction results in physical delivery of

the commodity.

Licences:

• Spot commodity broker

• Spot commodity pool operator

Licence exemptions: Section 14A and Schedule to the CTA

- Bank is exempted as a spot commodity pool operator but

not as a spot commodity broker

Extraterritoriality

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Extraterritoriality

SFA:

• Section 339 SFA, reg 52 SFR

• MAS guidelines on the application of section 339

• Paragraph 9, Third Schedule SFA; MAS Guidelines on

paragraph 9

FAA:

• Section 90 FAA, reg 3 FAR

• Paragraph 11, First Schedule FAA; MAS Guidelines on

paragraph 11

55

Extraterritoriality – SFA

Section 339(1): Where a person does an act partly in and partly

outside Singapore which, if done wholly in Singapore, would

constitute an offence against any provision of this Act, that

person shall be guilty of that offence as if the act were carried

out by that person wholly in Singapore

Section 339(2): Where:

(a) a person does an act outside Singapore which has a

substantial and reasonably foreseeable effect in

Singapore; and

(b) that act would, if carried out in Singapore, constitute an

offence under any provision of Part II, III, IV, VIII, XII, XIII

or XV, that person shall be guilty of that offence as if the

act were carried out by that person in Singapore

Extraterritoriality: SFA

56

• MAS is likely to look at the following factors in applying

the extraterritoriality provisions under section 339(2):

– Has there been marketing to Singapore investors?

– What type of clients are involved?

– Are all activities conducted from abroad?

– How many clients are involved?

– Does any activity affect the public?

Cross-Border Private Banking

Activities

57

Not exhaustively, cross border private banking activities can include the

following:

• Travelling to another country to meet clients or prospective clients

• Organising and participating in marketing events in another country

• Providing account-opening documentation or account statements to clients

in another country

• Providing advice on investment products to clients or prospective clients in

another country

• Offering investment products or services to clients or prospective clients in

another country

• Accepting client orders for investment products or signing up mandates for

investment services in another country

The reverse situation would be applicable for foreign bankers undertaking such

activities in Singapore.

Cross-Border Activities Landscape

58

• Representatives that conduct cross-border financial

services face a vast number of additional

requirements:

– They must conform with the applicable foreign law

in the country of question or run a risk of regulatory

sanctions or fines. In some instances, criminal

sanctions are imposed

– Therefore, representatives must take care not to

conduct cross border activities in countries where

the bank is not licensed and where the activities

may be considered regulated activities

Recent Developments

59

Proposal to extend licensing to cover

OTC derivatives• Main objective: Extend scope of licensing regime in SFA

to cover OTC derivatives

• Securities based derivatives are already regulated as

“dealing in securities”.

• New definition of “derivatives contracts” will extend scope

of regulation to other non-securities based derivatives

(e.g. interest rates and credit rating derivatives)

• For existing regulated activities in SFA, conduct of

business requirements are expected to generally stay the

same

• MAS proposes a “principles-based definition” of

“derivative contract” which will cover futures contracts,

leveraged FX contracts and also derivatives based on

shares/bonds

60

Proposed approach

• “Dealing in capital markets products” will replace “dealing

in securities”, “trading in futures contracts” and “leveraged

FX trading”, and cover dealing in OTC derivatives

• Old concepts of “securities” and “futures contracts” still

relevant because conduct of business requirements for

existing regulated activities are not expected to change

61

Summary of changes to regulated

activities

62

Existing regime Equivalent activities under proposed regime

Dealing in securities Dealing in capital markets products, which will

include:

- securities (essentially shares and bonds)

- collective investment schemes

- securities based derivative contracts (“SBD”)

Trading in futures contracts Dealing in capital markets products, which will

include futures contracts

Leveraged foreign exchange trading

(Exclusion for banks)

Dealing in capital markets products, which will

include:

- derivative contracts relating to currencies

- spot foreign exchange trading on margin basis

(Currently no exclusion for banks for FX trading)

Commodity broker (Commodity Trading Act) Dealing in capital markets products, which will

include derivative contracts relating to

commodities, but exclude physically settled

forwards

Summary of changes to regulated

activities (cont’d)Existing regime Equivalent activities under proposed regime

No regulation of interest rate derivatives and

credit derivatives (if they are not “securities”)

Dealing in capital markets products, which will

include derivative contracts relating to interest rates

and credit rating

Fund management, i.e. managing a portfolio of:

- securities

- futures contracts

- foreign exchange contracts

Fund management, i.e.

- managing a portfolio of capital markets products

- managing a collective investment scheme

- entering into spot foreign exchange contracts for

the purpose of managing a customer’s funds

Securities financing Securities, SBD and CIS financing

Providing custodial services for securities Providing custodial services in relation to securities,

SBD and CIS

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Thank You

Adrian Ang

Telephone +65 6890 7710

E-mail [email protected]

Allen & Gledhill LLP

One Marina Boulevard #28-00

Singapore 018989

Website www.allenandgledhill.com

65

Notes:

• This presentation is intended to provide general information and is not meant to be

exhaustive, comprehensive or authoritative. Allen & Gledhill LLP does not warrant its

accuracy or completeness or accept any liability for any loss or damage arising from

any reliance thereon.

• The information in this presentation should not be treated as a substitute for specific

legal advice concerning particular situations.

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