The Monetary Authority of Singapore (MAS) 26 March , Shenton Way Singapore

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1 The Monetary Authority of Singapore (MAS) 26 March , Shenton Way Singapore Dear Sir, MAS Consultation Paper on Proposed Regulation of OTC Derivatives The Alternative Investment Management Association (AIMA) 1 appreciates the opportunity to respond to the Monetary Authority of Singapore (MAS) Consultation Paper on the Proposed Regulation of OTC Derivatives (the Consultation Paper). Summary of AIMA s comments AIMA broadly supports the proposed regime for the over-the-counter derivatives market in Singapore; The regime should include a bottom-up and top-down approach to determining which contracts are suitable for clearing, and all types of OTC derivative contracts could potentially fall within this scope; All counterparties to OTC derivatives should be subject to the clearing obligation, although a de mininis threshold should exist which takes account of the size of the total assets for both financial and non-financial entities; Market participants subject to the proposed clearing obligation should be able to fulfil that obligation with either a regulated Singapore established CCP or a comparable recognised foreign CCP; The MAS clearing obligation should apply to all suitable OTC derivatives booked by at least one Singapore based or regulated financial or non-financial entity. Evasion of the clearing mandate should be narrowly defined to capture only those cases of purposeful avoidance of the specific obligation; All parties should be required to report full details, at the internationally agreed standard, of their derivative transactions, whether subject to the clearing mandate or not, without exception to either domestic trade repositories or recognised foreign trade repositories to which the MAS has access. Only one party should make such reports for both counterparties, under the proposed reporting protocol; A mandatory trading obligation for eligible derivative contracts should only be introduced when and if the effects on market liquidity are assessed and the industry is consulted further on such a proposal; and 1 AIMA is the trade body for the hedge fund industry globally; our membership represents all constituencies within the sector including hedge fund managers, fund of hedge fund managers, prime brokers, fund administrators, accountants and lawyers. Our membership comprises over 1,100 corporate bodies in over 40 countries

2 The MAS should ensure that the regime for the regulation of recognised clearing houses (RCH) and approved clearing houses (ACH) allows for the provision of client clearing and full segregation and portability of assets and positions of those clients. AIMA sets out full responses to the questions posed in the Consultation Paper in Annex 1 of this response letter. Conclusion AIMA supports the proposed regime for the over-the-counter derivatives market in Singapore and believes that its effect will be to greatly improve the transparency of the OTC derivatives markets in the jurisdiction and significantly reduce and manage counterparty credit risk. Much of the detail of the regime must be given further consideration and the MAS should ensure to conform its regime, where possible, with the CPSS-IOSCO standards and the agreed international consensus on OTC derivative clearing reforms. We thank you for this opportunity to respond to the Consultation Paper and we are, of course, very happy to discuss with you in greater detail any of our comments. Please do not hesitate to contact Lena Ng, Head of OTC Derivatives Working Group at lena.ng@cliffordchance.com or Angela Wee, Manager of AIMA Singapore at awee@aima.org if you have any questions. Yours sincerely, AIMA Singapore OTC Derivatives Working Group - 2 -

3 Annex 1 Question 1: MAS seeks views on the proposal to expand the scope of SFA to cover derivative contracts on commodities, credit, equities, foreign exchange and interest rates. AIMA supports the use of the existing Securities and Futures Act (SFA) to incorporate the new OTC derivative clearing and reporting reforms. We agree that a new definition is needed to set a clear scope for the contracts that are in scope for this regime and that this may usefully reference the five major underlying asset classes. The definition should be sufficiently clear so that there is no uncertainty as to the range of products subject to the clearing and reporting obligations. At a later stage, AIMA would be pleased to provide comments on the specific proposed drafting of the definition of derivative contract. Question 2: MAS seeks views on: (i) the proposal to adopt top-down and bottom-up approaches to identify products suitable for mandatory central clearing; (ii) the proposed criteria (paragraph 3.1.4) for determining whether a product is suitable for mandatory central clearing by a CCP; and (iii) the feasibility of mandating central clearing for SGD IRS, USD IRS, and NDFs in selected Asian currencies. It is important that the new MAS regime for derivative contracts has both a bottom-up and topdown approach to determining which contracts will be standardised enough and suitable for the mandatory clearing obligation. The vast majority of the universe of suitable derivative contracts will be those that are already offered by CCPs for clearing in Singapore. The top-down approach should be used sparingly to encourage the use of CCP clearing for contracts not currently cleared but which would obviously be suitable for clearing, e.g., very standardised OTC contracts. We particularly support the collection by the MAS of full information about the contracts submitted by the CCPs for clearing, including soliciting industry comments through a public consultation. The MAS should take into account all information about a particular class of