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MAS, European Commission work on common approach to derivatives trading obligations

SINGAPORE and European firms could still be able to use derivatives platforms in either market to trade in products such as interest rate and credit default derivatives, despite ongoing global reforms, as regulators work to make sure that trades in over-the-counter derivatives comply with changing rules.

The Monetary Authority of Singapore (MAS) and its European Union counterpart are joining forces on a common approach that would let trading venues on both sides support derivatives reforms by the Group of 20 (G-20) bloc, the MAS and European Commission said in a joint statement on Wednesday.

The move was billed as part of an effort to deepen economic ties between the Republic and the EU, add liquidity to previously fragmented markets, and help businesses better hedge currency risks.

The MAS had earlier said in February 2018 that it planned to require the trading of over-the-counter derivatives on organised markets, completing its implementation of the G-20 derivatives reforms. The EU is a G-20 member, but Singapore is not. The MAS also said at the time that it would seek equivalence determinations from the United States and EU for exchanges and other centralised trading facilities here.

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If the latest plans go through, some organised markets authorised here could be recognised as compliant with the EU derivatives trading obligation under EU regulations on markets in financial instruments.

The trading obligation - which requires over-the-counter derivatives to change hands in regulated markets - would cover interest rate swaps in currencies such as the greenback, euro and pound, which the MAS has noted are the most globally traded over-the-counter derivatives.

Valdis Dombrovskis, who heads the European Commission's Financial Stability, Financial Services and Capital Markets Union, will propose that the commission recognise Singapore-based markets operated by approved exchanges or recognised market operators as platforms eligible for the execution of derivatives subject to the EU "on-venue" trading obligation.

Meanwhile, the MAS will call for EU multilateral trading facilities and organised trading facilities to be exempted from Singapore requirements that they be approved exchanges or recognised market operators under the Securities and Futures Act. These facilities will also be recognised under the act as eligible for satisfying trading obligations here.

But the planned mutual recognition will not be taking place overnight.

According to the authorities' joint statement, "MAS and Commission services intend to work together to ensure that the common approach is put in place and followed in a coordinated manner, and will continuously monitor the impact to assess whether any further action is appropriate".

Mr Dombrovskis's proposal to recognise Singapore markets as eligible platforms would be done through an equivalence decision, but EU member-state authorities must first vote in favour of the draft decision in the European Securities Committee.

The list of venues covered by the equivalence decision and MAS exemptions could be tweaked, based on changes or developments in the markets, both parties said.

This would leave room for the possible further authorisation of trading venues on both sides.

Mr Dombrovskis said in a statement that the outcome of talks with the MAS - which he called "mutually beneficial" - "confirms how global cooperation can bring tangible benefits to EU market participants".

With five weeks left before Britain is slated to leave the EU on March 29, he still has this to say: "The European Union remains open for business."

Mr Dombrovskis added: "European firms will be able to continue trading interest rate and credit default derivatives on Singapore's trading platforms, and engaging with local counterparts in Asia. Singaporean firms will also be able to use EU platforms. This will facilitate trade and economic exchanges between the EU and Singapore."

Deputy Prime Minister Tharman Shanmugaratnam, who is also chairman of the MAS, added in the statement: "With the mutual recognition of each other's trading platforms, EU and Singapore businesses will be able to hedge risks across our derivatives markets more efficiently."

The derivatives decision comes one week after the European Parliament agreed to a free trade agreement and an investment protection agreement with Singapore on Feb 13. Minister-in-charge of Trade Relations S Iswaran has said that the trade deal will likely be ratified and take effect in 2019.