The Monetary Authority of Singapore is moving closer to allowing international clearing firms to become members of local clearinghouses without having to establish a local presence. On Aug. 5, the MAS published a report summarizing its findings from a 2015 consultation on this issue, and spelled out some of the conditions that it is considering to limit risk to the clearing system and prevent the "hollowing out" of the local clearing firm community.
Currently, a clearing firm that wants to become a member of a clearinghouse in Singapore must apply for a local license and set up a local operation. With several international market operators moving to set up clearinghouses in Singapore, MAS is now reconsidering this policy, and launched the consultation to gather feedback on the potential implications.
Responses were mixed. Some supported the proposal, saying it would encourage a greater diversity of clearing members and increase the breadth and depth of the derivatives markets in Singapore. But others raised concerns, saying it could lead to an increase in systemic risk, an "unlevel playing field" in terms of business conduct and regulatory capital requirements and a "hollowing out" of local clearing members.
In its report, MAS explained that it intends to put in place additional requirements to protect the clearing system from risks arising from the default of a clearing member that is not located in Singapore. For example, Singapore-based clearinghouses will have to have adequate risk management and default management procedures to handle such a default. MAS also said it intends to limit the exposure that a Singapore-based CCP has to its remote clearing members and will impose additional capital requirements to those CCPs with significant clearing exposure to remote members.
In response to the "unlevel playing field" concerns, MAS said that Singapore-based CCPs will only be allowed to admit remote clearing members that are licensed in a jurisdiction that has a "comparable" regulatory regime. MAS also said it will "tighten" the conditions for an exemption from the licensing requirements so that an overseas clearing firm will not qualify if it has an affiliate that provides any type of financial services in Singapore or if it provides clearing services to Singapore residents.
"This is in line with MAS’ objective to grow the liquidity on Singapore-based CCPs by admitting remote clearing members, rather than hollow out local clearing membership and have it substituted by remote clearing membership," the report explained. "It is also aligned to the intention to allow overseas firms new to Singapore to gain some familiarity with the Singapore market before committing resources for a full set-up in Singapore. If the business of a remote clearing member on a Singapore-based CCP reaches a substantial volume, the remote clearing member should consider setting up a presence in Singapore to support its business growth."