contracts before mandating it for clearing, as, for example, a single offering by a CCP to clear a class of particular contracts may not mean it is necessarily suitable for mandatory clearing. The MAS should also consider information included in trade repositories about contracts which are not currently cleared. All contracts that must be cleared by a CCP following a decision of the MAS should be cleared and publicly listed in an up-to-date register (ideally on the MAS website), to ensure market participants have clarity about which contracts they are required to clear. We agree with the criteria that the MAS should consider when deciding if a contract should be subject to mandatory clearing. In particular, given that market participants in Singapore may be trading internationally, it is important to consider the international regulatory approach, including whether a Singapore financial institution could clear a particular contract with a recognised large international CCP operator that may offer a particular product for clearing. In addition to the criteria listed in the Consultation Paper, in particular depth and liquidity of the market, the MAS should consider the total volume of contracts traded. If the volume of contracts of a particular class of derivatives is low, it may not warrant mandatory clearing. AIMA believes that the full range of OTC derivatives should be potentially in scope for mandatory clearing, but that the MAS should give serious and thorough consideration to which contracts are suitable for central clearing, which will reduce rather than increase counterparty credit risk and systemic risks. Although consideration of broad asset classes or contract types may be a good starting point, the MAS must consider whether certain contracts within the larger grouping are suitable and have the same characteristics as the rest of the contracts within that class or contract type. It may be necessary to consider specific contracts or provide exemptions from an obligation that applies to a wider class. AIMA has no evidence on whether Singapore Dollar and US Dollar Interest Rate Swaps or Asian Currency non-deliverable forwards may be suitable at this time. If the MAS consider that these might be suitable, we would encourage full consideration of the available - 3 -

4 data and the CCPs currently offering clearing in these products and then open up the proposal to a separate full public consultation. The MAS may also wish to consider whether it is necessary to have a review process for contracts after they are determined to be subject to the clearing obligation. Liquidity and volumes of contracts traded can change over time and may result in a mandatorily cleared contract no longer being suitable for the clearing obligation. AIMA suggests that a yearly review process, undertaken either by the CCPs or the MAS, is most appropriate. Question 3: MAS seeks views on the proposal to exempt foreign exchange forwards and swaps from mandatory central clearing. In general, we agree that for foreign exchange (FX) forwards and swaps, the main source of risk is settlement risk. This risk is already successfully dealt with by the use of systems, such as the CLS settlement system. A large number of FX swaps and forwards are short maturity, so the counterparty credit risk is low and, therefore, these derivative contracts should not be subject to the mandatory clearing obligation. However, it may be the case that some long maturity FX swaps and forwards do carry some counterparty credit risk that would be usefully addressed by central clearing. It should be noted that although in April 2011 the US Treasury consulted on the use of its power under the US Dodd-Frank Act to exclude FX forwards and Swaps from the clearing obligation, as of March 2012 no decision or final rule has been issued by the US Treasury on this power. In the EU, the EMIR legislation does not specifically exclude FX products, but instead indicates that ESMA should consider these derivatives in the same way as other derivatives, but have consideration for the level of risk that is already addressed by the use of the CLS settlement system. We believe the MAS should take note of the international consensus on this issue and should not propose a blanket exemption, but should give full consideration to whether FX forwards and swaps are suitable for mandatory clearing on a case-by-case basis. Question 4: MAS seeks views on the proposal to require transactions which fulfil the criteria stated in paragraphs and to be subject to the clearing obligation. We agree that it is important that whenever at least one party is resident or booking trades through a Singapore based and/or regulated institution, that the clearing obligation should be effective. It may be simpler to just to require that the clearing obligation is effective if it is booked in Singapore (i.e., a counterparty is based/regulated in Singapore). It is difficult to see how a trade could be booked in Singapore if the institution is not resident or does not have a presence in the jurisdiction. If this wording is kept, AIMA believes "residence" and presence should be clearly defined to ensure clarity for market participants. Where only one party is based or regulated in Singapore and the other is outside of Singapore, it must be recognised that parties may be subject to two different clearing regimes, which may have diverging or conflicting requirements, although broadly requiring the same actions (e.g., EMIR and the Dodd-Frank Act). The MAS should consider a regime for how to deal with such conflicts, specifying which regime needs to be complied with in certain scenarios, or parties may avoid the Singapore market entirely to prevent such impassable conflicts. We understand that it is necessary to have an anti-evasion provision within the MAS regime, so that firms cannot