Reprieve for small investors as MAS reviews 5% collateral for stock trades

Singapore

THE Monetary Authority of Singapore (MAS) is reviewing an earlier plan requiring retail investors to place a 5 per cent collateral on their open positions come 2020.

The rethink has brought relief to industry players who fear the proposal will smother retail interest and market liquidity.

The proposed practice is part of the regulator's effort to instil responsible trading among retail investors and to enhance credit risk management for securities intermediaries. It is already prevalent in the US and Australia, where it is seen as necessary to encourage responsible online trading.

Regulators felt such a step will also help to protect broking houses' financial integrity in the event of a market downturn or huge losses incurred by a client, like during the 2013 penny stock crash which wiped out S$8 billion in market value from the Singapore market. Many remisiers were burnt as they are fully liable for the losses incurred by their customers in the event of a default.

When asked about the status of the 5 per cent collateral, Lee Boon Ngiap, assistant managing director (Capital Markets) at MAS, said since 2014, MAS and Singapore Exchange (SGX) have implemented a number of measures to improve various market functions and trading practices in the securities market in Singapore.

"More recently, we issued a public consultation proposing new requirements on controls against market abuse, and published an MAS-SGX Trade Surveillance Practice Guide, to enhance risk management practices in the industry and facilitate investigations into suspected market misconduct,'' Mr Lee elaborated.

"We are now conducting an assessment to take stock of the combined market impact of these initiatives, before considering the implementation of other measures, such as collateral requirements for securities trading," he added.

Many changes have taken place in the market since Feb 2014 when the MAS and the Singapore Exchange (SGX) issued the consultation paper with five proposals to improve trading practices following the penny stock crash and concerns that investors were trading on unsecured or "free" credit when they engage in contra trading.

In contra trading, a trader need not cough up cash or put up any collateral for their trades. A buy is offset with a sell within the settlement period and the investor receives the contra profit, or pays the contra loss.

Contra trading accounted for about 31 per cent of total trading value on SGX based on statistics from Oct 2012 to Oct 2013. It was allegedly exploited by Malaysian businessman John Soh Chee Wen and girlfriend Quah Su-Ling to manipulate three stocks that were listed on the SGX mainboard - Blumont Group Ltd, Asiasons Capital Ltd and LionGold Corporation - which led to the 2013 penny stock crash. The criminal trial of Soh and Quah for their alleged part in the crash is ongoing.

Among the proposals in the MAS-SGX consultation paper included the 5 per cent collateral for all trades and cutting the trade settlement period. The latter was implemented on Dec 10 last year when the securities settlement cycle was cut to two market days (T+2) from three (T+3). But the implementation of the 5 per cent rule - which will mark the end of uncollateralised contra trading - was initially delayed till 2018 but speculated to be adopted by next year.

While there is still evidence of some contra trading these days, the volume has fallen along with the overall decline in market volume, brokers say.

Over the past five years, the MAS and SGX have also rolled out other initiatives including the introduction of short position reporting which provides clarity to the market on how many short positions are out there. Taken together, these measures have the effect of increasing transparency in the market and helping MAS in its surveillance of the market.

Asked about the collateral requirement, UOB Kay Hian senior executive director Esmond Choo said: "Our concern is like most brokerages - that this requirement may douse interest in equity trading."

Jimmy Ho, president of the Society of Remisiers in Singapore, shared the same sentiment and felt that there was no need for the upfront collateral, likening it to "hitting the nails on a coffin to seal the market's demise".

"By slapping on the collateral, it will inflict more inconvenience and people will stay out of the market,'' Mr Ho said.

Other brokers drew attention to the falling retail trading volumes ever since the settlement period has been shortened to T+2.

"Those days, we had an active retail market with contra. But with shorter settlement days, that advantage Singapore had for people who wanted to stretch out their settlement period diminished as we moved to T+2,'' said the head of a local brokerage.

The proposed 5 per cent collateral will not affect monthly plans offered by banks like OCBC's blue chip investment, Maybank Kim Eng's monthly investment plan, POSB Invest Saver and Phillip Share Builder Plan as these require pre-funding by customers.

Institutional investors, trades settled through delivery-versus-payment mode, and funds from the Central Provident Fund and Supplementary Retirement Schemes are also exempt from the collateral requirement.