Bloomberg News

Singapore Begins Consultation on Tighter Derivatives Rules

February 13, 2012

(Updates with OCBC’s comment in sixth paragraph.)

Feb. 13 (Bloomberg) -- The Monetary Authority of Singapore released a discussion paper about proposals to regulate over- the-counter derivatives transactions.

The city-state’s central bank joins regulators in South Korea and Hong Kong in efforts to reduce risks in derivatives markets. The MAS said in a statement it plans to initially require interest-rate, foreign-exchange and commodity derivatives products to be cleared by central counterparties and reported to trade repositories by the end of 2012.

The reforms “form part of the global efforts to strengthen the international financial regulatory system in the wake of the 2008 global financial crisis,” according to the statement. The MAS today issued a consultation paper seeking industry feedback on the proposed rules. The consultation runs until March 26.

Regulators worldwide are increasing scrutiny of over-the- counter derivatives after they were blamed in part for masking risk in the lead up to the 2008 credit crisis and the collapse of Lehman Brothers Holdings Inc. Governments globally are working to move the trades on to exchanges and through central clearing houses, which manage risk.

The notional value of derivatives transactions in Singapore amounted to $9.8 trillion in 2010, the MAS said, citing data from the Bank for International Settlements. Interest-rate derivatives products account for 55 percent of the market, while 38 percent are foreign exchange derivatives. The rest are commodities, which are currently regulated by International Enterprise Singapore, the country’s trade regulatory agency.

Mitigate Systemic Risk

“The MAS proposals are timely and we believe it will improve the transparency in the market and mitigate the systemic risk for the parties involved should the failure of a counterparty happen,” Lam Kun Kin, head of global treasury and investment banking at Oversea-Chinese Banking Corp., said in an e-mailed statement.

A derivative is a contract between two parties linked to the future value or status of the underlying asset to which it refers, including interest rates or the price of commodities such as oil or wheat. An over-the-counter derivative is privately negotiated between two parties, rather than being traded on an exchange.

Hong Kong last year started consultations on proposals for regulating the city’s over-the-counter derivatives markets. Korea Exchange Inc., which operates South Korea’s stock market, said last month it plans to start a clearinghouse for OTC derivatives. The Japan Securities Clearing Corp. began clearing over-the-counter credit default swaps on the iTraxx Japan Index in July.

Clearinghouse

Singapore Exchange Ltd., the only licensed clearinghouse in the city-state, processes non-deliverable forwards and standardized interest rate swaps in Singapore dollars and U.S. dollars. The MAS said it may allow other entities to provide clearing and repository services.

Clearinghouses operate as central counterparties for every buy and sell order executed by their members. Each party posts collateral to the clearinghouse, which is the intermediary in the trade, reducing the risk in the event a trader defaults on a deal as the counterparties would spread the open positions to the remaining members.

--Editors: Nick Gentle, Jason Clenfield

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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