create contrivances which have the sole purpose of avoiding the provisions of the legislation. However, it is important that this power is only used in limited circumstances and it is clear what is considered an evasion. Evasion should not include any legitimate business which is conducted outside of Singapore for, inter alia, reasons of efficiency, costs or compliance with fiduciary obligations to investors. For example, if a firm with multiple subsidiaries chooses to enter into eligible derivative contracts at a foreign subsidiary instead of in Singapore for cost reasons, this should not be considered an evasion. Investment managers, managing funds on behalf of underlying investors, are under a fiduciary obligation to provide the best available execution of their trades, transacting in jurisdictions that result in the best outcome for their investors, considering costs and efficiency. The MAS should consider the reasons for a decision to trade in a jurisdiction other than Singapore and, if they have concerns, seek to investigate the reasons further. There should be no automatic application of the clearing obligation to overseas counterparties and where, following an investigation, the MAS believes that the foreign - 4 -

5 counterparties are seeking to evade the provisions of the MAS regime, they should be given a set, but reasonable, period of time to comply with the obligation. Question 5: MAS seeks views on the proposed scope of entities to be subject to clearing obligations and on the factors to be taken into account when determining the clearing thresholds. We note that there will be a new definition of "financial entities" with respect to the scope of the clearing obligation (with different thresholds to be set for "financial entities" versus "non-financial entities"). With respect to hedge fund managers, currently most of the hedge fund managers in Singapore operate as exempt fund managers. Based on previous MAS consultation papers, we understand that there are forthcoming changes to the Singapore fund management licensing regime such that the exempt fund managers will need to transition to one of the following categories, depending on the size of their management activities: (a) Registered Fund Management Company ("FMC"); (b) Licensed Accredited/Institutional FMC; or (c) Licensed Retail FMC. Based on the proposed definition of "financial entities", exempt fund managers would be "non-financial entities" as exempt fund managers are not considered regulated by the MAS. We believe that this should apply similarly to the new Registered FMC category (i.e. that Registered FMCs should also be considered non-financial entities) as it is the lowest licensing tier and closest to the existing exempt fund manager category, and we would like to request for clarity on this point. AIMA supports the inclusion of both financial and non-financial entities within the scope of the clearing obligation. We believe that it is sensible to have an appropriate de minimis threshold applicable to all firms who engage in the derivative markets only incidentally. Given that the goal of clearing is to reduce counterparty credit risk and the impact of the failure of one firm could have on another, we believe that it is likely to be sensible to consider the size of the entities total assets for both financial and non-financial entities. The threshold should be set at an appropriate level (after removal of derivatives purely for hedging purposes) and should be equal across all types of institution. Outside of hedging exposures, we fail to see the need for different thresholds where the same speculative activities are being undertaken by different types of entities e.g., the same exposure exists and should be addressed for a bank, an insurer and an oil company, etc. Where possible, the clearing thresholds should be aligned with similar thresholds internationally to prevent regulatory arbitrage opportunities and a race to the bottom to exclude contracts from central clearing. Question 6: MAS seeks views on the proposal to exempt certain public bodies from the clearing obligation. Yes, we support the exemption of certain public bodies, including central banks, from the clearing obligation. Question 7: MAS seeks views on: (i) the proposal to exempt intra-group trades of both financial and non-financial entities from the clearing obligation but subject these trades to appropriate collateralisation requirements; (ii) whether such a proposal would pose any implementation issues; and (iii) whether there are other appropriate risk mitigating measures, apart from subjecting the exempt intra-group trades to collateralisation requirements. AIMA supports the inclusion of an intragroup trade exemption. When a trade is entered into between two group entities, there is very little benefit in mitigating the counterparty credit risk by central clearing if the failure of one entity would directly result in the failure of the other entity because of the second entity s provision of group support. Equally, it would seem unnecessary to post collateral to meeting initial margin payments if two entities are part of a single group

6 Provision of collateral to reflect mark-to-market values of the positions of the entities (i.e., variation margin) should continue to be required to be exchanged. The two entities must be part of the same group for the exemption to apply and the entities must have a relationship where they are legally obliged to financially support each other. Question 8: MAS seeks view on the proposal not to exclude pension schemes from clearing requirements. Although pension funds are generally managed by the Central Provident Fund Board, we query whether the MAS will consider also exempting foreign pension schemes in line with other international regulatory reform initiatives (for example there is a temporary exemption for pension schemes under the EU regulation)? Question 9: MAS seeks views on the proposal not to require central clearing through only domestic CCPs. AIMA strongly supports the ability for market participants to fulfil their clearing obligations either with domestically regulated CCPs or regulated foreign CCPs recognised by the MAS. The ability to use a range of CCPs will increase competition in the clearing market and will importantly improve the take-up and risk-reducing benefits of central clearing. Additionally, the use of foreign CCPs will allow parties to clear contracts to better manage their risk where there is no clearing offering available in the domestic market for a particular class of OTC derivatives. Question 10: MAS seeks views on: (i) the proposal to require backloading of outstanding derivative contracts with remaining maturity of more than one year; and (ii) any potential implementation challenges in requiring backloading of outstanding derivative contracts. AIMA agrees that given the number and size of contracts that currently existing in the market and the long maturity of some of the contracts, it will be necessary to have something like backloading of certain contracts on to CCPs to reduce current levels of risk in the system. We support the MAS decision to look to the EU regime and how it has proposed to tackle clearing of outstanding contracts. However, AIMA s understanding is that the EMIR legislation proposes socalled frontloading, rather than backloading. Frontloading provides that contracts must be cleared after a certain date (x), which are entered into between the date at which a CCP proposes the class of contracts for clearing and the compliance date x, provided they have a minimum remaining maturity. The minimum remaining maturity has yet to be determined by the European policymakers. We believe frontloading provides a fairer solution for the market as it does not apply the clearing requirement retroactively. When the counterparty enters into an OTC derivative, if the contract must be cleared, this consideration will impact the cost and, therefore, whether the party would like to enter the contract. We believe that the obligation should only be applied where the counterparty has some notice that a clearing obligation could be applied (e.g., with frontloading). A one year maturity thresholds seems sensible and would provide a clear rule for market participants to know whether their contract must be frontloaded in the future. If a contract is not captured by the frontloading rule, we believe that this should still, in all cases, be subject to the reporting obligation to ensure that the MAS has a full picture of the current OTC derivatives market. If the MAS decides to implement backloading, as proposed, it will be important to phase in this obligation to ensure that CCPs can handle the volume of contracts that would have to be cleared on the first date of compliance. Question 11: MAS seeks views on the proposal to implement the reporting obligation in phases, specifically on the proposal to include interest rate, foreign exchange and oil derivative contracts in the first phase

7 If the MAS believes it is necessary, we agree that the reporting obligation should be phased in over time, after issues on data content and access are resolved. After a period of phase in, the MAS should strive to ensure that all cleared and non-cleared OTC derivatives traded or booked in Singapore are reported. The phase in period of time should be appropriate and move forward when possible, once reporting and data issues are resolved. The best solution will be to first require reporting of the most commonly traded, standardised and simple products, where the data requirements will be clear. For less commonly traded and more bespoke contracts, time will be needed to work out the data requirements and the reporting obligation for these products and should be phased in at a later date. Question 12: MAS seeks views on the proposal to require all transactions booked or traded in Singapore to be reported. Yes, AIMA supports the requirement to report all derivatives contracts, cleared or uncleared, that are booked or traded in Singapore. While it is desirable for the MAS to have information on the contracts that are denominated in Singapore Dollars or reference entities in or related to Singapore, it may not be possible to enforce this obligation. For example, if two US financial institutions trade and book a derivative contract in the US that references a Singapore company s shares, it is difficult to see how the MAS could enforce the requirement to report details of this trade. Given that the vast majority of the global financial centres are implementing reporting obligations for OTC derivatives and that, due to the CPSS-IOSCO initiatives reported data will be shared internationally with other regulators, we believe the MAS should limit its obligation to just derivatives booked and traded in their jurisdiction. Market participants should be permitted to report to either domestically established or regulated trade repositories or to foreign trade repositories recognised by the MAS and which the MAS has access to. We also believe that the MAS will already be requesting trade reports from financial institutions for the purposes of monitoring and preventing market abuse and manipulation. Where the MAS requires trade data to be reported under two different obligations it should seek to avoid duplication and have reporting for one purpose to be sufficient to fulfil obligations for the other purpose. Question 13: MAS seeks views on: (i) the proposal to require reporting by all financial entities, as well as non-financial entities above a reporting threshold; and (ii) the proposal to determine the reporting threshold based on the asset size of the nonfinancial entity. AIMA believes that all financial entities that book or trade OTC derivatives in Singapore should be under an obligation to ensure that the details of their trade are reported. We note that under both the EU and US clearing regimes, there is no threshold on any parties, including non-financial counterparties, on the reporting obligation. Although we understand the burden that reporting would involved, we believe that this burden is small and would in the vast majority of cases not fall to small financial entities or non-financial entities of any size. In general, parties entering into OTC derivatives for hedging or speculative purposes do so with large financial derivatives dealers (usually investment banking institutions). For existing transaction reporting requirements, such institutions will typically undertake to report both sides of the trade and are well equipped to meet this requirement, placing no burdens on their counterparties. If certain parties are excluded from the reporting obligation, this is likely to leave a confusing picture about the derivative dealer counterparty s exposures, which would exist but would not be reported, or would be reported on just one side of the trade. For a complete picture, we believe that the obligation should apply to both counterparties, with the ability to nominate one party (the dealer) to make such reports, or to have a very low reporting threshold. Question 14: MAS seeks views on the proposed protocols for singlesided reporting and for the use of third party service providers to fulfil reporting obligations

8 AIMA fully agrees with the MAS s proposed protocol for reporting and believes it places the burden of reporting with the appropriate counterparties. We believe that it would be desirable to always have single-sided reporting for both sides of the trade to avoid any duplications of reporting and double counting of trades conducted. Where the performance of a reporting obligation is properly delegated to the other party or to a third party, however, the party not conducting the reporting should be deemed to have satisfied its reporting obligation. As the reporting would not be within such party's control, it would seem unfair for it to retain responsibility for the full and accurate reporting of the transaction information. Question 15: MAS seeks views on the proposal to exempt certain public bodies from the reporting obligation. We generally support the exemption of public bodies from the reporting obligation. However, it should be noted that the EMIR regime in the EU only exempts central banks from the reporting obligation and not all public bodies. The information reported by public bodies would be anonymised and only available to national regulators and, therefore, concerns about disclosure may be unwarranted. Question 16: MAS seeks views on the proposal to adopt international data reporting and aggregation standards recommended by CPSSIOSCO, including the requirement for parties to derivative contracts to provide information updates to the TR to ensure that TR data on the transaction remains accurate through the life of the transaction. As proposed, we believe that adoption of international data standards is essential to make the data collected by trade repositories meaningful and to allow international aggregation and an understanding of global risk. Further, adoption of the common standard will reduce compliance costs for firms who have to report in multiple different jurisdictions, as they can utilise the same systems and processes for their reporting obligations. Where two regimes seek to apply reporting obligations on one counterparty s derivative trade, if the reporting requirement is the same then it opens up the possibility to make just one report and fulfil both reporting requirements. The purpose of setting standards at a body like CPSS-IOSCO is to agree common, high quality standards that will be used everywhere. Reporting using this template will allow collection of data that properly reflects the risks that are being reviewed by the regulators, including the MAS. To ensure that the data is useful, it must also include all details about the trade, the counterparties and the events in the operational and trading process. However, we would not advocate set, regular updates of information to trade repositories but rather updated reporting about a trade at sensible and clearly defined junctures (e.g., trade date, confirmation, significant change in position, settlement, etc.). Question 17: MAS seeks views on the adoption of an LEI and a product classification system aligned with international standards. Yes, we support these initiatives and believe they will be very useful for clearly identifying counterparties and products, in Singapore and globally. The LEI and a single product classification system should be used as soon as they become available. Question 18: MAS seeks views on the proposal to require reporting of contracts (and any updates) within one business day of the transaction. Real-time reporting is unlikely to be feasible for many OTC derivatives trades, although trades should be reported almost instantly if this is feasible. In all cases, one business day should be sufficient to make the required reports. Question 19: MAS seeks views on the proposal to backload relevant pre-existing derivative contracts with remaining maturity of more than one year

9 AIMA supports the backloading of all outstanding contracts to trade repositories, where there is greater than 1 years remaining maturity. We believe that this may be a time consuming process for market participants and that they should be given a sufficiently long period of time to report preexisting derivative contracts. Question 20: MAS seeks views on the proposal not to require reporting to domestic TRs only. OTC derivatives markets are global in nature and the regulation of the market should be equally global. AIMA agrees that the MAS should permit counterparties to report the details of their trade to either a Singapore established or regulated trade repository or to a foreign trade repository to which the MAS has access to its data. This will significantly reduce the burden for firms trading with counterparties outside of Singapore that may need to report their trades to a domestic trade repository. Question 21: MAS seeks views on the proposal not to impose a trading mandate at this stage. The MAS will be aware that the commitments made at the G20 level include that all eligible OTC derivatives are to be moved on to exchanges or electronic trading platforms, where appropriate. by the end of AIMA recognises the importance of the trading obligation, however, we believe that addressing counterparty credit and systemic risk by the mandatory clearing and reporting obligations are more important priorities and further the trading obligation should only be implemented where this is appropriate for the market. We therefore support the MAS decision not to impose a trading mandate at this stage. Mandatory trading, if imposed, will be a big change for the current markets, where derivatives are currently traded in a number of ways, broadly categorised as OTC. Significant debate is ongoing in the US and EU about what a trading venue for OTC derivatives can look like, each proposing a new regulated market type. We believe that any consideration of implementing the trading obligation in Singapore should be done after the various international reform proposals in respect of mandatory trading are in more final form. We would be interested to discuss mandatory trading obligations further with the MAS and believe the MAS should publicly consult the industry widely on any such proposed obligation. The MAS will need to work with any exchanges or other trading venues to decide if contracts: trade sufficiently frequently; have sizable open interest; have minimum trading volumes; have minimum numbers of transactions over time; create a sustained presence of a two-way market; and have sufficient depth of the market. Contracts that do not fulfil these criteria are likely to be unsuitable for mandatory trading requirements and could damage liquidity in the markets if mandated for certain contracts, creating price volatility. Question 22: MAS seeks comments on the benefits and costs of introducing a trading mandate, taking into consideration the characteristics of the derivative markets in Singapore, and alternatives to a trading mandate, in moving derivative contracts to be traded on organised platforms

10 Where products are suitable for trading on organised trading platforms, AIMA supports moving these contracts for exclusive trading on such platforms. Exchange or exchange-like trading can have benefits for market users, including increasing the liquidity and volume of trades by making it easier to execute trades, reducing transactions costs, making transaction fees more transparent and improving price discovery and transparency. However, if the contracts are not suitable for trading on organised trading platforms this may have a significant impact on the liquidity in the market and may create significant price volatility as a result of the small number of trades. Therefore, price volatility may mean that the traded prices do not reflect fair market values, which may further discourage market participants from entering into these trades. By discouraging or, in some cases, preventing market participants from entering into suitable trades at fair prices may hamper their ability to construct balanced investment portfolios or effectively hedge risk exposures. Where suitable, AIMA believes on-exchange trading can be encouraged. We note that where there is demand for exchange trading of a particular product, and where there is liquidity, exchanges will be incentivised to list the contracts in any case. As operators of exchanges receive fees, they will wish to see as much suitable trading on their platform as possible. Additionally, customised OTC derivatives can be expensive to negotiate and enter into for market participants and where it is suitable, parties will generally favour cheaper, standardised on exchange products. The MAS would need to consider these costs and benefits and collect all necessary data on derivative contracts it is considering for the mandatory trading requirement. Question 23: MAS seeks views on the proposed scope of the definition of derivative market. We believe the definition of a derivative market seems sensible and should helpfully define which markets will be subject to the proposed regulatory regime for derivate market operators. As mentioned above, it may be prudent for the MAS to consider discussions about the regulation of derivative markets in the US and the EU and take any lessons learned in those markets for establishing the regime in Singapore. The definition of a derivative market should be considered again in light of possible future mandatory trading requirements, although without proposals in this regard it is difficult for AIMA to comment further. Question 24: MAS seeks views on the proposal to extend the existing two-tier regulatory regime to derivative market operators. AIMA does not have any particular objections at this stage to extending the existing two-tier regulatory regime to derivative market operators. That said, it is difficult to comment further at this stage without proposals for mandatory trading being put forward. We would also request that the regulatory framework for derivative market operators be suitably adapted for derivatives markets as the current framework which applies to securities and futures markets may not be entirely appropriate. Question 25: MAS seeks views on the proposed refinements of the RMO regime for locallyincorporated and overseas RMOs. AIMA agrees with the additional requirements for both types of RMO, in particular we highlight the importance of keeping market user information confidential. We are concerned that the requirement for an RMO to have five previous years of experience before it can gain authorisation may be overly restrictive, given that having further competition in market trading venues is a benefit to the market and that new market operators are likely to be created as a result of, for example, new mandatory trading requirements. The proposal to place reliance on home state regulators to regulate and supervise overseas RMOs is sensible and, in principle, we agree that RMOs should comply with the highest regulatory standards. However, it may be unclear in many circumstances which are the higher standards to which the RMO would be required to comply market operators must have clarity about which regime would be applicable to their business. Additionally, requiring overseas regulators to impose the MAS regime (if it is a higher standard) may

11 pose difficulties if that overseas regime has little or no knowledge or experience of the MAS regime. Question 26: MAS seeks views on the proposed amendment of the definition of clearing facility to include the clearing and settlement of derivative contracts. We agree that the MAS should extend their existing clearing definitions for clearing to derivative contracts. However, we feel that clearing and settlement are different operations and may, in many cases, be conducted by different institutions e.g., CCPs operating clearing facilities and parties such as CLS operating settlement systems. In the EU, EMIR defines clearing and CCPs as follows: Clearing - the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash or both are available to secure the exposures arising from those positions; and central counterparty (CCP) - a legal entity that interposes itself between the counterparties to the contracts traded within one or more financial markets, becoming the buyer to every seller and the seller to every buyer. The MAS should consider narrowing the scope of clearing facility to just operations that involve a central body interposing itself between counterparties to derivatives trades, which establish positions, including the calculation of net obligation and act as the buyer to every seller and the seller to every buyer. Question 27: MAS seeks views on the proposed authorisation framework for clearing facilities. It is difficult to comment on a regime for clearing facilities until we know how this term will be defined and the scope of institutions it will encompass. We agree that all CCPs should be considered systemically important and that there should be a strong regulatory regime surrounding their operation. Some of the criteria are similar to those included for the regulatory regime for RMOs and our comments are equally applicable for clearing facilities. AIMA particularly wants to highlight the importance of the protection of customers money and assets when handled by a regulated CCP. Not mentioned in the Consultation Paper, but of particular importance, is the need for CCPs to offer full segregation and portability of clients assets upon the failure of a clearing member of a CCP, which they use to access the CCP and fulfil their clearing obligation. Without such necessary requirements, clients will merely be substituting the credit risk they run with a counterparty for a different (perhaps greater) credit risk on a clearing member. The buyside has long recognised that the large derivative dealer banks are not failure-proof and that, should they go into insolvency, there is a risk that collateral and other assets placed by buyside firms with those derivatives dealers may be written down or subject to losses. Therefore, in the current bilateral market, many firms have produced arrangements whereby collateral posted to cover the positions on the OTC derivatives will be held in individual accounts with third party custodians. This arrangement thereby prevents losses being caused to assets by a clearing member s failure. In the cleared OTC derivatives market, buyside firms now insist that that they are able to maintain this same high level of protection against loss. In the futures market, clearing members have been able to pool clients assets together in omnibus accounts. We do not believe that the same structure should be used for OTC derivatives, as omnibus accounts exposure clients collateral to fellow customer risk the risk that the total value of assets in the pool will be less than the combined client positions under the pool (i.e., due to the failure of a client at the same time as the clearing member) such that the CCP, upon failure of a clearing member, will require all clients of the pool pro rata to add additional assets to top up the value caused by the shortfall. This fellow customer risk is unacceptable and clients must be at least offered the option to have full segregation that offers the same high-level of individual account protection that they have negotiated for in the bilateral market. Having such segregation allows clients collateral and positions to be easily transferred to other clearing members should the first clearing member default. This ultimately prevents runs on clearing members at the point

12 of failure, as the clients are not exposed to any losses and client assets are prevented from being tied up in complex insolvency proceedings. For these reasons, we support general requirement (g) but believe that the MAS must go further and mandate that CCPs offer full segregation and portability of clients assets and money provided as collateral to meet the CCPs margin requirements. AIMA supports the MAS decision to allow requirements for overseas RCHs to be met if they are subject to comparable requirements in their home jurisdiction. For a consideration of what is comparable, the MAS should consider the extent to which the other jurisdiction complies with the March 2011 CPSS-IOSCO principles for financial market infrastructure. The MAS should look to the broad effect of comparable regimes and should not seek to exactly matched requirements for the clearing and reporting of OTC derivatives. Question 28: MAS seeks views on the proposal to extend insolvency protection to all ACHs and RCHs. AIMA supports the MAS decision to extend insolvency protection to all ACHs and RCHs. The insolvency provisions may need a further review to ensure that under those provisions the CCP is able to operate its default procedures effectively, including ensuring full protection of segregated client assets and money provided as collateral and allowing for the prompt transfer of those assets and the contractual positions to other clearing members or, where not possible, liquidating the position and returning assets to the clients of a defaulting clearing member. Question 29: MAS seeks views on the proposed definition of trade repositories to be regulated under the SFA. We broadly agree with the definition of a trade repository to be regulated under the SFA. In addition to the collection and dissemination of data (to the public in aggregated form), the trade repository also acts as a permanent record or store of historic trades data for the MAS and other international regulators to access. Paragraph (e) of the Consultation Paper recognises that one of the roles of the trade repository is maintenance of data, which should also be included within the definition of a trade repository. Question 30: MAS seeks views on the proposed authorisation framework for trade repositories, including whether to impose minimum base capital requirements and governance standards on trade repositories. We agree that a framework is needed to regulate trade repositories and we support the requirements proposed in relation to approved trade repositories (ATRs) and recognised overseas trade repositories (ROTRs). We are concerned by the consideration that parties wishing to make a report to a trade repository must be a member and fulfil admission criteria. Trade repositories have the role of collecting data from market participants and take no risk relating to the trading of the derivative contract. They therefore need no pooled financial resources in the same way as a clearing house. Trade repositories are likely to need a minimum amount of capital and should be permitted to charge appropriate fees to accept data but we do not believe they should be permitted to reject any party who wishes to make legally mandated reports on derivatives transactions to them. Trade repositories should be fully accessible to all market participants. As well as maintaining confidentiality of user information, trade repositories should be required to ensure the full confidentiality of the trade data they record. Such data is both sensitive and proprietary in nature and any unauthorised leak of such information may create losses for affected parties and may have an adverse impact on market prices. Question 31: MAS seeks views on the proposal to not require foreign regulators to provide indemnification to an ATR/ROTR and MAS prior to obtaining data from the ATR/ROTR

13 We agree that requirements for foreign regulators to provide indemnifications on accessing data of ARTs and RORs will create unnecessary hurdles for regulators in mandating reporting and, thus, should be avoided. Question 32: MAS seeks views on: (i) the proposal to regulate non-bank intermediaries dealing in derivative contracts as CMS licensees under the SFA; and (ii) the proposed scope of activities for dealing in derivative contracts. Parties who are undertaking derivative dealer type activities which are not regulated to the same extent as banks undertaking these activities should be held to the same regulatory standard. For fund managers, we feel that a similar licensing exemption regime should apply when fund managers deal in OTC derivative contracts on behalf of their funds as for when they deal in securities and/or futures contracts currently Singapore fund managers whose dealing in securities or trading in futures contracts is incidental to their fund management business is exempted from the requirement to obtain a separate capital markets services licence for dealing in securities or trading in futures contracts. Question 33: MAS seeks views on the proposed exemption for derivative brokers We are unclear whether the MAS is proposing to exempt parties who operate as (a) intermediaries between an end-user client and a CCP clearing member (e.g., an indirect clearing relationship); or (b) a clearing member or broker, that allows a client to gain access to a CCP without becoming a clearing member themselves. In each case we would expect that the broker would hold clients positions (subject to the protections of the CCP) and would collect margin from the client, which it would be required to segregate. AIMA requests further clarity on which parties are envisioned by this exemption. Question 34: MAS seeks views on the proposal not to regulate endusers as CMS licensees under the SFA. AIMA agrees that the MAS should not seek to regulate end-users as CMS licensees under the SFA. The financial end-users are already likely to be regulated for other activities under the SFA by the MAS. In any case, all derivatives trades will be reportable so the MAS will have a full picture of the Singapore derivatives market, including that part which involves non-financial entities. Additionally, counterparties, CCPs and clearing members can be expected, to some extent, to exert market discipline and regulate their end-user customers